Groupon's Got Problems: Massive Competition

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Groupon stock may pop after the IPO, but the company faces a host of challenges beyond the accounting issues that forced the company to re-issue its S-1.

Competitors, deal fatigue, customer annoyance and small business frustration are all taking their toll on the company.

In the third quarter growth of the number of Groupons sold slowed to just one percent. Back in Q4 of 2010 the growth rate of Groupons sold was 97 percent, according to industry tracker Yipit.

Groupon may be the largest deal-a-day business, but with basically no barriers to entry, it has 383 rivals, according to Yipit. And the growing crowd of rivals threatens to steal customers and is driving up marketing costs. Groupon has #1 market share by quite a large margin -- it had 11 million visitors in September, followed by Living Socialwith 7.2 million. A distant third, Gilt Group had just over 800,000, according to ComScore MediaMetrix.

But some of its rivals are backed by some major funding and engineering resources. LivingSocial is backed by Amazon -- it grew gross revenues 32 percent from August to September, bolstered by a blockbuster Whole Foods deal. In contrast, Groupon only grew 6 percent month over month. And Google's been pushing its new entry in the space, Google Offers, which starts its roll out in July. From August to September its gross revenues grew 200 percent, according to Yipit.

And it's not just these big names who pose a threat to Groupon.

Smaller players like TravelZoo and Bloomspot have their own advantages. They tend to be more focused on a particular niche, and as Greg Sterling of Opus Research points out, the smaller companies may do a better job of servicing merchants.

Competition isn't Groupon's only headache. There's also the issue of taxation-- states including New York have decided merchants should collect sales taxes on the full face value of items purchased, not the price that consumers actually pay.

And then there's simply the question of whether Groupon's strategy makes sense. Pricing expert Rafi Mohammed (Author of "The One Percent Windfall" says the theory underlying Groupon's model is fundamentally flawed. He says that if customers pay a low price, they won't come back a day or two later and pay double that price for the same product or service. If Mohammed's analysis is correct, customers won't return to the merchants offering deals, merchants will pull back, and Groupon will suffer.

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