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It looks as if deal site Groupon (GRPN - Analyst Report) is expanding into new markets once more, this time experimenting in the bulk purchase segment with its brand new Groupon Basics division. This segment looks to offer users a bulk shopping service for a variety of home goods such as those in the consumer product, vitamin, and personal care categories.

Right now, the service has just under 110 items, with discounts generally at about 20%-30% off of retail prices. Beyond that, GRPN is also giving buyers 5% of their purchase back as ‘Groupon Bucks’ while there will also be free delivery for orders over $24.99, which is pretty much everything in its current offering.

Main Competition

The service looks to be a shot across the bow at Wal-Mart’s (WMT - Analyst Report) Sam’s Club division, as well as Costco (COST - Analyst Report). Both of these businesses are leaders in the bulk purchase segment, but they do require a membership fee to join, unlike what we see out of Groupon Basics.

However, this membership fee is a huge profit center for this bulk buying business, at least in terms of Costco. In fact, according to their most recent quarterly report, Costco stated that ‘our membership format is an integral part of our business model and has a significant effect on our profitability. This format is designed to reinforce member loyalty and provide continuing fee revenue. The extent to which we maintain growth in our membership base, upgrade members, and sustain high renewal rates materially influences our profitability.’

Given how crucial the membership fees are to companies like Costco, I for one am having trouble seeing how the new Groupon Basics system will be a real driver of profits for GRPN in the near term.  It also doesn’t help that Groupon has a very limited selection (at least right now) and that its food offering is especially poor for the time being.

Bottom Line

So while the move by GRPN does seem like a great next step for the deal-focused company, any panic for Sam’s Club or Costco right now seems overblown. The Groupon Basics selection right now is tiny, has a heavy focus on off-brand (or at least not top tier brand) products, and it doesn’t have the benefit of the membership to help boost profits either.

In other words, investors who are betting on this new segment to help push GRPN to profitability this year might be sorely disappointed, as this division, while interesting and a potential source of big revenues, definitely has a long way to go before it can compete with the likes of Sam’s Club or Costco.

What do you think?

Can GRPN make a successful push into the bulk buying business, or will Sam's Club and Costco maintain their dominance?

Let us know in the comments section below!

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Author is long COST

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