2023-05-11 08:47:41 ET
Summary
- The 5Y revenue trend of Groupon gives you all the backstory you need to know about the struggling aggregator.
- A complete wind-up of the company would leave investors with nothing, so trading out of trouble is one of the few remaining strategies.
- A pivot to the experiences market represents a potentially sound strategy, and competitors in the space are posting solid growth figures.
- The biggest challenge facing Groupon is the quality of inventory according to outgoing Groupon CEO Kedar Deshpande. I agree, but I have other reasons in mind.
- Competitors are very focused on user experience and showcasing experiences in their best light. Groupon has a long way to go in this space.
5Y Revenue Trend Paints A Solid Backstory
Groupon ( GRPN ) in my opinion represents a firm that has acknowledged it has lost the battle on its original value proposition, but has the opportunity to pivot and begin a process of rebuilding.
Look at GRPN’s 5-year revenue trend and you can see how the market has valued the firm’s value proposition over the years as a deal-finding site on products, as it has been beaten severely by Amazon ( AMZN ).
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One has to consider if a wind-up of the firm is potentially on the cards as revenues didn’t quite reach $600m in 2022. But a look at tangible value per share shows a wind-up means a complete and total loss of all value to shareholders, with a negative $7.75 per share vs a share price of $3.67. In this scenario, investor hopes will be pinned on trading out of trouble.
Further, Selling General & Admin Expenses (SG&A) expenses in 2022 outpaced revenue to a ratio of 1.05, indicating that the firm produced top-line revenue results below the costs to generate those revenues.
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The firm has implemented a number of cost savings strategies, which would assist the firm in treading water at current revenue levels, but I don’t feel the need to explore these in depth as cutting costs while revenue continues to fall is ultimately useless without turning revenue around. Instead, I’ll focus on sales and a pivot into experiences.
2023 Q1 Results: Improvements, Deteriorations, Outlooks
Q1 results released 10th of May gave us our first glimpse of how incoming interim CEO Dusan Senkypl expects to help Groupon turn its prospects around.
Improvements
- Experienced tech CEO Dusan Senkypl is taking the reins, having been in the role 40 days now, and believes Groupon has a solid transformation plan
- SG&A expense reductions bringing the SG&A / Revenue ratio back to 0.83
- Adjusted EBITDA -$4.9m, vs -$7m prior year
- Cost reductions continue to take effect, including reduced headcount (a key driver in the SG&A expense reduction)
- Total liabilities have been reduced from $784m to $675m
Deteriorations
- Balance sheet equity has turned negative, now -$24.478m ( -$0.60 equity per share)
- Revenues continue to fall, down 20.6% YoY
- All metrics across units sold & active customers continue to fall, with not a single segment showing any growth
- Total assets reduced from $793m to $650m
Groupon Q1 Sales Metrics (Groupon)
Outlooks
Senkypl outlined his 8-pillar transformation strategy which he says draws inspiration from a Czech website that mimicked Groupon and underwent its own transformation "...from a daily deal discount flash site to a destination experience marketplace,".
His transformation plan is not too much of a departure from Deshpande's, with a clear and defined focus on merchants and their impact on the business' performance.
Unfortunately, Senkypl's outlook for 2023 highlights continued YoY declines throughout the year as the business transforms itself, with revenues not showing growth until 2024. The good news though is that he expects to see losses reduce throughout the year as the transformation takes hold, and it's my opinion that the cash balance and current burn rate will support his outlook. This is supported by the CFO's comments that the planned spending reductions will see $250m in expenses removed, and thus provide a little more runway for Senkypl to execute his plan.
The Question Of A Wind-Up
I believe Senkypl has the right plan, the issue now will be whether the market will believe that Groupon can move on from its past and reestablish itself. The transformation is not too much of a departure from the firm's history as a deal site, and thus does not represent a significant barrier.
At this stage, I don't believe a wind-up is the best strategy on the table for shareholders.
A Pivot From Product to Experiences
Contributor Dilantha De Silva has already highlighted how a move to focusing on experiences is a potential good strategy for Groupon to trade their way out of trouble, and I'd like to expand on this theory a little.
I believe outgoing Groupon CEO Kedar Deshpande correctly recognized the current issue facing the firm is the quality of offerings in their inventory, and I believe the challenges it faces are similar to any other merchant aggregator website.
In my previous career, I worked in real estate, an industry saturated with aggregator websites all clamoring to get a slice of real estate listing advertising spend. The challenge these websites face is the same that Groupon will experience: It is surprisingly hard to get merchants to put their inventory on your website, and even harder to get them to maintain or update that inventory.
The current strategy as highlighted in the most recent earnings call transcript highlighted a change of direction for Groupon's sales teams, whereby sales teams will be incentivized to target particular high-quality merchants rather than just focussing on the volume of merchants onboarded. There are also incentives based on “...aligning the sales compensation to the performance of the deals and merchants that bring on the marketplace. In other words, they will be compensated based on the output of their deals, not just the number of deals launched or merchants acquired,” (per earnings call transcript).
In my view, there is a risk that the CEO’s 'Hyper Local Merchant Acquisition' strategy is too focused on the acquisition of new inventory, and not the care of existing merchants. If existing merchants aren’t serviced by Groupon (by offering to optimize a merchant’s deals and offerings on the site and offering data and insights to aid those merchants), there is every chance these deals could stagnate and merchants neglect to update or maintain their inventory.
Are Experiences A Good Move?
In order to explore whether the experiences market is a good move for Groupon, let’s take a look at an international competitor; An Australian private company called “ The Big Red Group ”.
The Big Red Group (founded in 2017) actually began in 2001 as a brand called Red Balloon , which focused on selling gift certificates for experiences, and specifically targeted the consumer gifts market.
The Big Red Group provides some metrics on the group’s growth and sales metrics, all of which paint a picture of a rapidly growing firm, and even lists Groupon as a large competitor in their local markets (Australia & New Zealand).
The Big Red Group
The Big Red Group
The Big Red Group
Provided Groupon can successfully move its business into helping consumers match with merchants, creating a quality user experience will be key. And I believe this is part of the inventory issue Groupon faces.
Groupon’s Content Is Poor Quality & Uninspiring
I firmly believe that a major part of successfully earning consumer spend in the experiences market, content (a part of inventory) is critical. Inspiring imagery drives a consumer to create an emotional connection to the experience they’re searching for, and low (or poor) quality content will leave a consumer concerned about what the end experience may be, creating a negative perception of not only the merchant, but also Groupon itself, and ultimately this will be a hurdle to driving sales.
Below I've collated examples from Groupon’s competitors showcasing the difference in content quality, based on search results for Chicago (with the exception of Groupon, which shows us the site’s homepage and featured deals). This should highlight how Groupon is lagging in content quality.
The Groupon Home Page (Groupon)
AirBnB Experiences Search Results - note that hovering the mouse over each image reveals these are stills from video content (AirBnB)
UberEats Search Results (UberEats)
RedBalloon Search Results (RedBalloon)
If Groupon is going to be serious about competing in the experiences market, they will need to ensure content quality across the site is at least comparable to other sites as a starting point.
It's hard to look at Groupon's website and feel inspired to book any of their experiences, no matter the deal on offer, if the content is poor and detracts from the offer.
An Academic View: Aesthetics Of Photos As A Driver Of Consumer Engagement
If we look to search for evidence that image quality is going to be an important part of Groupon's strategy, there is plenty of research online to support the thesis.
The most relevant to Groupon I have come across is a 2023 study "Aesthetics of hotel photos and its impact on consumer engagement: A computer vision approach (2023)" , which confirmed that image quality (for both thumbnail images and more detailed images) had a significant impact on consumer engagement with hotels when viewed online.
The study found that image quality was so significant, that the quality of images drove both the volume of engagement with hotels and was also positively correlated with the number of positive consumer reviews of hotels.
Further, "An Exploratory Examination Of Factors Affecting Online Sales (2002)" , looked to identify how website design impacted sales revenues, and found that 30% of variance in revenue for eCommerce websites, and that frequently updating and keeping relevant content on the site was the top variable impacting revenue impact. (It's worth noting this study noted that use of multimedia content had a negative impact on revenue, however the author also noted in their study that this was likely due to longer page loading times, which would have been significant in 2002 compared to 2023)
I would strongly suggest that these studies could be extrapolated to illustrate how important high-quality content will be to Groupon in successfully pivoting its business toward consumer experiences. This could also have an impact on the firm's brand perception in the market, though I don't wish to go into detail on this topic at this stage.
How Groupon goes about acting on this is hard to say, but it would appear to be worth the investment.
Catalyst To Watch
Groupon clearly represents a high-risk, high-reward stock for investors, with a poor financial situation requiring significant intervention amidst a pivot of the firm’s strategy; investors will need an iron stomach to ride the Groupon wave.
The key metric to watch, according to Deshpande, is the % of inventory being ordered more than 10 times in a month. Currently, 75% of deals sold fewer than 10 units a month, and Groupon is targeting only 20% of deals selling more than 10 units a month for all new merchants brought on. This is a low bar to clear, but at least is an improvement.
For further details see:
Content Warning: Groupon Must Improve User Experience