By Ciara Linnane, MarketWatch
MarketWatch photo illustration/iStockphoto
Groupon Inc. shares slid 43% Wednesday and Blue Apron Inc. was down 22%, after far weaker-than-expected earnings from both companies revived concerns about the sustainability of their business models.
Groupon’s /zigman2/quotes/207356672/composite GRPN +3.52% decline marked the biggest one-day selloff since its 2011 IPO and came in heavy volume of 119 million shares that made it the most actively traded stock on U.S. exchanges. The company said late Tuesday it plans to exit from the Goods category to focus on the $1 trillion “local experiences” market.
The news came as it reported a 23% decline in quarterly revenue, named Melissa Thomas as new chief financial officer, and said it plans to pursue a reverse-stock split to boost the price of its stock.
Wedbush analyst Ygal Arounian said the decision to exit Goods was the right one and would remove a significant drag on value.
“We see the 4Q results (and the exit of Goods) as increasing the likelihood of a takeout/merger (which we’ve written about previously), with our view that Groupon and Yelp /zigman2/quotes/201334325/composite YELP +4.49% would make a value-creating combination and that IAC /zigman2/quotes/205118493/composite IAC -0.13% can be a trusted steward to manage,” the analyst wrote in a note to clients, reiterating his neutral rating on the stock.
Groupon’s business model has been the subject of critical academic research, ever since the company first started its daily deal coupon business back in 2008, offering everything from spa and beauty treatments to restaurant deals.
That business involves signing up merchants that are willing to offer sometimes deep discounts on goods and services aimed at local consumers in the hope they can upsell them other services to make up the price shortfall. Groupon makes money by taking a commission from the discounted price.
For consumers, the draw was the perceived benefit of group buying. As long as enough people wanted the same thing, Groupon could help them get a good price. For merchants, the downside became apparent when the service mostly attracted bargain hunters, who were unwilling to spend more than the face value of the coupons. Some of the small-business owners that used the platform found themselves overwhelmed operationally when a deluge of customers took up the coupon offer.
“Some businesses were just ill-prepared to handle the service and support of this wave of low-quality, low-margin customers coming in the door,” said Jonathan Treiber, chief executive of RevTrax, a platform that manages special offers and discounts. “Groupon does drive traffic, but merchants have a love/hate relationship with it.”
David Reibstein, professor of marketing at The Wharton School, said there was never a compelling reason for Groupon to exist.
“There are two things that possibly happen with Groupon,” he said. “One is you have a customer that was paying full rate, but is now paying less and is just cutting margin away from the merchant. The second is that the people who are signing up are now occupying spaces that full-paying customers were going to use.”
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