Groupon is a company everyone seems to love to hate. The number of negative articles I see coming across each day has become a bit mind-numbing. From @rakeshlobster and @conorsen on Minyanville and TechCrunch, to media pundits, to @vacanti on Yipit’s blog, there’s definitely more than enough Groupon bashing to go around. Much of it is completely justified - there is a ton of uncertainty surrounding Groupon’s business and the local commerce industry as a whole, and pointing out the risks is very important. However, after having a look at the newly minted S-1 filing released yesterday, I thought I’d shed some light on a few potentially positive developments that I hadn’t seen mentioned anywhere else.
When a company has only been around several short years and is growing at the break-neck pace of Groupon – one additional quarter can completely change previous notions and expectations. Here’s a couple notes to consider in concert with other analysis out there from industry experts like Yipit and others.
Returning Customers
Many argue that the swelling subscriber base is becoming stale and most people are getting sick of the multitude of daily deal emails hitting their inbox every morning. Groupon doesn’t reveal how many of their subscribers actually click through the emails or more importantly, continue to buy groupons. However, there is one paragraph on the bottom of page 77 that gives us a sliver of insight into how much subscribers are actually coming back – their Q2 2010 cohort.
This group of 3.7 million subscribers acquired in 2Q 2010 cost Groupon $18 million in marketing expense to acquire in that quarter and they’ve tracked this group through today. Here’s what the data reveals (see chart below):
- Through 2Q 2011, this group of subscribers actually held up very well. Revenue and Gross Profit in 2Q 2011 fluctuated only slightly compared to the prior 3 quarters on average, and the number of groupons sold was flat. So over time, this same group of subscribers is continuing to contribute about the same amount of revenue and groupons sold each quarter. Unfortunately, there’s no way to tell if revenue from the prior three quarters was skewed towards earlier periods and therefore could be on a declining trend, but even on an average basis I’m somewhat surprised. I think the fall in Gross Profit here is also partially attributable to a larger proportion of national deals (lower margins) being run in 2Q11 compared to the prior 3 quarters.
- Takeaways: If subscribers can continue to generate considerable and relatively stable Revenue going forward as this cohort appears it could be doing, this is a good sign for Groupon because it means subscribers are coming back and buying. This means that the money Groupon is spending to acquire these customers is being covered and the return on investment continues to rise. For each of the past 4 quarters, this group of subscribers has consistently contributed more than $10 per subscriber (highlighted in green below). Needless to say, it would be very interesting to see if this continues as well as how other cohorts might fare against this one.
Note: Subscriber acquisition costs have almost certainly increased since 2Q 2010 due to saturation and competition. It’s also important to note that this group was a much more “early-adopter” crowd not only to Groupon, but also to the daily deal industry. This likely means they have a greater affinity to Groupon vs. other deal sites and may be benefiting from more referral bonuses, among other unquantified biases.
Marketing Expense
One of the biggest gripes I’ve seen out there is the huge amounts of money being spent on marketing to extend the rapid growth in subscribers and customers internationally and in North America, to a lesser extent. Notwithstanding the fact that their SG&A costs ballooned from a growingr salesforce, marketing expenses dipped significantly in 2Q 2011 vs. prior quarter. Marketing decreased from $78.6mm in 1Q to $55.2mm in 2Q for the North America Segment (26.4% vs. 16.1%, as a percentage of revenue), and from $129.4mm in 1Q to $115.6mm in 2Q for the International Segment (37.3% vs. 21.6%, as a percentage of revenue). Those are some pretty significant drops considering the huge amount of growth that was still observed, especially in the International Segment. Comparable growth quarter-over-quarter on a smaller marketing budget is a good sign.
*FY2010 for international assumes only 3 quarters of revenue
Subscriber Acquisition Costs
If the drop in marketing spend is not just a fluke, then subscriber acquisition costs are on the decline for both North America and Internationally. 1Q 2011 vs. 2Q 2011:
- North America: cost dropped from $6.35 to $5.75 per subscriber
- International: cost dropped from $5.12 to $4.81 per subscriber
I note that quarter-over-quarter, revenue per subscriber deteriorated in North America, and stayed flat Internationally. Is this a bad thing? It’s really hard to tell.. as Tricia Duryee of All Things D points out, “the average revenue per subscriber fell…which may sound bad, but at the same time, the number of subscribers skyrocketed…”.
In the end, I think there really is a silver lining in the supplemental S-1 filing. It’s not all sunshine and roses, but I’ll let you go elsewhere to read about the other side of the argument. Given how prevalent it is, I’d be surprised if you haven’t already, but just in case here are a few articles pointing out the faults – they all make some very valid points:
Groupon’s Updated IPO Filing: Big Revenues, Big Losses, Lots Of Banks Underwriting It by @jyarow
Yipit Blog: New Filing Reveals Groupon’s Oldest Markets Got Even Worse by @vacanti
Groupon In Major Trouble as Q2 Results Show Plunging Revenue Growth by @conorsen
BOMBSHELL: Groupon’s North American Merchant Pool DECLINED In Q2 by @nichcarlson
My favorite and Most Entertaining Content on the Groupon IPO:
Namesake panel of experts debate: is Groupon brilliant or a Ponzi scheme?
Some gems from the @namesake conversation:
“Groupons are the subprime mortgages of 2011″ – @rakeshlobster
“The S-1 lists recession as a risk. Wrong. That was their big opportunity. A strong recovery is a risk for Groupon.” – @rakeshlobster
What do YOU think?
UPDATE: Answer the question on Quora right now: “What are the main takeaways from Groupon’s amended S-1 filing showing 2Q results?”
