Published on February 21, 2014

OTHER VOICES: Groupon finds a way to lose — again

(Crain News Service photo)
Joe Cahill

By Joe Cahill, Crain News Service

CHICAGO (Feb. 21, 2014) — Groupon Inc. always manages to disappoint Wall Street, even when the online discounter beats quarterly earnings estimates.

On Feb. 19, Chicago-based Groupon posted the kind of numbers that ordinarily send a stock soaring. And its shares did rise on the headline news that revenue and operating profit for the fourth quarter came in well ahead of analysts’ forecasts.

But then all those traders reading through Groupon’s press release got to the first-quarter outlook. Groupon warned that expenses related to a pair of acquisitions would cause a net loss of between 2 and 4 cents per share. Wall Street expected a profit of 6 cents per share.

Down went Groupon stock. As I write this on Feb. 20, the shares are off 11 percent in after-hours trading.

So goes another installment in the good-news-bad-news drama of Chicago’s wayward technology lodestar. But what does the latest financial report really tell us about Groupon’s progress toward the elusive goal of a consistently profitable business model?

Good news and bad news

First the good news. Groupon posted an operating profit in the fourth quarter, compared with a loss the year before.

That means it actually took in more money than it spent on day-to-day business operations. What’s more, revenue rose significantly, while overhead, the costs lumped together under the heading Selling, General and Administrative expenses, actually declined. If Groupon can repeat this achievement on a regular basis, it may have a future.

As always with Groupon, there’s plenty of bad news. For one thing, it lost money on an overall basis, as it has in every quarter except one since going public in 2011. The cause was a range of one-time expenses, which have become pretty routine at Groupon. As the earnings release warned, more such expenses will submerge the first-quarter bottom line. Groupon needs to break this habit.

More troubling is a shrinking gross margin, which fell to 4.9 percent in the quarter from 5.6 percent a year earlier. This underscores the risks of Groupon’s push into direct merchandise sales, a low-margin business. Revenue from Groupon Goods rose 62.4 percent to $366.8 million in the quarter. Groupon’s original business of offering discounts on third-party services (also profit-challenged) saw sales slip 2.8 percent to $401.7 million.

This makes Groupon look more like Amazon, the online retailing giant that operates on razor-thin margins. That’s not a trick anybody should attempt at home. Amazon succeeds based on its enormous size and ability to drive rivals out of business by crushing profit margins in any industry it enters.

Groupon can’t go toe-to-toe with Amazon. It needs to find a profitable niche it can dominate by offering consumers something they can’t get from bigger players like Amazon. CEO Eric Lefkofsky believes Groupon can create such a niche in mobile commerce. It’s offering more deals via smartphones. Mobile transactions accounted for 50 percent of Groupon’s total in the fourth quarter, Mr. Lefkofsky said in the earnings release.

Sounds impressive. But to win more fans on Wall Street, Groupon must show that mobile transactions will drive profits. Otherwise, it’s just shifting a flawed business model from laptops to smartphones.

Joe Cahill wrote this blog for Crain’s Chicago Business magazine, a sister publication of Tire Business. Follow Joe on Twitter at @CahillOnBiz.

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