How Groupon Could Use Ideeli to Win the Online Flash Sales Market

Deal-of-the-day company Groupon announced early this week the acquisition of online retailer Ideeli for $43 million in cash. The move will accelerate Groupon's presence in the fast-growing flash-sales market. Ideeli, a fashion-focused e-commerce start-up founded in 2007, specializes in acquiring sample and excess merchandise in order to sell it fast at steep discounts to its millions of members over periods that usually last less than two days.

Groupon's latest acquisition will hopefully provide the company with an additional edge in the competitive e-commerce industry, dominated by giant players such as and eBay .  The flash-sales segment appears very lucrative, as evidenced by the success of Chinese Vipshop Holdings , up an amazing 337% in the past 12 months. However, the fact that Groupon managed to acquire Ideeli at a bargain price provides a worrying sign that flash sales sites are struggling, at least in America. Can Groupon use Ideeli to replicate Vipshop Holdings' success?

The deal
By paying $43 million, Groupon managed to acquire Ideeli at a great discount, considering that the company received $107 million in funding between 2007 and 2013. 

However, as the proverb says, if the price is low, there's probably a good reason for that. Ideeli has never been profitable. Its revenue is quite small, and it may not be growing as fast as expected. Last year, the company lost $30 million and only generated $115 million in revenue. To put this in perspective, auction king eBay generated revenue of $3.9 billion in the last quarter.

From a profit perspective, the deal may not be a good idea for Groupon. This is because Groupon itself has profitability issues. The company is still trying to find a formula to make money. The company's revenue only increased 5% to $594 million in the third quarter, well below eBay's 14% increase. This slight top-line improvement was not enough for the company to break even, and it caused Groupon to report negative operating cash flow of $12 million. eBay, on the other hand, is a genuine money-making machine. The auction site benefited from a 75% increase in mobile commerce volume in the third quarter and beat the Street's earnings consensus.

Replicating Vipshop Holdings' massive success
There's both risk and opportunity in this deal. Although in the short run Ideeli may affect Groupon's profitability negatively, in the long run Groupon could take advantage of some key synergies. First, Ideeli may help to extend Groupon's fashion presence. Second, as Groupon CEO Eric Lefkofks notes, Groupon can leverage Ideeli's business relationships with several top brands in apparel. Groupon can also reduce its customer acquisition costs by absorbing Ideeli's user base. 

More important, the deal gives Groupon direct exposure to the flash-sales business model. Online flash sales were quite popular in the U.S. some years ago, allowing Ideeli's founder Paul Hurley to attract a good amount of investment. Although some analysts suggest that flash sales have lost momentum in the past two years, the business model may still work under certain conditions.

For example, Vipshop Holdings successfully uses a business model based on flash sales in China. As a result, between 2009 and 2012, Vipshop Holdings managed to increase its revenue from $3 million to $692 million. Although Vipshop Holdings benefits enormously from the lack of well-developed physical discount chains in the world's second-largest economy, the company's 5800 solid partnerships with top brands and efficient word-of-mouth marketing strategy also contribute to its success.

Groupon, which serves 500 markets in 48 countries, could replicate Vipshop Holdings' success by bringing Ideeli to markets that lack well-developed discount stores. The company could combine its experience in localization and global operations with Ideeli's technology and partnerships to make a truly global flash-sales app. Finally, Groupon could increase the number of partnerships it has by introducing Ideeli to its merchants.

Foolish bottom line
There's both opportunity and risk in Groupon's latest acquisition. Short term, Ideeli adds pressure to Groupon's margins and balance sheet. In the long run, Groupon's ability to find synergies and use Ideeli to replicate Vipshop Holdings' success in markets with few well-developed discount stores will define the real return of this acquisition.

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Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends and eBay. The Motley Fool owns shares of and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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