Groupon Changes Daily Deal Economics

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( Trefis) -- Groupon ( GRPN) recently restated its fourth-quarter 2011 earnings, which resulted in lower revenue and net profit because of an increase in Groupon's refund reserve accrual. This was due to a shift in the company's deal mix which now includes higher priced deals which generally have higher refund. Since the refund rates are generally much higher for such deals, Groupon had to increase its refund reserves, and this led to a decline in reported sales and an increase in operating expenses.

It has already been hit with an SEC probe and a shareholder lawsuit following the restatement. However, that won't be the first lawsuit it will have to deal with. It is already fighting a series of lawsuits related to illegal coupon expiration dates for its coupons.

Check out our complete analysis of Groupon.

The lawsuits in question accused Groupon of violating federal and state consumer protection laws, which requires gift cards and coupons to have an expiration date more than 5 years from the date of purchase. They covered the daily deal coupons that Groupon offers, which expire in around 24 hours and other deals which expire in a month. The lawsuit also accused Groupon of imposing onerous conditions like no cash refunds and coupon use only for single transactions only.

Groupon has settled the lawsuit for $8.5 million. It is allowing consumers who received Groupon vouchers between November 2008 and December 2011 to redeem their expired vouchers or recover from the $8.5 million fund.

While this is just chump change for Groupon, what's more interesting (or worrying) is the fact that Groupon has agreed to not sell more than 10% of its daily deals with expiration periods of less than 30 days over the next three years, as part of the settlement. This might impact the economics of its business as Groupon makes a significant portion of its revenue from deals with short expiration periods and could also restrain growth. It's hard to assess the exact impact it would have on Groupon's sales, but we should definitely see some effect of this new condition on Groupon's earnings in the coming years


We currently have a $14 Trefis price estimate for Groupon, which stands nearly 10% below its market price.

Groupon's daily deals business in North America and international markets accounts for almost all of its value. Groupon leads the daily deals space where it competes with LivingSocial backed by Amazon ( AMZN), Google ( GOOG) Offers, Yelp ( YELP) and countless clones.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.