After eight mostly difficult years following the launch of the daily group deals buying site, Groupon has attracted a major player in e-commerce behemoth Alibaba and has seen its stock increase more than 80 percent in less than a week. The purchase last week by Alibaba of approximately 33 million shares of Groupon stock automatically made the Chinese company its fourth-largest investor and triggered – at least at the time – the biggest daily gain for the stock in more than four years, up more than 40 percent.
Groupon debuted in 2008 with plenty of fans and a truly innovative business model. Businesses would receive free promotion on the site for a daily deal on everything from meals, retail products and personal services, such as massages. Those ads offered discounts of 50 to 70 percent and even more, if a certain number of users signed up for the coupon (or “Groupon”).
The company reached $760 million in revenue as it spread quickly through the United States and established a presence in 29 countries within just a couple of years. That led to an IPO in 2011 that raised about $700 million, the largest IPO for a U.S.-based Internet company since the launch of Google, Inc. in 2004.
But almost from the beginning of its public life, things went sour for Groupon. It would take less than three weeks for the stock price to tumble below the IPO offering. Through the end of 2015, the total stock loss had hit 87 percent of that initial IPO.
Analysts questioned the very business fundamentals that called for rapid expansion in far-flung areas around the globe, and business owners complained that the Groupon experience was not only unpleasant but often unprofitable, as well. In a typical daily deal arrangement, Groupon gets half of the revenue and many businesses found that customers did not purchase anything other than the discounted item for the day. That meant many companies – particularly small and mid-sized businesses – lost money through the partnership with Groupon. To make matters worse, more than 300 competitors crowded into the group-coupons marketplace. The numbers were gruesome: a net loss of $820 million between 2009 and 2013, and more of the same in 2015.
In December, 2015, Rich Williams replaced co-founder Eric Lefkofsky as the CEO. Williams had valuable experience at Amazon and first joined Groupon in 2011, so he was familiar with the landscape and quickly announced he had a 100-day plan to begin turning the company around. That involved making the company much less far-flung–Groupon left 19 international markets. In addition to the focus on geography, the company also moved away from less profitable deals. Williams described the change in philosophy as “moving away from empty calories in shopping.” Some lower margin items will still be used to attract customers, but the new strategy is to rely on deals for home goods, jewelry, apparel, healthcare and other higher margin categories. Also, Williams saved money by centralizing operations within the company.
So far, it’s hard to argue with the results. The company reported a 4th quarter profit of 4 cents per share on in February, 2016, beating forecasts of a 5-cent loss per share. That started the stock upward, followed by the news of the Alibaba investment, convincing a large group of investors that Groupon itself had been discounted for too long.