With growth in its daily deals business slowing, Groupon is looking to turn itself into a local mobile commerce powerhouse by selling merchandise directly to consumers.

In the second quarter, Groupon’s revenue increased 45 percent from a year ago – driven by direct sales of merchandise to consumers. It was the first time that direct sales were material to Groupon’s overall performance but the company expects this area to continue to grow as it focuses investment here.  

“With our massive network of both customers and merchants, we believe we are better positioned than anyone to create the first true global, local mobile ecommerce marketplace,” said Andrew Mason, CEO and director of Groupon, Chicago, during a conference call with analysts to discuss the quarterly results.

“We have the largest percentage of transactions occurring on mobile devices of any major ecommerce company, which makes us extraordinarily well positioned as we make this transition towards becoming the local commerce operating system,” he said.  

Direct sales
The company’s gross billings, which is what Groupon earns after paying a cut to merchants, rose 38 percent compared with a year ago but slipped five percent compared with the first quarter of the year. Mr. Mason pointed to the poor economy in Europe as one of the factors dragging down the daily deals business during the second quarter.

In contrast, direct revenue was $65.4 million in the quarter, compared with $19.2 million in the first quarter 2012. Direct revenues come from the Groupon Goods business, which was introduced last fall and sells physical goods directly to consumers, as well as the sale of movie tickets and travel vouchers.

Mobile plays a big role in both Groupon’s daily deals business as well as in direct sales.

Groupon, which reported more than 38 million customers, said that nearly one-third of North American transactions in July originated from mobile devices and that the average customer on mobile spends about 50 percent more than on desktop.

Despite the significant growth in direct sales, the market did not react well Groupon’s results since the new ecommerce focus is unproven. Groupon’s stock was down significantly following the release of its quarterly results.

One of the reasons for the concern about the direct business is that Groupon has not revealed what its margins are for this business.  

“Consumers will always be interested in the opportunity to buy goods at a discount, so their Groupon Goods business does provide an opportunity,” said Dave Kaminsky, emerging technologies analyst at Mercator Advisory Group, Maynard, MA. “This is why this arm of Groupon’s business has been growing rapidly – revenue in Q2 was more than 3 times higher than in Q1. 

“The question is whether the profit margins are high enough to justify Groupon shifting the focus of its future investments from coupons to merchandise,” he said.

“Although Groupon has not disclosed specific margins for their Goods business, it is well known that they are significantly smaller than their core business of daily deals.”

Taking on Amazon
Groupon faces significant competition in ecommerce, where Amazon, eBay and others have already made significant inroads.

Groupon hopes to build its ecommerce business by leveraging its email database to drive Groupon Goods. The company said it will focus investment going forward on building the ecommerce experience.

“The biggest challenge is that, in many ways, Groupon is trying to take on Amazon’s ecommerce territory,” Mr. Kaminsky said. “Groupon’s head start in developing its coupon industry gave them a significant advantage over the Amazon-supported LivingSocial; Amazon’s head start in ecommerce is far larger and gives them a much greater advantage.”

While the focus is on the ecommerce business, Groupon is not walking away from the daily business at all. The growing competition in the daily deals space is making it difficult for companies such as Groupon to continue to drive growth from this area.

Groupon is attempting to deal with the situation by focusing on delivering more personalized deals.

“Consumers will always have interest discounts, and that obviously includes Daily Deal coupons,” Mr. Kaminsky said. “One issue facing companies like Groupon is that the barriers to entry for the Daily Deals industry are relatively low -as seen by the rapid rise and fall of daily deals companies in  2011 and early 2012. 

“Groupon’s large merchant network and customer base provide an advantage that startups do not have, but companies like financial institutions and payment networks are now offering deals themselves,” he said.

“Moreover, unlike Groupon, these companies have access to the consumer’s credit card account, and can factor the coupon directly into the transaction without requiring any action from either the customer or the merchant.  This is a level of convenience that Groupon cannot offer, at least not as easily.”

Final Take
Chantal Tode is associate editor on Mobile Commerce Daily, New York