Groupon, Inc. (GRPN) Earnings Call Transcript & Summary

Welcome, Aaron, and thank you for joining us today.

Excellent. Thank you very much.

All right. Excellent. All right. So at a high level, can you maybe talk about where you are benefiting versus seeing headwinds due to the pandemic? And to what degree do you anticipate a bounce back in a post-vaccine world?

Absolutely. And -- but I have to start. It's a good question. It's [Technical Difficulty]

You can hear us, yes?

You can hear us okay?

Yes, we're just fine.

Great. I'll start by telling you about personal experience. This last week over Thanksgiving weekend, my family went out, and we used a Groupon for an outdoor scavenger hunt in Downtown, Chicago. We're out and about. We're all down by the Bean and Millennium Park, solving puzzles. And it was just a great couple of hours of memories. And earlier in the week, I went out and got a car wash on Groupon. So there's a lot open on Groupon now, and we're bringing business to small businesses in the way that only Groupon does. One of the reasons for that is that we have a lot of unique inventory. As a matter of fact, the vast majority of our inventory is unique. And so as the way we see the pandemic impact our marketplace is different by geography and also by our verticals. And when I talk about our verticals, I'm talking about things like our beauty and wellness vertical, our home and auto vertical and even our verticals like Groupon live, which is live events, which we know will be on the later end of the recovery. But with home and auto and health, beauty, wellness, even into the summer, which has surprised us, those verticals came back to 70% and 80% fully recovered. So over this period of time, we took out 40% of the SG&A of the company, and we're finding that we're moving faster internally. And so if you take the combination of those 2 things, the resilience of the business, which we've now seen proven in the third quarter. And the cost takeout, which is going smoothly, we see a couple of really key points of inflection for the business, which is getting to a recovery of 80%. Of course, we saw that in some of our leading verticals already, puts us at EBITDA greater than 2019 with the reduced cost structure. And we've seen the recovery mimic things that we saw as Groupon helped small businesses and customers emerge from the economic downturn of 2009 and 2010. Of course, in this and in the management of pandemic and what it's meant for small businesses and our overall community, I'm really impressed by our team, and it's the focus they've had because our job is to grow this business. And to take share in the $1 trillion space, in which we participate and compete. And for that, we have our main focus in addition to delivering on the recovery, which is delivering on our growth strategy, which means that we're improving the customer value proposition and merchant value proposition with changes that this business has not seen before so that when customers and merchants come back, which we're seeing them do at an increasing pace, they're coming back to a fundamentally improved Groupon experience.

Got you. Can you talk about the benefits of your new supply strategy as you tested new types of inventory products such as market reinventory in several of the earlier markets?

Sure. So Stephen, this is a great question. So you're talking about our new strategy here. And I want to help set the context for folks that aren't as familiar as you are with the overall Groupon marketplace. And I'll put it in the context of other scaled marketplaces and advertising platform. Because broadly speaking, all we're doing is we're taking proven marketplace growth approaches and applying them to the uniqueness of our model, which is built, of course, on tens of thousands, hundreds of thousands of unique SKUs of inventory. So here's the situation, and here's the way to think about Groupon. Groupon was built. It is one of the fastest-growing businesses of all time, based on our ability to inspire. That's scavenger hunt that I mentioned earlier that my family and I did last week. That was something that Groupon suggested to me. I didn't know when I woke up that I was going to do that scavenger hunt. That was something that was suggested. And I was like, that's exactly what I got to do. And it was a ton of fun. That inspiration model is something that sets Groupon apart and has been very important to delivering demand to our merchants. Now most other marketplaces and advertising platforms operate like a destination model. When somebody knows what they want, they go there. They don't -- they're not waiting for that inspiration. And so what we see and what our customers and merchants are asking for is the ability for us to complement our huge and like long-standing inspiration model with features of destination-oriented marketplace. And this is where our inventory strategy comes in. Other marketplaces and advertising platforms, and you can just track them all back over the years, they tend to start with very low take rates, achieve density of supply on the platform, and then as demand grows, they have the suppliers compete, oftentimes in CPC or other types of option models, and that helps the marketplace then make money. Now if you look at the Groupon marketplace, we kind of, in some ways, built our marketplace backwards. We've started with what is a very high cost model and has based it on inspiration. And now the opportunity, looking at other players out there, to take what really works and added on to complement our marketplace. So here's what customers and merchants are looking for. Customers, what do they want more from Groupon? They want more supply, they can buy and buy repeatedly. That means, for merchants, they have to be comfortable putting their full catalog. So it's not just the nails or the pedicure, but it's also the facial and the waxing. They have to put it all on Groupon and feel comfortable with that. They don't just have to run Groupons for customers to come from new customer only, but also to repeat and spend more money with the merchant to try different services. For this, what do merchants want? They want a lower price, again, just like what we've seen from other marketplaces and advertising platforms. So the inventory strategy you asked about hits this directly with 3 core products. Deals, which we've sold billions of dollars on over the years. And again, is that core inspiration product; offers, which is now -- we have now finally introduced a product that comes at a lower cost to our merchants, so that they can feel comfortable putting all of their inventory on there. This is for higher intent customers. So when you come in search, you always have something to buy; and the third part is market rate. This is where we include third-party supply on our platform, and that helps fill out the store. For the inventory test you asked about, we set a goal of 50% growth in inventory, actually 25% to 50%. But we take the high bar internally. In any case, we beat it. And so with a 50% growth in inventory in our test versus control markets and with new inventory coming on without any of these new cost without 90% of leases coming out without any new customer only restrictions, we're changing what Groupon is all about in these individual cities. And for anyone who's launched a new market, a 50% improvement in supply in just a short period of time, that's a big uptick. You know you're onto something. And what that helps us understand is not only are we now moving on to the second phase of this test, which is to demonstrate that we're going to grow billings in these markets, outsized compared to the control markets, but it also gives us confidence that other things that proven marketplaces do, such as sponsored listings, which typically provides predictable revenue. That's something we now have even increased confidence in. Self-service, also something scaled marketplaces and advertising platforms do. Groupon hasn't done that before, but can give huge leverage to your cost structure. So these are just things that we're now seeing and saying like, well, hang on a second, our marketplace works like others, how do we include these proven practices and get them working at scale. So the net for us is that we feel as though our growth strategy will really unlock the velocity on this platform, which is, again, fueled by our unique inventory. And just to put the numbers in context for you, one more purchase from our 2019 customer base, on a base of just 3 to 4 purchases per customer, is $750 million in incremental billings. So the opportunity here is enormous. Thanks for asking.

Yes, of course. Let's unpack some of the things that you brought up. I think in terms of what it actually means for merchants to "Unrestrict inventory and why that's important for customer retention and overall unit accounts, right." It seems like as more inventory comes onto the platform, you have more supply, that improves the shopping experience. So there's a higher likelihood that you will have a richer scavenger hunt in the weekend, but can you walk through that and give us more color?

You got it. So restrictions is something that is almost, in many cases, unique to our model and something that we're ready to move beyond. So restrictions tend to be a merchant puts a deal on his site and says, this is for new customers only or they put the deal on the site and said, this is a great deal, but you can only use it Monday through Thursday. Now what customers want, and we see it from their behavior is we see hundreds of thousands of clicks on deals that we aren't letting customers buy. That's not a good business model. We have to be able to say, yes, to customers. And when customers want to buy it, they want to redeem it when they want to redeem it. And so what we're able to do now is in 2 ways: one, many merchants, just with a little bit of nudge with the opportunity is what's on the other side of it, where are happy to drop the restrictions. And with others, they see the opportunity with offers, which is this lower-margin product to remove these restrictions so that customers will always have something to buy. And what we've seen now is in our test markets, 90% of new inventory come on without restrictions. Again, changing what Groupon is all about. That means that we're able to say yes to customers. We say yes to merchants, you can put it on our platform at a lower price. And we say yes to customers, we have something for you to buy and buy again. So it's a big deal for marketplace.

Yes. So you talked about, I guess, lower-margin product for you, I guess, in terms of some of the newer products. Compared to the legacy deals offering, right, which was a high take rate model. So there has to be differences in terms of the underlying unit economics. And if you're going to onboard a lot of the incremental inventory from the sellers, what they're going say? Well, instead of giving you 1 deal for that day, if we're giving you 10 mani-pedi slots, I mean, we're not going to pay that high take rate across every single one. So you're -- the underlying unit economics will be changing for Groupon across the board. So can you talk about how that's going to manifest itself on the P&L and your margins et cetera.?

Yes. That's -- it's an important question. So let me also redefine these different types of inventories so that, again, folks that are less familiar with the story can be clear. Deals, deals is the high discount and higher-margin product that Groupon adds in our e-mails and push notifications, using our algorithms on a targeted basis and that we've sold billions of dollars of local inventory on deals, proven at scale and it drives this inspiration that Stephen mentioned. These deals have special meaning to our customers. Now again, they do come with high discount and higher margins, which overall can be a high cost to our merchants as much as $0.70 on the dollar. When we add in offers, offers are intended to complement deals. The offers help fill out the marketplace so that when I'm searching, I might just not see the deal that this merchant tried to inspire me with, but I search with that merchant, I'll be able to find that she offers multiple products on our platform. Offers help fill out the store so that when our high intent customers come to Groupon, they will always find something to buy. And the cost per offer is an all-in cost which is competitive with any other place that these merchants will seek to advertise. So we're not asking for this extra premium, which goes along with this unique real estate that we have that new course causes inspiration relationship with our customers. It's simply to fill out the store. So the same price that they would be paying anywhere else. Additionally, when we add in market rate supply, that also helps fill on through the store, which comes from third-party suppliers. There again, you have the same price that a merchant would pay anywhere else. So we feel really confident as we're putting this inventory on the platform and with the response that we've seen, again, a 50% uptick in inventory, that we've really hit it right with our merchants. And then with our customers, because of the behavior difference, I'm not -- the inspiration product, we still make good money on. However, this destination product, which can complement our marketplace is something that, again, we've seen other marketplaces and advertising platforms do in a way that complements. And so we feel really good about the potential there and exactly where we stand in our test. You asked about the mix that we're seeing in our test markets in that 50% growth in inventory, and this is another 50% number, we saw about 50% of the additional supply come on and offers and about 50% of the additional supply come on in deals. So we saw a pretty good mixture of both. I do expect the sales to be different. And I don't think that's going to play out exactly 50-50, but with the way it's filling out the store, it's got really big uptake on of sides. And what that gives us confidence in is that other ways that we've seen scaled marketplaces, add additional features, again, such as sponsor listings. We feel as though these are the exact type of things that we can then add on, and we have sponsor listings right now in an initial product launch.

Got it. So is it safe to characterize the changing dynamic as well, trying to change Groupon in the minds of the consumer from an every now and then deals-oriented thing. But now there's a ton of inventory where you can go look for Groupon for just about everything. So while the unit economics might be poor for some of your newer products, hopefully, there will be an acceleration in transaction velocity so that overall, the amount of, I guess, purchasing activity that you extract on a per user basis actually rises. And the total profit dollars, gross profit dollars actually be accelerated as well?

Yes, that's exactly right. We're in it to grow this business. We see that the -- adding the fuller complete offering to our marketplace is a way to grow overall in a way that's noncannibalistic from the gross profit that our deals business drives and allows us to further monetize a growing local marketplace with absolute tons of unique inventory. Thanks for asking the colorblind question.

Of course. So let's talk about any sort of change in consumer behavior and retention. I suppose, in terms of retention, you're probably going to say that the improvement in inventory and what you can actually buy is probably helping with the retention. But anything to call out in terms of change in consumer behavior because of the pandemic? And how you see that reverting potentially over the coming months? It seems like based on your prior answer, there's some pent-up demand and potentially rebend shopping that might happen as the economy begins to open up here?

Well, you know that we did see that after -- I mean, everyone into this severe lockdown in April, and I think it was May 1, our beauty business. I mean it was like -- it was night and day. But there are some treatments that people just -- they're not going to wait a minute longer than they have to for. And our beauty business is one of our most differentiated businesses. What we're focused on is we're focused on selling more, increasing purchase frequency and filling out our customers' share of wallet. What we've seen, we've seen that our best customers over this period have stayed with us and stayed the absolute most engaged. We've also seen that as people have gotten more comfortable with different services, based on our unique inventory, the customers are coming back. Again, we saw that immediately with carwashes, all throughout -- even throughout April and May. We saw it then with beauty services, and you could see them one-by-one, people get more comfortable as the merchants adapted and the customers got more comfortable just that business come back and right up to 70% recovery and towards the end of the summer. And so even as some businesses we know will recover later, we feel really confident in our recovery thesis here. And in the way we're seeing it play out, which is, to your point, I want to make sure to differentiate. The inventory strategy, the recovery is not dependent on our inventory strategy. The inventory strategy is additive to the recovery. The recovery of our business, just to the 80% level that we've already seen some verticals recover, throws off more EBITDAs in 2019 at our lower cost structure and a recovery to 90% actually throws off record EBITDA for this business. So the recovery thesis by itself, given the leaner way that we're operating is a very important inflection point. Now beyond that, you mentioned our growth thesis, and that's, of course, what we're testing in these 4 markets. And we have a lot of confidence in that. But as we scale that, that is additive to the recovery portion here. And again, as I mentioned, just one more purchase from our 2019 customers is another $750 million in overall billings. And that's what we're really focused on. More share of wallet and more purchase frequency built on a stronger merchant value proposition, which we've demonstrated success in, and then that stronger customer value proposition, given her exactly what she wants from Groupon, which is the ability to buy more stuff and buy it repeatedly.

Got it. So in terms of the user behavior in terms of the returning users and some of the new users might be getting? Are they becoming the new power user for Groupon? Because it seems like as we talk to other operators in the space, it seems like the new users that they're getting, because of the virus, they're turning out to be power users. So I'm just wondering if you're kind of seeing the similar dynamic as you get your customers back, that might have lapsed As what's been...

Yes. Listen, in some ways, I would say, it's too soon to tell. But in some of our verticals, again, like our beauty vertical, which is very differentiated, customers are increasingly comfortable within a COVID environment with adaptations that those merchants have made. Absolutely. It's like the customers that are the stronger customers or the customers that are coming back and spending more money with us and where we have the most differentiated inventory. So customers that buy beauty, buy our leisure product as well. These are customers that know Groupon for these offerings because this is stuff that nobody else sells. And these end up being our best customers, our most profitable customers and loyal customers.

Got it. You have been transitioning the goods business to a pure third-party model. Are there any sort of benefits or any sort of unforeseen impacts from the shift there that you want to call out?

Yes. I mean there's a number of benefits here. Any time we talk about Goods at Groupon, I promise myself, and I'm going to remind everyone that wining for us is on the other side of winning in Local. And that Goods has a very important part of our broad assortments. But again, Local is what differentiates Groupon, and that's what we're all about. And so the benefits of goods of moving to third-party are really material. One, we have a lower cost structure; two, the operations are just simplified. We weren't managing our warehouses, other teams around the company have a simpler and easier way to support the Goods business, which is a lower drain on resources overall. And we feel really good about our relationships with our third-party suppliers, such that we feel that we can provide all the supply that our customers are used to expecting from Groupon. So I mean, across the board, we feel really good about the decision and really good about the execution.

So you offered directional commentary on, I guess, that one incremental transaction turning into incremental gross merchandise value and that falling down to the gross profit line, but can you contextualize that within the broader philosophy around what your OpEx needs are going to be for the company, especially as you look to roll out some of these new initiatives and hopefully expand some of the success that you're seeing in those test markets into a nationwide product?

Yes, which is an important point because what this helps to do is helps you think through the P&L as to why that recovery case, that I've mentioned a couple of times, can generate such high levels of EBITDA relative to what we've seen in the past. We're really comfortable with our overall cost structure. That's important for everyone to understand. The teams have settled in, and we're executing faster. And we have potential to actually go even faster. Let me give you a couple of examples, just so you can really think through the level of dynamic here. Groupon historically has had very little by way of merchant self-service tools. Very little that merchants can do and do on their own. Now if you compare that to other advertising platforms or marketplaces, it's a market in different situation. But in Groupon merchants still, and over the years, have had the call to have basic changes done to their deal. Now increasingly, and with the tools that we've rolled out recently, merchants can do a lot of these things on their own. They can change their picture, they can change their price, they can add an additional item. Soon they'll be able to actually add an offer, which is something, of course, that we didn't have before. So there's a lot that they can do. That gives leverage to our sales team, and quite frankly, it makes it easier for the merchants. So everything that you've seen from other scale businesses we're adapting here and of course, we expect to see similar leverage in our cost structure. And again, as we make things better at even lower drain on resources. So we feel really good about the progress we're getting here today, that's one side. The other side is leverage out of our engineering team. We're adopting product development philosophy and execution that other top organizations have, which is specifically designed to get greater throughput out of the engineering team. And you're starting to see that in a lot of the execution already. And I expect that to even improve. But with the work that we've done in sponsor listings, the connectivity that we've rolled out with Groupon Connect, which allows merchants to bring their booking tool and connect to the Groupon marketplace and the improvements that we've made to self-service. The engineer team and the product team are really gaining momentum. And again, that's not a cost structure, which we've communicated, and we feel really good about our ability to maintain and get more out of.

Got it. You've also made several strategic decisions around your international business over the last year. And what's your philosophy and, I guess, the medium-term plans for the different markets outside the West?

Sure. There's 3 ways potentially ways we think about our international business, and we know there's a lot of potential in international markets. One, we exit countries where we don't see the growth potential. In Q3, we exited New Zealand and Japan. And right now, we feel good about our international footprint with those decisions behind us. And then we're going to invest in markets where we feel we have the most potential to grow and scale, and these will be markets that then fast follow success in our growth strategy that we're rolling out in these test markets in North America. And for other markets, we're going to rightsize the cost structure, and we feel as though we've made the progress we need to make and then run it for EBITDA and cash flow optimization.

Got it. Now you brought up sponsored listing earlier and it seems like given your merchant base driving adoption is key there. So what has the uptake rate been? And do you have to twist people's arms to buy into that product? But once they do, it seems like the incremental margins of that business should be really high. So can you talk about what that might look like over the near and the medium term?

Sure. This is something we're really excited about based on proof that we've seen in other scaled marketplaces and advertising platforms. And additionally, this is something our merchants have been asking for, specifically, not talk to a number of these merchants, how can I get more from Groupon? I am frustrated that I can't get more from Groupon because we only have one product offering, which was this deals product. Now with a more complete offering, they can put more on with offers and now the sponsor listings merchants that want to pay more, can get more. Before they wanted to pay more, and they couldn't get more. So we just launched this MVP. But it gives us the ability to finally say yes to merchants. And this is a big deal. So over time, we believe very much that this can grow into a high-margin revenue stream, like you see from other marketplaces.

Yes. We're almost out of time. So let's fast forward to a year from now. And once again, you are presenting at the Credit Suisse Annual Technology Conference 2021 version, and we're all there physically in Arizona, what do you think we will be talking about in terms of your accomplishments over the trailing 12 months?

That's great. There's a number of things, but I'm going to ground it in a couple of points that we've talked about. Listen, I'm very hopeful that everything proceeds well with vaccination and progress in the recovery overall in our economy, as with what's happening with the COVID pandemic. That's a big deal here. As these other industries recover all the way from our beauty business, where Groupon live, from our unique inventory, comes back on, and we're able to do so much for these merchants and so much for their customers to get them back out, and participating in a full way and in a safe way. And so we very much envision this world where the recovery has us recovering definitely to that 80% and 90%. And and we see growth beyond based directly on the strategies that we're talking about. And this is, again, grounded improve that we've seen. So we're very excited by what we can bring to merchants by way of helping them put more on our platform, do more with our customers and get more all things that they have asked about and all things that we couldn't offer them back in 2009 and 2010 when we helped small businesses pull out of that downturn. And so we're really excited about the growth potential there and about helping customers do more. This is an important time for Groupon and for what we can do for the broader community. In 2009 and 2010, the cost leverage that customers can get out of their own dollars, and it was really important to them. And it helps people do a lot more. And so for that, we're very appreciative of our customer and merchant communities, and we're just really excited about the potential we have and the momentum we have here with the team on both our recovery plans, the financial power of the model and our growth strategy.

Got you. And with that, we are out of time. Thank you very much for joining us, Aaron, and best of luck in the coming year.

Stephen, thanks a ton.

All right. Thank you.