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Groupon downgraded over reliance on low-margin discount business

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Barclays Capital downgraded Groupon Inc to "underweight" from "overweight" and cut its price target on the stock as the company faces a slowdown at its core daily deal business, forcing it to rely on its lower-margin discount business.

Shares of the company looked set to open down 2 per cent on the Nasdaq on Tuesday morning.

The company is also making changes at the top, but investors have been sceptical that CEO Andrew Mason has the ability to turn the business around.

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"The sale of products or "Groupon Goods", which practically didn't exist two quarters ago and represented an immaterial amount of first-quarter sales, represented the vast majority of incremental sales growth in the second quarter," Barclays analyst Mark May said.

A continuation of this trend could hurt Groupon's margin profile, he added.

Groupon often takes inventory risk with its Goods business, which was launched in the third quarter of 2011, as it buys products in bulk at a discount and sells them to customers at higher prices. However, Groupon Goods may not be as profitable as its original daily deals.

Groupon grew rapidly as a private company by offering big daily discounts on local services such as restaurants to millions of online subscribers. It acts as an agent, or middleman, between merchants and consumers.

That business is slowing and rivals from Google Inc. to Amazon.com Inc. are getting into the market.

Analyst May added that slowing customer growth could increase Groupon's marketing costs, and slashed his price target on the company's stock to $4 from $15.

Groupon shares were down at $4.55 in pre-market trading on Tuesday. They closed at $4.65 on the Nasdaq on Monday. The stock has fallen about 40 per cent since it announced disappointing second-quarter results last week.

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