The Future of Groupon Depends on Goods, Not Deals

As Groupon’s stock has tumbled recently—it is now down 80% from its IPO, at about $4.69—so has the company’s confidence in its leader, founder and CEO Andrew Mason.

Screen shot 2012-12-09 at 4.23.05 PMThat’s because the company’s strategy of selling discounted deals to local restaurants, shops, and entertainment venues isn’t profiting like it did at its debut. LivingSocial and other competitors rose up. People grew tired of Groupon’s ceaseless emails.

And though brands that participate in Groupon deals may prosper from increased awareness and customers, the deals themselves really don’t make participants much money. For example, if a restaurant sells a deal worth $50 for $25, it only makes $12.50 off the transaction. That’s a 75% loss.

(Here’s a breakdown of how Groupon makes money off deals, from an article I wrote for FSR magazine last year.)

The one bright spot in all this, perhaps, is that Groupon goods are accounting for more revenue at the company than its deals. This means that Groupon could reposition itself as a direct seller of goods, like Amazon.

The Journal article states:

“Direct merchandise sales like television and jewelry should improve the company’s overall revenue growth, though its profitability is threatened by fiercer competition from the likes of Inc. (AMZN) and eBay Inc. (EBAY).”

So what’s the next step for Groupon, given this? Perhaps a pivot into retail territory. It could keep selling deals as an offshoot, which would differentiate it from competitors such as Amazon and eBay, but a brand needs to a) know who is buying its products and b) continue to offer what is profitable. At some point, those discount deals will cost more than they are worth, and those nifty hair straighteners and wine openers known as Groupon goods will be the future.