Two months ago, when LivingSocial unveiled its marketplace of longer-term deals and a new category dedicated to coupon codes, I said it was getting “harder and harder to decipher how LivingSocial is setting itself apart” in light of the similarities between those products and ones from Groupon and RetailMeNot.
Turns out LivingSocial is not the only player in the category looking at other deals companies for a little product inspiration.
Today, Groupon announced the launch of its “Freebies” category, which is essentially a database of coupons much like the one LivingSocial recently launched – which was much like the one Austin-based RetailMeNot rode to a stock price increase of 50 percent in the four months since it priced its IPO at $21 a share. Groupon’s new coupon portal includes discount codes for large brands such as Adidas, Puma and American Eagle instead of the small businesses that are the target customer of its local deals business.
Putting aside the imitation play, what is it about the online coupon business that has LivingSocial, Groupon (and some Wall Street analysts) salivating? For one, profit margins, since a large chunk of customers find the deals through organic search results. Also, profit margins!
In a research note this morning, Sterne Agee analyst Arvind Bhatia called out RetailMeNot’s “90%+ gross margins” as one reason why the category is so attractive. He also pointed to Groupon’s existing customer base as well as its tech platform as possible advantages it has over the competition.
“If we assume that GRPN could achieve over time 1% to 2% market share of the overall coupon business (on line and off line) and generate margins similar to Retailmenot … this could result in incremental EBITDA of more than $100M,” he wrote. “If this business were to be afforded an [enterprise value] to EBITDA multiple of 15x, it would equate to incremental enterprise value of more than $1.5B or more than $2.00 per share.”
Let the search engine optimization wars begin.