What Groupon Means for Grandma's Coupons

Traditional Players Valassis, SmartSource, Others Monitor Digital Darling's Success, Bottom-line Effects

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SmartSource coupon books are published under Rupert Murdoch's News Corp.
SmartSource coupon books are published under Rupert Murdoch's News Corp.

Groupon never set out to take over the traditional couponing space. Nor is it discernibly taking any business yet from the leaders in national newspaper-distributed coupon books -- Valassis Communications or News Corp.'s SmartSource.

But there's something about spurning a $6 billion takeout offer from Google and spawning rumors of an initial public offering priced at $25 billion that gets people's attention. One of those people is Rupert Murdoch. The News Corp. chairman-CEO has asked executives at his SmartSource unit what Groupon means to the company, said Henri Lellouche, senior VP of the unit.

The short answer, at least for Mr. Lellouche, is "not much." But the longer answer is that Groupon has so taken the promotion world by storm that it can't be ignored. "I think about Groupon all the time," Mr. Lellouche said, before adding that he's not actually getting any requests from clients to do Groupon-type deals, including from Unilever, whose executives he'd just met with last week.

Yet who can blame Mr. Murdoch for asking? In two years, Groupon has generated enough business, combined perhaps with enough hype, to walk away from a buyout offer four times the size of the $1.4 billion market cap it took Valassis 41 years to amass. At $25 billion, Groupon would be valued at 16 times Valassis and more than half what News Corp. as a whole commands.

In a little more than two years, Groupon has amassed 50 million users in 35 countries.
In a little more than two years, Groupon has amassed 50 million users in 35 countries.

It's all the more remarkable given that so far Groupon has gotten its close to 80 million global members to buy fewer than 33 million Groupons so far. That's only one hundredth the volume of 3.3 billion coupons redeemed last year in the U.S. alone by users of Valassis, SmartSource and other more conventional print and digital coupons. In terms of value, it's a little closer, with Groupon users having saved people more than $2 billion over two years, while more conventional coupons saved consumers $3.7 billion just in the U.S. last year, according to NCH Marketing Services, a unit of Valassis.

"Groupon has done a very nice job of creating a new way of going to market and a new channel of promotion," said Suzie Brown, chief marketing officer of Valassis. "Everybody's curious about it, but our core customer base doesn't really lend itself to the kind of promotional model they have."

Consumer packaged goods, mass retailers and many other national advertisers often don't have the fat margins or lack of brand recognition that makes deep-discounted Groupon deals attractive or necessary for local restaurants, specialty retailers and service providers who are Groupon's customer base, Ms. Brown said.

Even so, she believes it's almost inevitable a big CPG player and/or mass retailer will try Groupon, as the Gap and Barnes & Noble already have done. "It's such a big deal and it seems to have connected so well with consumers that all anybody wants to talk to me about is how do we do Groupons for CPG or Groupons for food, drug or mass retailers," said David Diamond, a former Catalina Marketing executive who's now an industry consultant.

Groupon brought promotion something it hasn't had in a long time: a truly new idea. It's not a coupon at all, Mr. Diamond said. Consumers must buy in advance, so redemption rates are more like 85% to 90% rather than the 1% or so typical for cents-off cereal coupons distributed in newspapers, he said.

A Groupon also typically requires a minimum number of people to participate and often comes with limits on how many can be purchased, limiting liability -- a feature CPG and mass retail coupons typically don't have.

CPG, mass retail and national fast-feeders aren't markets Groupon is actively seeking out, said spokeswoman Julie Mossler. The greatest relevance of Groupon has been to local merchants, she said, because "with traditional coupons, it was impossible for local businesses to find customers online and have that translate into real-world traffic through their doors."

The bigger threat Groupon poses may be to the likes of local shopper publications such as those run or franchised by Cox Target Media's Valpak, with one person close to Groupon saying it could do for such vehicles what Craigslist did to newspaper classified advertising -- though unlike Craigslist, Groupon charges for its services. A spokeswoman for Cox didn't return calls for comment.

Frankly, packaged goods may just not be exciting enough for Groupon subscribers. "Packaged goods -- that's not why people look to us," Ms. Mossler said. "They look to us because they want to get up off their couch and do something, whether at a restaurant or skydiving." But she later added: "I would never say never."

One question is whether Groupon will have to lure more national advertisers to fuel its rapid growth and convince investors its lofty valuation won't fade like yesterday's deal. The new U.S. markets it has entered this year are such places as San Angelo, Tex., and Macon, Ga., which are unlikely to create much of a bump for a company that generated $760 million in revenue last year.

Late last year, Groupon added a national sales manager, and the opportunity to cash in on growing interest from traditional advertisers may be too hard to ignore.

"What's really fueling our growth is partnering with those local businesses, not just in the U.S. but all over the world," Ms. Mossler said. "But there is some value in working with a national merchant or an online merchant."

Meanwhile, the big national coupon powers are focusing more on the older threat -- or opportunity -- of digital and mobile coupons. Valassis joined with AOL earlier this year on its Shortcuts program that loads packaged-goods offers on shoppers' loyalty-card accounts for redemption at checkouts and with rival SmartSource to share its coupon content on its websites -- SmartSource.com and Redplum.com.

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