What's Next for Groupon - 12/13/2010

NEW YORK (AdAge.com) -- Groupon left many, many mouths agape last week, as the daily deals site walked away from a $6 billion acquisition bid from Google.

While news of the failed deal ensured that the last person under the last rock is now aware of the Chicago-based social-commerce startup, it also means more eyes are watching to see if two-year-old group-buying site will stumble as it walks away.

So, where exactly is Groupon headed?

"We'll continue to expand geographically and on the subscriber front," Rob Solomon, Groupon president and chief operating officer, told Ad Age on Wednesday. Beyond growing its already expansive global footprint -- Groupon has more than 40 million users in 300 global markets to date -- the company is also starting to float services that evolve its daily deals for local merchants to something beyond just emails and alerts.

As for where Groupon plans to plant its flag next, Mr. Solomon says its analyzing the best way to enter China, India and Korea and that the Middle East is also a likely region.

Source: comScore

Even without a global partner like Google, Groupon's footprint is spreading at a dizzying pace -- it went from one country to 35 this year alone. With $135 million in new capital from Battery Ventures and Facebook and Zynga investor Mail.ru Group, Groupon entered Europe, Latin America, Asia and Russia largely through acquisition. In May, Groupon picked up CityDeal -- at the time, the European group buying service had sent out its first deal in Berlin only five months prior.

By summer, it was setting up operations in Latin America and, today, it gets 12% of its 21 million in global website unique visitors from Argentina alone, according to ComScore. It went on to acquire Russia's Darberry and Japan's Qpod in August and picked up a trio of sites to get into Hong Kong, Singapore, Taiwan and the Philippines in late November.

Top 10 Groupon Countries by Unique Visitors
United States 6,256,000
Germany 2,928,000
Argentina 2,581,000
United Kingdom 2,413,000
Italy 2,296,000
France 1,620,000
Canada 874,000
Poland 732,000
Spain 504,000
Japan 438,000

"What you'll find is our international business in the very near future will likely be larger than our North American business in terms of revenue," Mr. Solomon said. Like it's done up until now, acquiring fledgling companies like Qpod, which had 20 employees when it was picked up, is part of the formula.

Boots on the ground and subscriber lists abroad have not yet begun to pay off, though. Groupon has more subscribers outside of North America, but is selling far more within North America. The company reports 18 million deals sold in North America, and 7 million abroad, even though the company reports 19 million North American subscribers to 21 million abroad.

That's not to say Groupon isn't doing well -- it says it was profitable less than a year after launch and Citigroup analyst Mark Mahaney put its gross sales at $800 million (estimates for sales have ranged from $500 million to $1 billion). However, time with tell if local merchants will continue to brings their collective millions back to Groupon -- slashing prices and splitting revenue with Groupon ends up unprofitable for one-third of businesses, according to a study from Utpal M. Dholakia, associate professor of Management at Rice University. That meant 42% of small businesses surveyed said they wouldn't run a Groupon deal again.

On global sales catching up to those at home, Groupon spokesman says North America leads in sales because it's the oldest market. As for the others, conversion rates have traditionally improved over time. It could rely on perfecting sales and editorial strategies for international markets -- a key factor when local merchants and local buying habits are concerned. In the U.S., Groupon has created a stylebook and calculated editorial strategy to drive those conversions.

"I have a hard time believing [Groupon is] completing a level of diligence in these acquisitions," said Kevin Ryan, CEO of the strategic consulting and project management firm Motivity Marketing. "America is very unique in that the buying behavior here is not the same it is in South America, or Japan or China. Looking for the inside deal -- the local deal -- it's not the same."

Alongside Groupon, stiff competition is springing up abroad. In Brazil, a market Groupon has just begun to crack, group buying site Peixe Urbano opened its doors before Groupon and has 5 million subscribers. (Check back for Ad Age's three-day series on group buying trends in Latin America, Europe and Asia.)

Meanwhile, back in the U.S., more competitors rush the group-buying field. E-commerce giant Amazon recently invested $175 million in Groupon's biggest competitor here, LivingSocial. Local broadcasters and newspapers are wading into the fray with white-label technology so they, too, can set up shop and send discount emails on deals brought in from their existing sales forces. Though, Mr. Solomon is not worried: "It's easy to copy this model," he said. "But unless you're a 100% dedicated you're going to fail. There's going to be a lot of consolidating over the next year."

Groupon undoubtedly already has the brand, especially thanks to Google, and a healthy head start. But, to prove it can grow above that $6 billion, Groupon will likely have to think bigger than emails and mobile apps. Facebook has managed the feat, largely thanks to CEO Mark Zuckerberg's vision of transforming the website into the social connective tissue for the entire internet. Since Mr. Zuckerberg launched his social graph in April -- those like-thumbs-up buttons that have since popped up on websites everywhere -- the company's valuation has ballooned to $50 billion, based on recent private market transactions.

Groupon, too, has begun to think beyond the emails that have made it popular. While the company is largely known for its deal emails, arriving in users' inboxes daily, Groupon also supports mobile apps, which bring in a "material portion" of its revenue, according to Mr. Solomon. It also acquired a mobile developer Mob.ly this year.

In three U.S. markets, Groupon has launched an e-commerce storefront tool for local merchants, Groupon Stores, for businesses to create their own deals whenever they want and the Deal Feed. With the feed, consumers get a personalized stream of deals, where they can follow merchants and are served others based on prior behavior. The phenomenon builds on Groupon personalization, which it launched this summer to slice and dice the deals to be more relevant. It has also hired ad agency Euro RSCG for strategic counsel on its database and customer-relationship management.

"One driving principle is that we want to be the e-commerce engine for local transactions," Mr. Solomon said. "We hold mobile, hyper-local, social and real-time as basic tenets that we have to get great at. If we get those four right, that can be very powerful. We're focused on all of those things."

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Contributing: Edmund Lee

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