Is Groupon’s Boston Performance a Glass Half Empty or Half Full?

Editor’s note: The following is a guest post by Shane Hayes.  Shane is the CEO of daily deal aggregator, Siftie

Yipit founder Vinicus Vacanti, has a new blog post up where he concludes that business in “Groupon’s Oldest Markets Got Even Worse.” However, to my mind, the symptoms leading to this diagnosis are exactly the same symptoms that one would expect if Groupon’s strategy to add more value for its merchants were working.

So what were the symptoms? Well impressive subscriber growth did not result in an increase in the number of Groupons sold. There was in fact a slight decline in the overall number to 387K and a 17% decline in Groupons bought per subscriber.

Another symptom is that Groupon featured 50% more merchants in the quarter. Thus driving up the sales acquisition cost which can no longer be hidden in that fancy “adjusted consolidated segment operating income” metric.

Having said that though, there was a 17% increase in revenue in a mature market, which provides some comfort. I suspect also that international markets are showing solid growth. For instance, our analysis of Groupon’s growth in Ireland shows a 75% increase in sales in just two months.

So let’s look at this from the perspective of Groupon’s goal of becoming more relevant to its merchant partners. A key way to do this is for Groupon to drive more loyal customers through the merchant’s doors. This largely translates into more local customers. A merchant doesn’t want a dealhound coming from across town once and once only. He wants new business from locals who will come back.

If Groupon is delivering local customers to merchants the symptoms described above, would be exactly the same – namely more merchants offering more deals, fewer vouchers being bought per deal being offered and fewer vouchers being sold per subscriber. That is why Groupon is slicing up cities into ever finer “territories” and pushing out multiple deals in each territory. If you own a hair salon in a suburb, this is exactly what you want as it will keep away cross town cheapskates.

Having just outlined the glass half full scenario, Vinicus’s glass half empty scenario is still worth considering. The cost of consumer and merchant acquisition must be through the roof to increase merchant numbers by 50% in a mature market in three months. (Hence the creation of that fancy “adjusted consolidated segment operating income” metric.) This naturally leads to that never-ending question about whether or not Groupon’s business model is sustainable.

So let us go back to Groupon’s strategy. They want to be more relevant to their merchant partners. I would say they are succeeding based on the numbers above, but at what cost?

Groupon sees Groupon Now as being the key to another round of growth. (Groupon Now is where you walk down the street and your phone wakes up to tell you that there is a deal nearby.) The key to making Groupon Now successful will be Deal Density. When the phone goes off, you want there to be plenty of deals nearby. Deal density will be driven by the number of relationships Groupon has with local merchants and the quality of those relationships.

So from that perspective it is all about the Groupon “land grab”. These Boston numbers would indicate that the land grab is working.  The question for investors is, will the land grab unleash another round of value creation for Groupon…?