Costco Wholesale Corporation's Newest Competitor: Groupon Inc?

Source: Groupon. 

Move over Costco (NASDAQ: COST  ) , there's a new competitor invading your turf. After Groupon (NASDAQ: GRPN  ) revealed its new Basics service, it's clear that there's another competitor in the world of bulk sales. In essence, Groupon's Basics allows customers to buy personal care, health & wellness, and household products, in addition to groceries, on its site with no subscription required. With the company's foray into this realm of consumer goods, can Groupon become an even bigger e-commerce player or should the company order one of Costco's caskets to bury itself?

Groupon's results have been mixed these past few years
With revenue of $2.57 billion, Groupon is a decent-sized business. However, the company does have two problems; slowing revenue growth and consecutive annual net losses. Even though the company's revenue has soared over 17,600% from $14.5 million in 2009 to its current level, its rate of growth has fallen considerably. Between 2012 and 2013 alone, the business's top line grew just 10%. On top of this, shareholders have been hit by net losses totaling $820.5 million over this timeframe.

GRPN Revenue (Annual) Chart

Groupon revenue data by YCharts.

In an effort to grow its sales, Groupon has undertaken the task of acquiring businesses like fashion site Ideeli and LivingSocial's Ticket Monster. While these deals have been conducted with the purpose of improving the business, the company's main emphasis seems to be on growing its Groupon Goods category.

Over the past year, this part of the company, which sells everything from jewelry to electronics, has seen its revenue climb 47% from $773 million to $1.1 billion. The business is such a major part of Groupon that, in 2013, it accounted for 44.2% of the company's consolidated sales and 52% of its U.S. sales, up from 33.1% and 38.7%, respectively, the year before. If management's efforts prove successful, Groupon Goods could see a significant rise in sales over the next few years.

Groupon's move has big potential
By moving into this space, Groupon is moving closer to the business model used by Costco. As one of the largest retailers in the country, Costco has enjoyed tremendous success by selling thousands of products to consumers in bulk at prices that are lower than many of its peers. This business model has allowed Costco to increase its sales by 47% from $71.4 billion to $105.2 billion in just the past five years, while net income soared an impressive 88% from $1.1 billion to $2 billion.

COST Revenue (Annual) Chart

Costco revenue data by YCharts.

Although its Basics operation is just starting up, Groupon has one advantage that Costco does not; it has not announced plans to charge customers for the right to use its Basics service. This stands in stark contrast to the $55 to $110 membership fees charged by Costco each year.

Admittedly, Costco's decision to charge customers to be members created $2.3 billion in sales in 2013 and the company has an 86% member renewal rate, but having the option to shop for similar deals online at no extra charge might incentivize some customers to defect to Groupon, especially with the free shipping the company offers on orders of $24.99 or more.

Foolish takeaway
Right now, Groupon is striking out with the intention of taking over some of Costco's turf. In the long run, it will be interesting to see how much traction the company can gain, but with only 3% (or $3.2 billion) of Costco's sales coming from e-commerce, it's unlikely that Groupon's business will change materially overnight. However, if the company can effectively compete with Costco, Groupon's strategic move could create a great deal of value for shareholders down the road.

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Read/Post Comments (2) | Recommend This Article (3)

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  • Report this Comment On May 11, 2014, at 11:20 AM, GeTull wrote:

    I have used Groupon in the past and plan to use Groupon in the future to purchase items. Each time the items are of better quality than I expected. Most of the time the prices are at what most people would call clearance prices, much lower than you could get at any retail store even Costco.

    Lately Groupon has stepped up and increased their online adds and really increased the items you can buy online. The prices they offer for most items are almost unbelievable. Usually 50 to 70 percent lower than you could find at any store.

    I do own Groupon stocks. I purchased them last Thursday at $5.50 per share. I think that was the bargain of the year.

  • Report this Comment On May 12, 2014, at 2:01 PM, 1492 wrote:

    Thank you for your interesting take.

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