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The Three Pillars of Groupon's Survival Strategy


It's not all about pizza coupons anymore. A forthcoming location-based mobile app, a move into direct sales, and a major acquisition put the company in a position to stay on top.

It can no longer claim to be the fastest-growing business ever, but Groupon (NASDAQ:GRPN) at least can brag that it survived the short-lived bubble for daily deals sites.

It may even have come up with a business plan that makes sense to investors.

It's not making money yet, but it's closer after the last quarter. It earned $0.02 per share before factoring in the costs of employee stock options and past acquisitions.

On the surface, the quarterly earnings announced Thursday after the close weren't that great. Sales rose 4.7% to $595.1 million, and net loss narrowed to $2.58 million. That fell short of the analyst consensus, compiled by Bloomberg, for sales of $615.7 million, though the loss was less than the expected $14.3 million.

Groupon's forecast for the fourth quarter is in line with expectations. It foresees revenue of $690 million to $740 million, and operating income of $40 million to $60 million. The analysts' estimate is $723.7 million in revenue, and profit of $46.1 million.

The initial reaction was negative, with the company's stock dropping 10% in after-hours trading before reversing direction to add 1.47%, ending up at $9.64 per share.

The whiplash may have been caused by the upbeat details that started filtering through on Groupon's latest quarter, and its intentions going forward.

First, the excuses, excuses for the shortfall in revenue: It's mostly Google's (NASDAQ:GOOG) fault. The company redesigned its Gmail, tucking promotions under a separate tab and thus reducing visibility for Groupon's daily emails to subscribers.

Mobile Apps

That explanation was made more palatable by the fact that Groupon is less dependent than it used to be on promotional emails. Increasingly, its people are accessing its offers via mobile apps, which have been downloaded by 60 million users. More than 40% of transactions are now completed on mobile devices, according to the company.

For the future, it has a location-based app in place, pointing to an enhanced ability to target consumers on the go with the right offers.

"We have to even further reduce our reliance on email and whatever happens with Gmail becomes less relevant," CEO Eric Lefkofsky told the Wall Street Journal on Thursday.

The second excuse involves revenue outside North America, which fell 21%. Europe was a particular trouble spot, not all that surprising as much of the continent struggles with soaring unemployment and spending cuts.

That shortfall was offset, however, by a 24% increase in revenue from North America.

Monster buy

The company also got points on its international position by announcing its purchase of South Korea's Ticket Monster from its biggest rival, LivingSocial, for an estimated $260 million cash and stock.

Despite its name, Ticket Monster, according to the Global Post, uses the daily deals model to sell consumer goods as well as tickets. About 90% of its sales are made through mobile apps.

Tweaked Model

Meanwhile, Groupon has been building up its website to offer a far greater range of products and services, national and local, than it originally envisioned when it was hawking coupons to merchants door to door.

The expansion includes direct sales of products, and a network of warehouses to support them. That draws inevitable -- and scary -- references to "the Amazon (NASDAQ:AMZN) model."

The two sites are nothing alike, actually. Groupon is strictly for bargain-hunters, the kind of shoppers who like nothing better than browsing through the latest fire sales and finding a weird selection of dog chews, blood pressure monitors, and guided tours of Peru.

It's a long way from 2010, when Fortune called Groupon the fastest-growing company in history. It was, too, as measured by the breakneck pace at which it was opening offices to feed daily deals websites in nearly 300 cities around the world, regardless of expense.

It was, presumably, trying to get in ahead of the competition, and it didn't work at all. By the time the daily deals frenzy peaked, in 2011, New York alone had 40 competitors spamming the population with coupons for pizza and nail salons.

It has settled down considerably since then, as has Groupon stock. It plummeted after its $20 debut in November 2011, falling as low as $2.60.

But it's still standing, and still at the top of a short list of most-visited coupon sites. A list of the top-15 daily deals sites in November, based on global traffic, shows Groupon as most-visited site, with only LivingSocial and RetailMeNot coming close.

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No positions in stocks mentioned.
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