Summary:

Things are looking up a little for beleaguered daily deals company Groupon. Shares in the company rallied Monday morning after a Morgan Stanley analyst upgraded the company to “overweight.”

Groupon

GrouponThings are looking up a little for beleaguered daily deals company Groupon. Shares in the company rallied Monday morning after a Morgan Stanley analyst upgraded the company to “overweight.”

“Groupon has emerged as the leading local e-commerce company in an industry with significant barriers to scale,”analyst Scott Devitt wrote in a note to clients. “Its advantage due to scale (largest merchant and customer base) and technology (8 acquisitions YTD) has enabled it to accelerate NA revenue growth while improving 
its margins.” Groupon shares gained more than 8 percent to reach $10.94 Monday morning.

Since its IPO in November,  Chicago-based Groupon, which debuted at $20 a share, has lost about half of its market value. There has been concern about its growth potential and financial reporting, as well as consumer fatigue with the daily-deal space in general. Additionally, reports and studies have suggested that Groupon’s daily deals model isn’t good for local merchants.

But data released Monday from New York-based daily deal aggregator Yipit suggested that merchants might actually be warming up to Groupon. According to Yipit, between the third quarter of 2011 and first quarter of 2012, the number of deals Groupon offered grew 12 percent. But the number of merchants it featured in those deals grew just 4 percent, suggested that Groupon is offering more deals with the same merchants, Yipit said.

A few other interesting findings from Yipit’s report:

- The number of first-time merchants has fallen to 59 percent in the first quarter of this year, from 84 percent in the third quarter of 2011. The number of repeat merchants is climbing, now representing more than 40 percent of Groupon’s total merchants.

- Repeat merchants represent a majority of Groupon’s local gross billings, climbing to 56 percent in 21 2012 from 33 percent in Q3 2011.

- Repeat merchants perform 21 percent better than new merchants.

While Yipit acknowledges that the reliance on repeat merchants might mean that Groupon has saturated the market, the company says the data is showing that repeat merchants still perform better.

Still, even if merchants are becoming more satisfied with Groupon deals, a report last month showed that the quality of the merchants themselves may be going down. A study from Giorgos Zervas, a postdoctoral fellow of computer science at Yale University, found that, in the aggregate, the quality of merchants that offer Groupon deals (as measured by Yelp ratings) is decreasing over time. He said that may be because as Groupon expands, it is working with more lower-rated merchants, or it could be that Yelp ratings are “naturally eroding” over time. Meanwhile, an earlier study by Zervas found that Yelp ratings for individual businesses decreased after a Groupon deal.

As we’ve reported before, the daily deals space, in general, is in transition. The number of pure play daily deals players has fallen considerably, but at the same time, more companies are starting to blend social and mobile technology with local deals and commerce. Earlier this month, an analyst with Stifel Nicolaus said his research shows Groupon is transitioning with the industry – from being a daily deals provider to a broader e-commerce company. Groupon’s large customer and merchant base will help the company as it transforms, but it will be interesting to see whether it can maintain a leadership position among a broader set of rivals.

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