There are many ways of analyzing a business. But perhaps one of the best ways to do so is by creating a SWOT analysis. This sheds light on the good and bad points of a business in terms of its strengths and weaknesses, which are mostly internal in nature, as well as its opportunities and threats, which are largely external.

I recently wrote about why Groupon (Nasdaq: GRPN) is not a good investment, and here's a further assessment of Groupon's business.

Strengths

  • Groupon enjoys strong brand recognition given the sheer number of subscribers, which went up in the fourth quarter of 2011 by 275% from the comparable quarter last year to 33 million.
  • Revenue has been on a steep upward trajectory. Fourth-quarter revenue was up 194% to $506.5 million from $172 million in the comparable quarter last year.
  • The company offers deals from a large number of merchants spanning a diversified range of products and services that cater to many groups of consumers.
  • Groupon is geographically diversified. It operates not only in the U.S., but also in at least 45 other countries across the globe.
  • The company does not have any debt on its balance sheet.

Weaknesses

  • Groupon has incurred net losses totaling $650 million since June 2009.
  • Groupon's gross billings have been growing at a slower rate than before. I believe this is the result of a faulty and unsustainable business model.
  • The company's business significantly depends on marketing to acquire new customers and retain existing ones. This entails recurring marketing expenditure to maintain growth.
  • Groupon's deals are generally not profitable to merchants. It usually deducts 50% from sales proceeds as commission for marketing a vendor's deals, over and above the discount offered to customers. This seems unsustainable in the long run for small businesses with low margins.
  • The company has been subject to negative publicity. Last year, its financial reporting was considered misleading by the SEC.

Opportunities

  • Groupon can be a potential acquisition target for larger companies, such as Google, Facebook or Amazon.com, leveraging its subscriber base and brand value.
  • On the flip side, if Groupon is not a takeover target, it has the opportunity to tie up with Internet companies such as Google and Facebook to publicize its deals and enhance its reach.
  • Groupon has the opportunity to go beyond its core business of offering daily deals to become an e-commerce site like Amazon or eBay.

Threats

  • Groupon mostly offers deals on discretionary items. In a weak economic environment, consumers would not readily spend money on items such as club memberships and dining.
  • There are no significant barriers of entry in the daily-deals segment. And Groupon doesn't offer anything unique or special that it can use to draw the attention of online customers or merchants in the highly competitive daily-deals market.
  • Besides facing competition from strikingly similar sites like LivingSocial, Groupon also has to contend with more financially capable rivals, including Amazon Local and Google Offers, as well as more focused rivals, such as Travelzoo, for deals relating to the travel and entertainment segment.

The Foolish bottom line
While Groupon may have successfully grown its business very quickly, the company's future survival looks questionable. If the company could make some changes to the way it operates, or maybe go beyond just offering daily deals, that might make its future seem a lot less bleak than it does right now.

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