Mobile Commerce

Groupon Takes On Amazon And The High Cost Of Shipping

More than just a home for daily deals and highly price-conscious shoppers, Groupon is aiming to be a major e-commerce player and a first choice web destination for consumer goods of all kinds. If only they didn't then have to ship them to consumers.

CEO Eric P. Lefkofsky told investors during the call on the 2014 Q1 earnings report that the company is paying much as two times comparable online retailers’ costs for shipping. He also noted that though the company's North American gross margins— sales minus payments made to suppliers — are around 5 percent, they would be closer to 30 percent except for the extremely high cost of shipping.

"The main culprit that drags down our gross margin in North America from an over 30 percent pure product margin, which is defined as sales less the payments we make to direct suppliers to roughly 5 percent overall relates to shipping and fulfillment."

Lefkofsky went on to outline some of the steps the company is taking to address the problem.

"Our costs are almost 2x other comparable e-commerce companies. In an effort to improve our results, we’re making some significant changes, which includes shifting more of our business to drop ship, increasing units per order, changing our free shipping threshold from $19.99 to $24.99, and shifting more fulfillment to our own distribution center in Kentucky."

The company hopes to see gross margins double as a result of these steps.

While Groupon is unusually afflicted, they are not uniquely plagued by the high cost of shipping.  Amazon reported Q1 shipping costs of $1 billion, an all-time high for a non-holiday period and up 28 percent from the same period a year ago.  Amazon, however, do to scale, can balance these costs through sales of its Prime service and by making price increases. Groupon's price increases, on the other hand, might represent a slightly more risky strategy in the early phases of its e-commerce expansion.

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