UPDATE 1-Groupon speeds payments to some European merchants

Tue Jun 12, 2012 6:59pm EDT

* Groupon shifts to quicker US approach to paying some merchants

* Groupon runs less risky repeat deals with some European merchants

* CFO says Groupon Goods inventory risk is limited

By Alistair Barr

SAN FRANCISCO, June 12 (Reuters) - Groupon Inc is speeding up payments to some merchants in Europe as the world's largest daily deal company gets more comfortable running repeat offers in more mature markets, according to Chief Financial Officer Jason Child.

The shift, which has been happening gradually over recent quarters, may be considered a negative trend by some analysts because it could reduce the amount of cash Groupon has to fund operations and growth.

In a recent interview, Child also addressed concern about potential inventory risk that Groupon is taking through its growing Groupon Goods business, which sells products at deep discounts.

Groupon has lost half its market value since last year's IPO on concern about the company's growth prospects and accounting. One area of focus has been accrued merchant payables - what Groupon owes merchants that run its daily deals. [ID: L1E8G7OWS]

In the U.S., Groupon generally collects money for deals from consumers and then pays merchants their cut in installments over 60 days. In most overseas markets, Groupon uses a redemption model where merchants are not paid until customers redeem their Groupons.

Groupon gets to hold the cash before it pays merchants, which has helped it fund operations and growth efficiently. But some analysts are concerned that this cash cushion may dwindle if competition or merchant demands force the company to pay more quickly.

The company mentioned this as a risk in recent regulatory filings.

"In the current period presented, we have offered our merchant partners more favorable and accelerated payment terms which has affected our overall cash inflow for merchant payables for the period," Groupon said in a May 15 filing.

Groupon did not provide more details in the filing. However, Child said in a recent interview that Groupon has moved to the U.S. model of paying merchants in some mature overseas markets, especially in Europe.

Paying merchants before customers redeem their Groupons is a potential risk because if some merchants go out of business or fail to honor the deals properly, Groupon promises refunds.

In some mature European markets, Groupon is running more deals with merchants it has worked with before, which is less risky because the company knows the businesses better, Child explained.

This shift has been happening slowly in recent quarters. About a year ago, Groupon took about 75 days to pay merchants on average. In the first quarter of 2012, the company took about 66 days to pay on average.

Still, Groupon took about 64 days on average to pay merchants in the fourth quarter of 2011. Such swings are also influenced by other factors, such as the type of deals Groupon runs or the type of merchants the company works with.

If Groupon is negotiating a deal with a large, well-known merchant, it may offer that business more favorable terms, Child said.

"We wouldn't sacrifice good deals to maintain a strict structure for terms," he said.

INVENTORY RISK

Analysts have also been watching Groupon Goods, which sells gadgets, jewelry and other products at steep discounts.

This business has been growing quickly, however, and some analysts are concerned Groupon may be exposed to inventory risks and possible write-downs from the initiative.

"Groupon has disclosed that it sometimes takes title (ownership) to some of the hard goods it offers - which if it fails to sell at adequate margins could result in inventory losses," Chuck Cerankosky, an analyst at Northcoast Research, wrote in a note to investors last month.

Groupon mostly uses third-party shippers when it sells products through Groupon Goods. In those cases, the company takes on inventory risk, but usually only for a week or two, Child said.

"It is very different from Amazon or Wal-Mart, which take on new inventory early on in the product cycle and for several months at a time," added Child, a former Amazon finance executive.

Groupon also sells items that are usually in the middle or near the end of product life cycles, the CFO said. This is especially true in the case of electronic gadgets, which is a popular category for Groupon Goods.

For example, Groupon may sell flat-screen TVs for a manufacturer that is planning to bring out a new version of the product soon, Child explained.

This is less risky because the value of such products has already declined, making it less likely that major write-downs are needed on unsold goods.

"We're not selling a lot of low-discount, new products that may need to be deflated," Child said.

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