Deal chasers know that Groupon's (GRPN) daily deals have a limited shelf life.
"Reminder: Go use your Groupons!" urges the company's email missive when a buyer's prepaid voucher is about to expire.
But what if Groupon is the one that expires?
Its flagship business -- selling prepaid vouchers for discounted dining, spa treatments, and other local experiences -- is in a bind. Competitors are giving up on the model. The daily deals product as we now know it is endangered.
The problem is that Groupon just doesn't realize it yet.
It was fun while it lasted
As bad as things have gotten, Groupon probably isn't going anywhere. It closed out its latest quarter with $1.2 billion in cash and no long-term debt. But it's easy to be pessimistic. Groupon went public at $20 last November. A year -- and an 87% haircut -- later, and the company has become a punch line on Wall Street.
Things were rosy when Groupon hit the market with a whopping $13 billion valuation. The model seemed perfect. It made sense: Approach local establishments to sell prepaid vouchers, and ask the businesses to split the revenue with Groupon. Sure, companies would be taking in roughly $0.25 on the dollar for a typical half-off deal, but it meant new customers for operators hurting for traffic.
Groupon became the leader in this seemingly no-brainer niche, mastering Facebook (FB) and Twitter to turn local deals viral. Offering buyers a deal for free if they could get three of their friends to follow suit was sheer genius.
It didn't take long before other companies hopped on the bandwagon.
It wasn't just Groupon, LivingSocial, and a growing number of copycats. Facebook rolled out its own daily deals platform. Dining reservations leader OpenTable (OPEN), travel deals publisher Travelzoo (TZOO), and foodie reviews website Yelp (YELP) followed suit.
After initial success, all four of those companies abandoned their offerings.
About that half-off mani-pedi Groupon...
Whatever happens, the Groupons you're still holding will be fine. The same can be said for that hair coloring deal you were thinking about buying this week or the half-off sushi outing that you will buy next month. Groupon's not going to burn its customers that way.
Even after most of the deals expire, merchants are on the hook for the money that you paid initially for the vouchers. Groupon pays the merchants in installments to account for any refunds, but the third and final payment is made after the second month.
However, the actual business of offering these prepaid vouchers is already starting to sting Groupon.
Dig deeper into last week's quarterly report and the problems are easy to spot. Revenue may have climbed 32% since last year's third quarter, but a major part of this is the Groupon Goods that the company began selling late last year. Instead of selling vouchers for marked down local experiences, Groupon resells closeouts at clearance prices. It's a low-margin business, but it pads the company's top line. Back out direct revenue, and year-over-year growth was essentially flat. On a sequential basis -- meaning pitting the third quarter to this year's second quarter -- Groupon suffered a 16% slide in non-direct revenue.
What's next for Groupon?
You can already see Groupon's head spinning in different directions, finding new ways to spin a Rolodex. It has helped roughly 250,000 businesses sell deals, and now it's going after them by offering other services.
Groupon recently began offering companies credit card processing at more attractive rates than traditional transaction services. It also offers a scheduler for appointment-based businesses and a tablet app for restaurants to improve their operations.
It's clear that Groupon is building out new businesses to compensate for the sequential decline in its original voucher business.
Reminder: Go use your Groupons! They may not be around too much longer.
Motley Fool contributor Rick Munarriz does not own shares in any of the stocks, except for Travelzoo. The Motley Fool owns shares of Facebook. The Motley Fool has bought calls on Facebook. Motley Fool newsletter services have recommended buying shares of OpenTable, Travelzoo, and Facebook.
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