Groupon Inc. is a public company based in Chicago, United States of America. Traded in the NASDAQ, Groupon has grown has grown into a worldwide e-commerce site since its founding in 2008. From its humble begins in Chicago, the site has grown to capture a record 30 million registered users spread across four continents including Asia, Europe, and North America. This number represents a large chunk of the approximately 50 million users that have been active on the websites and interacted with it in one way or the other. But the impact of Groupon Inc. doesn’t end there. During the time of its existence, the company has grown mutually beneficial partnerships with a wide array of merchants in different sectors with different products and services. The merchants range from hotels, restaurant chains, consumer products manufacturers and technology companies. The overarching business of Groupon involves the leveraging of the power of groups to get discounts on products. This explains their name and brand which was formed by merging group and coupons to form the name Groupon. The e-commerce site’s mode of operation was unique, and game changing at the time of its inception.
The operational activities of Groupon involve the use of discounts to ramp up the customer acquisition process of a company at subsidized prices. This model of operation involves three parties, Groupon Inc., the customer, and the merchant. Groupon using its optimized website would act as a marketing and product promotion site with the aim of getting a product out into the market. This is done by offering unbelievably great deals meant to be redeemable when the customers got to a certain number. This is so that when the number is deemed high enough, the company mitigate the perceived losses from cutting down prices considerably (Dholakia, 2010). The merchant would also get numerous benefits in the long run from customer acquisition and retention in the long run thus higher growth for the company (Edelman, Jaffe and Kominers, 2016). This keeps the company costs low since they don’t handle any products but instead provide a conduit for companies to reach out to customers with great deals and acquire new customers in the process (Groupon, 2017).
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The business model of Groupon can be described as commission based. This is because they charge marketing and promotion fees to merchants depending on the volume of customers reached and deals closed (Edelman, Jaffe and Kominers, 2016). The business model is attractive to both the customer and merchant. First, Groupon doesn’t charge any upfront fees to the merchant or the customer prior to any transaction (Groupon, 2017). The merchant can only pay when they have closed a customer or customers. This model survived on account of its convenience as compared to traditional print media advertising. The company’s growth has ridden on its exponential base to a subscription of over 30 million users making it attractive because of its wide reach of customers. Worldwide companies especially would find Groupon convenient due to its global reach and low prices (Dholakia, 2010).
Recently the company has sort of shifting its business model in the wake of waning profits and deepening losses. The new model which provides coupons that are redeemable in the high season of merchants has been seen as detrimental to the growth of the merchant companies since it leads to erosion of value especially to the regular buyer in favor of coupon customers. The Groupon model only makes sense when the company can reach out to a large group of consumers in the off-peak period of operation of the merchant. This would allow the merchant to wade through the periods of slow business with coupon sales while increasing the customer base at the same time.
In recent years, Groupon Inc. has seen the shrinking of its revenues and decrease in value due to the replication of its business model by companies and by the fact of them having reached the stagnation phase. These numbers are better depicted by their income statement over the past three years.
Figure 1 :Income statement showing revenue and operating expenses. Source: Yahoo Finance
Figure 2 : continued income statement showing income from continuing operations and non-recurring events. Source: Yahoo Finance
Figure 3 : income statement showing net income. Source: Yahoo Finance
Trends over the past three years
Over the past three years, the revenue of Groupon has grown steadily from $3.042B in 2014 to $3.143B. While the growth has seen the addition of the revenue by $100M over the three years, this has been declared barely attractive following the high growth potential the company had at the time of its Initial Public Offering with came only second to Google. The setback that the company has had is the equal growth of the cost of the revenue which has been double the growth of its revenues over the three years to the fiscal year 2016. This has seen a progressive decrease of the gross revenue from $1.465B in 2014 to $1.356B in 2016 (Yahoo Finance, 2017).
Another trend that has been alarming especially to the investors is the high cost of running the site’s operations. It would seem that the management has been unable to streamline processes to grow their revenue. This comes even after the company has implemented job cuts meant to keep its administrative costs low. Another concern has been the growing non-recurring costs and expenses from $1.27 million to $49.258 million over three years increasing fifty-fold (Yahoo Finance, 2017).
Because of these trends, data from Yahoo Finance the net income of the company went from losses of $73.090 million in 2014 to a profit of $20.668 million in 2015 (Yahoo Finance, 2017). This was followed by a corresponding loss of $194.587. The upsurge in the income from 2015 can be attributed to the discontinued operations that are reported to have earned the company an extra $122.850 million in that fiscal year.
Profit margin ratio for each year
Profit margin is expressed as a percentage calculated by dividing the net income by the revenues of the company. For Groupon, the profit margins for the three years were as follows:
Profit margin is a measure of how much income is retained by a company out of every dollar earned. The profit margin is, therefore, express as a percentage on a dollar earned. A close look at the figures reveal that in 2014, Groupon was running at a loss meaning for every dollar earned, they lost $0.024. The following year, they retained $0.0066 for every dollar earned. The third year in these series saw their losses escalate to $0.062 for every dollar earned. The profit margin effectively indicates whether a company is profitable or running at a loss. For the financial year 2014 and 2016, Groupon recorded losses, and 2015 saw them get a small profit which can be attributed to the discontinued operations as discussed in the income statement section.
The dwindling fortunes of Groupon Inc. have since been blamed on the company’s management with calls for its overhaul. The income statement is a vivid indicator of the state of a business and is watched closely by investors before making the decision to invest in a company. Groupon being a publicly listed company is also subject to this kind of analysis. Despite being in the red as shown in the income statement Groupon’s business model is still largely viable, and this can be seen in a growing list of competitors that have since replicated their mode of operation.
Dholakia, U.M. (2010). How Effective are Groupon Promotions for Businesses? Retrieved from http://dx.doi.org/10.2139/ssrn.1696327
Edelman, B, Jaffe, S, and Kominers, S D. (March 2016). To Groupon or not to Groupon: The profitability of deep discounts. Marketing Letters , 27 (1): 39-53.
Groupon (2017). How Groupon Makes Money. Groupon Merchant . Retrieved from https://www.groupon.com/merchant/article/how-groupon-makes-money
Yahoo Finance (2017 ). Groupon, Inc. (GRPN): Income Statemen t. Retrieved from https://finance.yahoo.com/quote/GRPN/financials?p=GRPN