Is Groupon Better-Positioned Than We Thought?

Count me among the Groupon skeptics. The business is losing money and failing to attract repeat customers, while Google (Nasdaq: GOOG  ) and Facebook use their extensive reach to steal group-buying contracts from Groupon and its chief rival, LivingSocial.

Or at least, that's how it was. Late last week, Facebook officially ended a four-month trial of a would-be Groupon competitor called Deals. "We've learned a lot from our test, and we'll continue to evaluate how to best serve local businesses," the social network said in a statement emailed to Reuters.

Some will be tempted to look at this with relief, as if Groupon and LivingSocial have a lot less to worry about. I suppose that's true to some extent. But let's also not kid ourselves; both of these companies face hundreds of local competitors. HomeRun and Denver Daily Deals send my family offers all the time.

Nor is the model unique. Groupon's travel deals service isn't materially different or better than what Travelzoo (Nasdaq: TZOO  ) offers. And OpenTable (Nasdaq: OPEN  ) already has relationships with thousands of restaurants. Why use Groupon or LivingSocial if your primary reservations partner -- a partner your customers already like -- offers a similar service?

From where I sit, backing is the only reason Groupon or LivingSocial are still considered relevant. Big-name venture capitalists Accel Partners and Kleiner Perkins Caulfield and Byers have joined with big fund operators Fidelity and T. Rowe Price in funding Groupon, while Amazon.com (Nasdaq: AMZN  ) has taken a stake in LivingSocial.

Alas, these are early investors. If Groupon and LivingSocial go public as expected, VCs and corporate backers will rake in millions (billions?) pushing junk stock to unwitting common investors who may never see a dime of profit.

Too harsh? Perhaps, but to me Groupon is salesforce.com (NYSE: CRM  ) without the stickiness. Customers never commit; they just come and go. My family's bought more from Denver Daily Deals than we have from Groupon. Why? They pitched coupons we'd actually use.

In this sense, neither Groupon nor LivingSocial possesses the sort of brand power that allows other commodity operators to thrive. Rackspace Hosting (NYSE: RAX  ) and Netflix (Nasdaq: NFLX  ) offer services that are slightly different than their peers, allowing them to profit handsomely despite their abundance of well-funded competitors.

Facebook is out of the group buying business. Good for you, Groupon. Live it up, LivingSocial. Take a breath and then get back to work. Your businesses aren't any better-positioned than they were a month ago.

Do you agree? Disagree? Please weigh in using the comments box below. And if you're in the mood for more stock ideas, watch this free video special report. You'll walk away with a better understanding of the cloud computing movement Facebook is cashing in on and a winning pick from our Motley Fool Rule Breakers scorecard. Click here to watch now -- it's 100% free.

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Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (2)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 31, 2011, at 8:33 PM, prginww wrote:

    Groupon and LivingSocial are way out front. No one will catch them because there it would take at least $1,5bn to get the massive distribution these companies already own. The only company that has the money - Google - simply doesn't have it in their DNA / understand how to sell advertising direct to SME's or sell face to face as is required in the deal space. Not only that but the deal business will morph into and takeover the Yellow Pages business within the next 3 years. The nonsense about no customer loyalty is simply not true - GP customers buy on average every 4 months and their merchants renew their deals at a 50-60% rate. Compared to 95% of media businesses including Google this is a win win for everyone.

  • Report this Comment On September 01, 2011, at 2:30 PM, tgauchat wrote:

    Facebook will be back.

  • Report this Comment On September 04, 2011, at 5:12 PM, InsideSales wrote:

    Groupon is falling apart internally, and sales on a city by city basis have been declining for more than 3 months. They even stopped the "get your swagger back" mid week keg parties. They are laying off significant numbers and rearranging the management team. If they survive, it will be a different company.

    Right now, they are hiding behind the sec quiet period, but lots of laid off staff members with siginificant lawsuits will show what is really a happening. Just Look at the Court system. More than 120 lawsuits. Many in the most recent weeks. Several will be class action. And talking about the mismanagement will get you fired on the spot.

  • Report this Comment On September 06, 2011, at 4:02 PM, tu1532 wrote:

    I would have to say that groupon and livingsocial are not that great. Yes they offer really good deals that you have to pay in advance and YOU have to pay in advance to use them. These companies are on the users side finding them great deals, but who is on the merchants side? These companies take half of the advertised price plus whatever the merchant has to pay to be on their sites. That is not a good deal for either of the parties involved. In the end these merchants are offering their service for not just 50% of what their deal is but 75% or more and most of these users are not repeat customers because they are only going to go to that business for the deal and mostly likely are not going to go back.

  • Report this Comment On September 06, 2011, at 4:17 PM, cuneiform wrote:

    Google is poised to be in direct competition with Livingsocial and groupon- they are partnered with Local.com (LOCM), and LOCM is gaining a large share of this space. LOCM is poised to be in the top five. They have made key acquisitions this year that are going to enable them to be frontunners. Take SDD (screaminDailyDeals) for example... they are really doing well and are expanding across the nation as we speak. LOCM is stealthily gaining huge momentumin the local adspace industry, and will be Google's answer to grabbing a large share of the multi-billion dollar local adspace market.

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