Can it get better for Groupon
1: Can daily deals work in a crowded marketplace?
Groupon was really the first company of its type, but any seemingly successful niche never stays lonely for long. Internet giants Google
The primary barrier to entry to daily deals isn't technology; it's marketing. Groupon's insane employee growth rate was built almost entirely on an expanding web of salesmen, who sold small businesses on the benefits of Groupon and thus established a local presence from which to sell deals.
The Google and Amazon brands are undeniably stronger than Groupon's in the public consciousness, which should (at least in theory) allow the two companies to attract better deals with less legwork. The increasingly public negative backlash against Groupon promotions should also have the long-term effect of winnowing down the small businesses that continue to work with daily deals. My Foolish colleague Dan Newman recently pointed out that many small businesses suffer declines in their Yelp
Will Groupon be able to maintain profitability as competition intensifies? Perhaps, if there's enough growth left. That leads us to the second issue.
2: How much more growth is possible?
Growth estimates for 2013 expect Groupon's bottom line to grow by triple digits, but next year's revenue is expected to grow by only 20%. That's a good sign in the short term, as many bears doubted that Groupon might be able to improve its margins. Margins can't increase forever, so when will Groupon be "mature"? The same problems plague Facebook, which was already suffering declining growth rates when it went public.
Between competitive pressure pushing gross margins down and market saturation pushing growth rates down, Groupon looks set to smack into a growth wall sooner rather than later. To overcome that problem, we look at the final issue.
3: Can Groupon diversify effectively?
Groupon's already moving into a new niche with Groupon Goods, an online retail operation that puts it in direct competition with (who else?) Amazon. If Jeff Bezos didn't have a bull's-eye on Groupon before, he probably does now. Shareholders already have to contend with potentially dodgy accounting regarding the retail segment, which is a pretty inexcusable fumble from a company that's been dogged by accounting problems since its IPO filing.
Accounting issues aside, does Groupon really think it's wise to go head-to-head with not only Amazon, but also deep-discount money-loser Overstock.com
I don't doubt that there are ways to diversify. Many top tech companies have. However, Groupon Goods doesn't look like the best way to do that. What else is up CEO Andrew Mason's sleeve?
Amazon might hold more sway over Groupon's future than anyone else, thanks to its position in daily deals and its online retail dominance. Stay on top of Jeff Bezos' next big move with the Fool's premium research service. It might not be as fun as a half-off spa treatment, but it's a whole lot more valuable. Subscribe today.
Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter, @TMFBiggles, for more news and insights. The Motley Fool owns shares of Amazon.com and Facebook. Motley Fool newsletter services have recommended buying shares of Amazon.com, Facebook, and Google. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.