When the Internet was still relatively new, groupon (GRPN 3.26%) It has become a huge name in its own right by offering coupons to restaurants and other attractions. We then tried to change our business model, but 20/20 in hindsight it was a terrible decision to sell a physical product. Now that the company is back to basics, management is telling investors that the fourth quarter of 2022 will be a key turning point for the business. But how true is that?
very different business
Groupon’s origin story was basically to provide online marketing to local businesses. Partnering with Groupon meant that the local business owner offered discounts to his Groupon customers to bring in these new patrons. Groupon received part of a promotional sale to offer the platform, and consumers benefited from discounts. It was a novel idea that combined the savings of bulk buying with the rapidly growing world of e-commerce.
Ten years ago it was a very popular platform, attracting a huge number of consumers and businesses. However, the challenges of this operating model eventually became apparent. For example, many businesses have found that coupon customers don’t necessarily become repeat customers. Instead of trying to improve their merchandise, Groupon chose to shift gears significantly and began offering physical merchandise through Groupon merchandise.
Creating a trading platform is fairly cost effective as there are no inventory, storage, or shipping costs. Selling physical products is a completely different business model. Groupon suddenly walmart When AmazonUnsurprisingly, that new strategy didn’t pan out, and Groupon went back to its roots of offering coupons and promotions. The transition has been tough, but nearly three years after announcing its exit from the Groupon Goods business, company management says it will be cash flow positive starting in the fourth quarter of this year.
good but not good enough
If a company is generating positive free cash flow, it can usually hold back, even if its business model remains challenged. This is a very important step for Groupon. But the bigger question for investors is whether Groupon’s business will stand the test of time. There are still signs of trouble in that regard.
For example, CEO Kedar Deshpande, who is leading Back to Basics, said in the third quarter earnings call: It is a constant effort to raise this metric even higher. Sounds great, but the company’s success here is somewhat mixed.
On the international side of the business, where revenue reached $36.5 million last quarter, active local customers (for coupon businesses) increased 22% year-over-year. The good news is that the region only accounts for about a quarter of the company’s total revenue. The North American business, which had sales of $107.9 million in the quarter, saw a 9% decline in active local customers.
There are many variables here. A shift from selling products to trading resulted in significant revenue declines in each region. However, the metrics CEOs have highlighted as “most important” still show significant weakness in their largest markets.
Even if Groupon achieves positive free cash flow in the final quarter of 2022, it may not mean much if it fails to improve its ability to engage with consumers. In fact, despite the company’s cash flow statement, if engagement in its core markets continues to decline, Groupon may not be able to sustain the positive momentum in its metrics.
work still in progress
Groupon has been a comeback stock for most of the last decade. Customer engagement metrics for North America suggest there is still work to be done. In addition to the risks here, Groupon has run out of $182 million in cash in his first nine months of 2022, leaving him with $308 million in cash on the balance sheet. There is the fact that
A sustained recovery is still possible, especially if the company can maintain positive free cash flow, but Groupon needs to raise its “most important” metrics across the board before it can be successful. The recovery will be even more difficult if the recession that many experts expect next year hits. Groupon is only suitable for investors who like risk.