How the Emerging Markets Can Help Rescue Groupon

Groupon is spending a lot of money to grow internationally. While that's hurting the company now, its strategy in the emerging markets could pay off big time.

May 22, 2014 at 12:02PM

It's been a horrible start to the year for online deals purveyor Groupon, (NASDAQ:GRPN). The stock has lost half its value just since the beginning of 2014, at its recent price of $6 per share.

There's good reason for this, as the company remains consistently unprofitable due to its outsized costs. As Groupon grows, it's having to spend a lot more money to acquire incremental sales, and that's weighing heavily on the bottom line.

But while you may be quick to write-off Groupon entirely, that may be premature. Groupon has an opportunity in front of it in the form of significant emerging market growth.

Groupon goes on a spending spree
Groupon operates in three major geographic segments: North America; Europe, Middle East, and Africa (EMEA); and Rest of World. For the time being, Groupon still does most of its business in North America. To illustrate, the company generated 56% of its revenue from North America last quarter. That was about unchanged from the same quarter one year ago, and it means international operations only make up 44% of its business. This stands to change going forward, however, once Groupon's overseas growth initiatives gain traction.

Groupon bought Ticket Monster last year for $260 million in cash and stock to expand into Korea. At the time, the deal was meant to serve as a cornerstone for Groupon's plans for Asia more broadly. It looks like the strategy is working, especially in the product category that matters most, which is goods. Groupon's goods segment is much more important than its local deals or travel Segment, because goods itself makes up half the company's total revenue.

Revenue in the company's Rest of World segment increased by 22% last quarter, which lagged North America's 26% revenue growth. From that perspective, it might seem like it's not a wise strategy to keep investing in overseas growth. But Groupon's Rest of World goods product category is taking off. Revenue in Rest of World goods soared 69% last year, far better than its domestic Goods performance.

Such strong growth was due mostly to Ticket Monster, which contributed virtually all of the growth in Rest of World goods revenue. Ticket Monster itself now comprises 30% of Groupon's Rest of World total revenue base, and that's only poised for further growth going forward, because the Rest of World segment overall comprises just 12% of Groupon's total revenue.

An emerging opportunity up ahead
Groupon is busily building out its business internationally, but the benefits have been slow to materialize. The company is spending a lot of money on marketing and other growth expenses, and it's also generating lower margins in the emerging markets. That could all change in future periods. As its services gain traction and it acquires active users, it should be able to reduce marketing expenses and become more profitable.

The bottom line is that while Groupon's growth initiatives are weighing on the company currently, there's a light at the end of the tunnel. The emerging markets represent a strong opportunity. It's now up to management to execute.

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Bob Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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.

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