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Groupon's biggest weakness is that its model is easy to replicate by some of its big moneyed rivals.
By Douglas A. McIntyre, 24/7 Wall St.
?Many American companies have been lauded for their rapid rise to greatness, a process that sometimes takes less than a decade. These firms become leaders in their industries, are renowned for innovation, phenomenal growth, and, in the case of public corporations, their soaring share prices. Google Inc.?usually makes the list, as does Apple Inc.?At the other end of the scale are well-known firms that are so crippled they go bankrupt or disappear entirely. Recently, these have included AMR, the parent of American Airlines, Borders, and Eastman Kodak.
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Somewhere in the middle -- between the companies that do phenomenally well and those that fail -- are ones that were once leaders in their industries but have fallen hopelessly behind. They may remain in business for years or even decades after their best days. Their executives struggle to find better strategies, and often their boards seek new management. But, in the case of companies that fall permanently into trouble and well behind the leaders in their industries, the chance of a turnaround has passed. Competitors have taken too much market share, and often have stronger balance sheets. Or their products and services are no longer in demand because of changes in the overall economy or the sectors in which they operate.
To compile a list of names that were once leaders in their industries, but are no longer and likely will never be again, 24/7 Wall St. looked at companies that have lost most of their market share, suffered sharp share price erosion, and posted a sharp drop in earnings, or even losses. We focused on companies that are included in the S&P 500. Almost all have lost money recently. Each has had a drop in share price of over 50 percent in the last five years. Each has powerful competitors who have built market share or moats around their businesses that are nearly impossible to overcome.
1. J.C. Penney Company Inc.
J.C. Penney, founded in 1913, counted itself among the primary retailers and catalog companies in the US for decades. But under CEO Myron Ullman III, who took over in 2004, its revenue began to slide, dropping from $19.9 billion in 2007 to $17.3 billion in 2011. Earnings fell from $1.1 billion to a loss of $152 million in the same period. J.C. Penney?s share price has fallen 70 percent in five years.
By way of contrast, the shares of Macy?s Inc. and Target Corp. --?two direct competitors -- have been essentially flat over the same period. Penney was challenged by these two companies and several others, including Wal-Mart Stores Inc. and Costco Wholesale Corp.
Problems became so severe that J.C. Penney closed its formerly successful catalog business and reached outside for a new CEO. The board?s choice was Apple Retail Chief Ron Johnson, who was picked in June 2011. Johnson changed the company?s pricing structure, but the reaction was so poor that revenue dropped an extraordinary 20.1 percent to $3.2 billion in the first fiscal quarter. J.C. Penney posted a loss of $163 million.
Internet sales, so essential in a world in which Amazon.com Inc.?has become a significant presence, fell 27.9 percent to $271 million. By contrast, Macy?s sales rose 4.3 percent to $6.1 billion in the last reported quarter. And Macy?s is hardly J.C. Penney?s largest competitor by revenue or workforce. Walmart?s sales were $450 billion last year, while Costco?s were $89 billion.
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2. The New York Times Co.
The New York Times is, and has been for decades, the premier daily newspaper company in the U.S. But the company has been shrinking rapidly. Ten years ago, The New York Times Company made $300 million on revenue of $3.1 billion. Last year it lost $40 million on revenue of $2.3 billion.
The Times did not move online fast enough to offset the rapid erosion of print advertising. Its tardiness allowed it to be challenged on the Internet by properties like The Huffington Post, Google News, and the news, sports, and financial properties of portals MSN, AOL, and Yahoo!.
As an indication of how the stock market measures the value of The New York Times Company, its market cap is $1.2 billion against its revenue of $2.3 billion in 2011. Low-brow content aggregator Demand Media has a market capitalization of $865 million against 2011 revenue of $325 million. Demand lost $13 million last year. The reason the market values of the two companies are so close? The Times still relies on the dying print business for the lion?s share of its revenue. Its market cap and cash balance are too low to allow it to more aggressively move to the internet or buy large online properties. In the last quarter, The Times? revenue was roughly flat at $515 million. The company lost 57 cents a share compared with a profit of 5 cents a share in the same period last year. The worst news from the quarter was that ?Digital advertising revenues at the News Media Group decreased 1.6 percent to $52.6 million from $53.5 million mainly due to declines in national display and real estate classified advertising revenues.?
The Times did make advances in online paid subscriptions, but circulation revenue barely offset the drop in advertising sales. At the heart of The New York Times? uniqueness among American newspapers is the quality of its editorial content. The company has held the line on retaining its large editorial staff. It did lay off 100 people in 2009, which was about 8 percent of the news staff. The industry is in the midst of another wave of job cuts. The Times has not been able to show significant top-line growth, even with its digital subscription efforts. Print is in too much of a shambles for the company to shore itself up in the digital world.
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3. Groupon Inc.
Groupon is an unlikely candidate for a list of companies that have their best years behind them. One reason Groupon belongs on this list is its stock price has fallen by well over 70 percent since its November 2011 IPO. Groupon?s primary problem is that the online coupon business, in which it was the major pioneer, is a commodity business now. It has not been terribly difficult for Amazon and other large retailers like Walmart to enter the sector.
Groupon was the most significant player in its industry after beginning operations in 2009, when it posted revenue of only $15 million. That number rose to over $1.6 billion last year, but Groupon paid dearly for that growth. The company lost $675 million over that same two-year period before interest and taxes. Groupon?s revenue grew 89 percent to $559 million in the most recently reported quarter.
But expansion continued to come at a cost. Groupon?s bottom line grew from a loss of $12 million in the same quarter last year to one of $147 million. Groupon?s new competitors replicated most of its tactics very quickly. LivingSocial, the rival most like Groupon in terms of its business model, had 7.2 million unique visitors last year to Groupon?s 11 million, according to online industry research firm Comscore. LivingSocial has financial support from Amazon. Google has entered the sector with a product called Google Offers. Well-regarded industry website VentureBeat lists 33 direct competitors to Groupon, and none is a large corporation.
The Chicago Sun-Times, one of the two daily papers in the city where Groupon is headquartered, summed up Groupon?s difficult challenges, ?Groupon has been weighed down by high marketing and staffing costs and faces increasing competition from the likes of Amazon.com and Living Social, among hundreds of other local deals sites.? Even the hometown press has nothing positive to say about the company.
Read the rest of great American companies that will never recover at the 24/7 Wall St. site.
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