You know how buyer’s remorse settles in quickly after you buy a daily deal for a fitness class you’ve never taken or a cuisine you’ve never tried in an inconvenient neighborhood? Some analysts think Groupon’s going to experience that on a grand scale after plunking down $43 million for flash-sale site Ideeli, suggesting that the purchase highlights what’s wrong with both flash-sale and daily-deal business models today.
Groupon has been trying to turn itself around after a series of management stumbles, accounting issues that had both the SEC and investors eyeing it warily, and the firing of founder and CEO Andrew Mason last year. Since going public in November 2011, the company has struggled to live up to investors’ expectations.
Ideeli, which Inc. magazine called “The Fastest-Growing Private Company of 2011,” sells discounted clothes, shoes and accessories — both men’s and women’s — along with home goods. It lost $30 million on revenues of $115 million in its last fiscal year, according to Groupon’s SEC filing about the purchase.
Since its founding in 2007, venture capitalists poured $107 million into Ideeli, according to TechCrunch, making the flash sale site nearly as much of a deal as Groupon’s vouchers for sushi or pedicures. Groupon hs been on a buying spree lately, acquiring South Korean company Ticket Monster from rival LivingSocial a couple of months ago.
“We believe ideeli is well-positioned in the online fashion segment of that market, as one of the leading independent fashion flash sites in the United States today,” Groupon says in its regulatory filing.
Some analysts are less enthusiastic. “I think they still have a mentality that dates back to 2010 when there was an inflated sense of the size of the market and a belief that off price sales were disruptive and still in evolution,” says Forrester Research analyst Sucharita Mulpuru. “To the contrary, the industry is pretty established at this point.”
Part of the concern is that the flash-sale business model is experiencing trouble of its own. Sameet Sinha, an analyst at B. Riley & Co. tells Forbes, “flash sales have lost their momentum.”
“Access to great inventory is still a problem,” Mulpuru says. Especially as the economy has recovered and retailers and manufacturers have gotten smarter about inventory management, there’s just less stuff out there for sites to scoop up at fire-sale prices, then turn around and sell at a heavy discount while still turning a profit.
Groupon also takes on more risk when it sells stuff as opposed to services, because it has to buy and hold onto inventory and hope it sells rather than just acting as a middleman between merchant and deal-seeking customer. When Groupon rolled out and aggressively expanded its Groupon Goods platform, this gave some investors pause.
“It’s going to be tougher for them to grow because the e-commerce space is very competitive,” analyst Edward Woo told Bloomberg in November, when Groupon reported a lower-than-expected loss for the quarter but missed analysts’ revenue projections.
To this point, Groupon suggests acquiring Ideeli could help it boost sales of high-end (and, presumably, higher-margin) items. “We’ve seen our customers respond very favorably to high-end apparel deals featured on our Goods site, as well as on Groupon Reserve,” it says in its SEC filing. “We intend for the ideeli brand to remain, with higher end brands continuing to live on that platform.”
According to Internet Retailer, Ideeli’s average sale in 2012 was $170, compared with just $40 for Groupon. In this respect, the purchase “helps Groupon gain access to a new category and adds to its top line and over time, to its bottom line,” Sterne Agee analyst Arvind Bhatia writes, calling the development “positive.”
“There’s an argument to be made that for 5% of their cash on hand, that’s worth acquiring a bunch of merchandisers who may have access to fashion brands,” Mulpuru says, noting that Groupon has $1 billion in cash on hand.
And Groupon says Ideeli’s mobile activity is attractive, praising its “growing mobile presence,” in the announcement about the purchase, although it doesn’t provide any additional details. The transition from desktop computers to tablets and smartphones has been a challenge for Groupon to navigate in the past.
By far, the biggest issue will be battling shoppers’ deal fatigue. The whole reason Groupon was able to score such a great deal on Ideeli in the first place is because people are tired of having their inboxes crammed with an endless stream of deal emails. “Shoppers are fatigued by these offers and growth comes from tactics like private label, not from the preponderance of branded goods that are unsold,” Mulpuru says.