Barclays downgrades Groupon on shift to low-margin business model

CHICAGO, Tue Aug 21, 2012 – Barclays Capital downgraded Groupon Inc. to “underweight” from “overweight” and cut its price target on the stock as the company faces a slowdown at its core daily deal business, forcing it to rely on its lower-margin discount business.

Shares of the company looked set to open down 2 percent on the Nasdaq on Tuesday morning.

The company is also making changes at the top, but investors have been skeptical that CEO Andrew Mason has the ability to turn the business around.

“The sale of products or “Groupon Goods”, which practically didn’t exist two quarters ago and represented an immaterial amount of first-quarter sales, represented the vast majority of incremental sales growth in the second quarter,” Barclays analyst Mark May said.

A continuation of this trend could hurt Groupon’s margin profile, he added.

Groupon often takes inventory risk with its Goods business, which was launched in the third quarter of 2011, as it buys products in bulk at a discount and sells them to customers at higher prices. However, Groupon Goods may not be as profitable as its original daily deals.