Groupon - the client guessing game

Groupon which just completed a $700 million initial public offering last week is a company taking an old-school product like coupons into the internet age. This provides some opportunities and pitfalls for investors as it requires more insight into the business model which the company has barely provided leaving investors guessing.

Poor disclosure versus peers
We have previously given our view on Skype and LinkedIn, with the disclosures on clients/customers being quite different in each company. Skype had good disclosure while LinkedIn did not. Groupon’s seems even worse. When this client/customer information is not disclosed the initial opinion is that the numbers are not good – hardly supporting an IPO nor a bullish view.

What do investors need?
Investors would benefit greatly from more segmentation information from Groupon (and not just on subscribers/customers) to grasp the life of them in Groupon deals but also information on what goods they are buying.

Subscribers/customers.
Groupon’s subscriptions (email addresses) have risen from 1.8m to 142.9m in 2½ years, see table 1. Even if this number is impressive then we would like to know how many unsubscribe from this – i.e. “churn”. How much does Groupon have to pour into the bucket just to stay even? This number would provide information on what marketing efforts are needed to keep this asset alive. Talk to Vodafone or Verizon – they know how painful this can be!

Of its email base so far in the short history of the company there has been a fairly constant fraction of approximately 20 percent which have actually done a deal (cumulative customers, pct). This is an important number to keep an eye on. If this fraction declines then the quality of the overall email list is declining and has less value. This would point to less payoff from marketing expenditure.
 
From the email list some have become customers and we are informed that 29.5m have bought something. But this group of customers has different qualities and herein lies the key issue. A better indication of the health of the business would be evident by data concerning who has bought something in the last three months, 3-6 months ago and then even further back. Other interesting questions to be answered could include how have purchasing patterns changed over time? Which customers are actually buying things now as they are actually the most valuable customers. What are the average revenues in this segment – and not just averages on the year? Table 2 below gives an example of the information Groupon should provide.
 
Merchants!
 The number of merchants has risen from 2,695 to 190,795! We need some detailed information about these however. How do we now if they are happy with this model? The same segmentation for customers should be done on merchants too. Do they only make one deal – and skip the concept – or are they thrilled about it and make many deals?

Which products are in the deals?
Finally it would be nice to have information on the products sold. We would expect the merchants to be more inclined to make deals if there is a good chance of selling more on top of a deal. Deals in restaurants could probably also include the sale of drinks and desserts which would be logical when people buy a cheap meal. If the deal is towels and the customer just picks them up and leaves then it is of less value to the merchant.

Conclusion
We have seen a lot of numbers from Groupon, but when it comes to the essential numbers then the company is not particularly informative. Investors interested in the stock need more details! One could easily take the stance that less information is a negative sign and this requires more marketing.