Morningstar | No-Moat Groupon Not Likely to Generate Excess Return on Invested Capital in the Long Run
As a first mover in the local-market daily deals space, Groupon has captured a leadership position, but robust profitability has not followed. While there have been some indications of improvements thanks to the firm's restructuring plan, we are skeptical about Groupon's ability to accelerate top-line growth and expand margins over the long run. Groupon’s business is split about evenly from two different revenue streams. First, Groupon provides daily deals (in the form of online vouchers) from local merchants to consumers. Groupon’s online discounts cover a variety of services including restaurants, health, beauty and fitness, and home and garden. Groupon’s average take rate on the purchase and/or usage of the vouchers is between 30% and 35%. Second, customers can also shop for different products on Groupon (such as toys, apparel, and so on), where the company would be the direct merchant. Gross margin on these direct sales typically comes to 12%-15%. Unfortunately, we don’t see Groupon benefiting from switching costs either from its merchant partners or from its customers. Customers can make one-time voucher purchases without guaranteeing repeat business with either the merchant or Groupon in general. This dynamic has led to lackluster revenue growth and consistently high customer acquisition costs that pressure margins. Groupon’s revenue growth has been decelerating and gross margins have been declining since the company went public in 2011. Revenue from its higher-margin daily deals and vouchers has declined, while lower-margin revenue from direct sales has been increasing. Additionally, the firm is implementing a more aggressive customer acquisition strategy that requires higher marketing expenses. Although a restructuring plan is in place for a turnaround, we remain concerned about future revenue growth and gross margin compression, both of which may prevent Groupon from yielding excess returns on capital in the long run.Groupon operates online local commerce marketplaces that connect merchants to consumers by providing goods and services through its websites, groupon.com, and its mobile applications. The company provides goods and services in three categories: Local, which includes offerings from local and national merchants, and local events; Goods, which provides customers the ability to find discounted merchandise across multiple product lines, including electronics, sporting goods, jewelry, toys, household items and apparel; and Travel, which features travel offers at both discounted and market rates, such as hotels, airfare and package deals covering both domestic and international travel.
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