Groupon Must Prove Pull Model Works, Say Analysts

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Groupon's main business of emailing daily deals to consumers is ailing, but some on Wall Street remain upbeat that the struggling company will grow again with new marketing products.

Chicago-basedGroupon ( GRPN ) is working to switch to a pull business model -- meaning it expects customers to visit its website for deals, instead of sending out emails, known as a push marketing model.

Attracting customers to a site is seen as a tougher, less in-your-face approach. So Groupon "is witnessing some head winds," wrote JPMorgan analyst Doug Anmuth.

But Groupon's transition to pull marketing may already be working for some consumers who are searching the Web for quick deals. Groupon has noted that "the percentage of same-day deal redemptions has doubled since the beginning of 2013, suggesting user behavior is adjusting toward the pull model," wrote Anmuth.

Investors Ponder Possibilities

Wall Street largely is standing on the sidelines, waiting to see if Groupon can jump-start its growth. Of 24 analysts Thomson Reuters polled, 14 rate Groupon hold. Nine say it's a buy, and one calls it underperform. The median price target is 12, according to Thomson Reuters. Groupon stock traded near 11 Friday.

Groupon says it has made progress moving advertisers and users to a pull model. Like rival LivingSocial, partly owned byAmazon.com ( AMZN ), most of Groupon's business since its 2008 founding has come via emails prompting customers to buy a deal. For example, French restaurant Chez Jacqueline in New York's Greenwich Village has a $69 dinner-for-two deal (58% off regular price). More than 5,000 Groupon users have bought it.

In September, about 6% of Groupon's traffic came via search results, the company said in November, as it released Q3 results. (Q4 results are due Thursday afternoon.)

Those customers who came to Groupon via search results on average spent 25% more than those who came via other means.

About 75% of Groupon's North American advertisers have signed up for monthly recurring deals through the new pull program.

The rollout of pull marketing in Q3 created slight pressure on Groupon's email business, CEO Eric Lefkofsky told analysts in November. "In the new pull marketplace, customers can wait and buy deals closer to when they intend to actually use them," he said.

Groupon might have to compete more directly withGoogle ( GOOG ), which has seen success with Product Listing Ads in its search results. The ads usually have photos of products, plus prices at nearby stores.

Still, Groupon's active customer growth slid in the first three quarters of 2013. The count climbed 10% to 43.5 million in Q3, vs. 12% Q2 growth and 13% Q1 growth.

In Q3 the average customer spent $137 in the prior 12 months, down from $138 in Q2. The firm ended 2012 with a customer spending $144 in the trailing 12 months.

The move into new marketing territory is to be partly fueled by acquisitions, such as a $43 million Ideeli.com cash buyout Jan. 13.

The fashion site has 6 million active users who look for deals, which analysts see as a positive. "It helps Groupon gain access to a new category and adds to its top line and, over time, to its bottom line," wrote Sterne Agee analyst Arvind Bhatia.

Organic Growth Efforts

The company's not relying just on acquisitions. In September 2011 it launched Groupon Goods , a retail site offering products at deep discount. And Feb. 10 it launched a back-end program called Deal Builder that for the first time lets U.S. advertisers post product deals without contacting a person.

Adding new ways for advertisers to contact Groupon will provide customers with deals on "just about anything, anywhere, anytime," Vice President of Deal Development Dan Roarty said.

Groupon works best for bigger advertisers, says R3 Communications' Rhonda Moret, who formerly used it to market the Tour Academy, a PGA golf licensee for which she was senior vice president of marketing .

For a small business with razor-thin margins, having a customer buy a deal and then not visit the store for months can be tough to manage. "I think depending on the business and the sophistication of those running the campaign, the traction and return can be very good or very poor," Moret said.

For businesses that don't gain traction with a Groupon deal, there's little incentive to stay, said Mark Aselstine of wine club Uncorked Ventures: "We learned that customers looking for discounts are always going to be customers looking for discounts -- those aren't the type of customers that can help a business."

As Groupon reinvents itself, it's going through some executive-level turmoil. Founder and CEO Andrew Mason was forced out a year ago. This month Groupon disclosed that Senior Vice President of Product Management Jeff Holden will exit Groupon on March 18.

The timing "adds to our existing concerns ," analyst Bhatia wrote.

Groupon's 2013 sales are expected to come in up 8%, trailing their 44% 2012 growth, according to Thomson Reuters. And 2013 per-share profit ex items is seen at 9 cents, down 31%. But analyst consensus for 2014 points to a brighter future. Sales are expected to climb 15% to $2.9 billion, while EPS is seen leaping 178% to 25 cents.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: GRPN , AMZN , GOOG

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