Is Groupon A Threat To Wal-Mart And Google?

There's been so much going on in the world of e-commerce that, unfortunately, I haven't had much time to blog. Over the next couple of days I wanted to share and discuss two big items that I think will have tectonic implications for e-commerce and the incumbent players.

Groupon - changing the game of e-commerce?

The first e-commerce shaking topic I wanted to cover is Groupon's entrance into the marketplace space and it's impact. I'm pretty shocked this has flown under the radar for so long, but I think it's time to really shine a bright light on it as it can and will be pretty big. How big? To quote Justin Timberlake playing the semi-fictional role of Sean Parker from Social Network:

"A million dollars isn't cool. You know what's cool - a BILLION dollars."

Yes, I think Groupon (GRPN) could quickly siphon $1B+++ out of the e-commerce market. Before we jump into my thesis, here's a brief backgrounder on Groupon.

Groupon - brief backgrounder

• In August in an update to their S1 Groupon disclosed that its subscriber base had mushroomed up to 115m subscribers.
• Groupon's subscriber base is growing on average 17% m/m (so by the time you read this that 115m is probably more like 134m!
• I can't re-itereate this point enough - Groupon emails 134m globally EVERY DAY. No other company on the planet has that type of daily customer direct touch. Sure FB has 750m users, but they don't have permission to put a deal in front of them every day.
• When I say Groupon, I mean 'the daily deal space which is dominated by Groupon' - the second largest is LivingSocial and they have 30m subscribers. Groupon states that 75% of LS's subscribers are also on Groupon, so there's an incremental 10m or so users on LS and maybe another 20m if you count the 'clones'. Suffice it to say that once Groupon comes out with their offering, every clone will, well, clone that too. LS is already well down the path as you'll see.
• There's a big discussion in the blogosphere around if Groupon is a viable business. Everyone remember 1999 when everyone thought that, 'Sure Amazon sells books to millions of people, but they'll never turn it into a viable business'. I don't want to get into the Groupon viability discussion, but personally, I think Groupon is viable on their business today and has an opportunity to really expand dramatically beyond the 'daily local deal' space if they can continue to drive value for subscribers.

Introducing Groupon Product

Months ago, we discovered (and I continue to be amazed there's no press on this!!) that Groupon has been running daily deals in the UK and internally seems to refer to this as "Groupon Product" as noted in this famous leaked internal emailfrom Groupon CEO Andrew Mason: (bolding is my own)

Travel and Product are enormous opportunities. After only a few months, they’re already making up 20% of revenue in some countries. We sold $2M worth of mattresses in the UK — in one day!

In the UK, you can find the Deals of the Day by choosing the city 'National Deal' or click here.

Here's a good example - it's a customized calendar at over half off. This was one of many deals available this day and you can see that an amazing > 21k were sold!

Clearly this is doing well in the UK and it can only be a matter of time before it comes to the good ole USA.

How it works

Here's how it works. Groupon emails the product deal to some subset or the entire subscriber base. The consumer then can learn details about the product by clicking through to a one-page product description. Note that the merchant has some branding exposure here (albelli in the above example). To purchase, the consumer clicks a buy-now button and is taken to a streamlined one-page checkout. The checkout is pre-populated with the subscribers stored payment /account information. The consumer confirms the transaction and is done.

All-in-all it’s an extremely smooth process aided by the fact that Groupon already knows a lot about you. The only thing that’s a little different from your average Groupon is that there is no voucher involved which is good as that would really complicate matters.

Finally, the merchant receives the order and ships the item to the consumers.

Groupon Product - a new marketplace is born!

At ChannelAdvisor we have a simple technical definition of a marketplace – whenever an order happens for a retailer/merchant off of their website, that’s a marketplace.

In the Groupon Product example:

• Groupon is the merchant of record
• The merchant ships the product

This is very similar to how Amazon’s 3P works and different only from eBay (EBAY) in that eBay is not the merchant of record, they run the payment against the merchant’s account, not eBay’s. So call it what you will, but according to our definitions and view, this is a new marketplace.

Groupon Product - Calculating the Oppportunity

Let’s think about what Groupon Product could mean for e-commerce by working on some math to put some bounds on the size of the program.

First here are some assumptions:

• Remember, Groupon has > 130m subscribers
• An average sales price (ASP) of $50 - very common for e-commerce
• A per-deal conversion rate range of .1%-1% - again very common.

Based on these datapoints the formula for calculating the Groupon Product GMV is: GMV = # of deals * ASP * CR * subscribers

For example to run through the formula:

• Groupon has one deal that is $50
• It is sent to 10m subscribers
• There is a .5% conversion rate
• GMV = 1 * $50 * .5% * 10m or $50 * 50,000 purchases = $2.5m

With that model as background, I built a table that calculates a range (low/high) of GMVs for different scenarios with the primary variables being the number of deals, the number of subscribers targeted and the conversion rate.

Having watched the Deal of the Day model play out at Woot, eBay, etc., I think the CR will be smack in the middle and the subscribers will be on the high side (they email them all today daily already). The biggest unknown in my mind is the deal frequency.

I’ve highlighted the 365 row in the table as that’s of course the deal rate for a daily deal offering. You can see at that level there is a range of $912m-$27b with a midpoint of $13b. At that rate, Groupon would a larger marketplace than Amazon. I took the deals up to 1400 as we've seen many programs (eBay specifically) scale up to 4-10 deals/day. Now at that deal pace, there will be conversion fatigue and maybe pressure on ASP, but look at the midpoint there of $40-50b.

Playing this out to its logical conclusion

I'm not aware of the details around the business model, but let's assume that Groupon Product has a 10-20% take rate vs. the 50% take rate used for local services. This product line could quickly swamp the size of the local deals and essentially convert Groupon to a complete marketplace type business vs. what we think of today.

Of course, what would happened if the daily product deal is successful is that you would have everyday deals, the number increases and suddenly you have a complete marketplace on a very large scale that TODAY has more users than eBay.

What does this mean for eBay, Walmart? Why shouldn't Amazon be worried?

Groupon's identity and messaging which is: "save half off with us" is one that clearly appeals to the value consumer. The value consumer is 100% in both eBay and Walmart's wheel house, so I think they are most at risk from Groupon's metamorphosis from a local deal site to a full-on national marketplace.

It's also interesting that eBay hasn't really caught on to this and is continuing to send eBay users over to Groupon through the eBay bucksprogram.

Amazon (AMZN) is somewhat insulated from this situation by a couple of factors:

• Amazon doesn't hang their hat on the value consumer. Sure they have some exposure, but primarily Amazon focuses on a combination of selection, value, convenience, ease of use.
• Amazon has a hedge in the form of their ownership of LivingSocial. This could be leveraged in a number of ways.
• Amazon could acquire the rest of LivingSocial and have a complete counter-offer to Groupon
• Amazon could keep LivingSocial separate, but perhaps have a counter to Groupon Products by leveraging Amazon's huge user base and access to products and merchants.

What do you think?

It's very early days, but from what I can see, Groupon Products could be a very, VERY big deal in the World of e-commerce that shakes up some of the incumbents - especially value-oriented players: eBay and Walmart (WMT). I'd be interested in what readers think in comments.

We'll continue to track this offering from Groupon closely here on eBay Strategies, so stay tuned!

Disclosure: I am long Google and Amazon. eBay is an investor in ChannelAdvisor where I am CEO. I am also a Groupon subscriber and avid user of Groupons.