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Groupon shares drop on concern about merchants

By Alistair Barr

(Reuters) - Groupon Inc shares fell more than 6 percent on Tuesday on concern the company may not have as many daily deals to offer due to some merchants pulling back.

Susquehanna Financial Group and daily deal industry tracking firm Yipit surveyed almost 400 merchants recently about their experiences running daily deals with Groupon, LivingSocial and other providers.

An average of 8 out of 10 merchants enjoyed working with daily deal companies, the survey found.

However, it also found that 52 percent of the surveyed merchants are currently not planning to feature deals in the next six months. Nearly 24 percent of the merchants intend to feature only one deal in the next six months, the poll also found.

Groupon shares fell 6.6 percent to close at $19.27 on Tuesday, below the company's initial public offering price of $20.

Last year, Groupon completed one of the largest Internet IPOs since Google's debut, but the Chicago-based company's business model has been questioned by some analysts.

A crucial part of the company's business involves persuading merchants to run deals and accept the large discounts that are integral to the offers.

"Our proprietary merchant survey highlights concerns of the daily deal sites and early read implies lower usage over the next six months, despite some surprisingly high satisfaction rates," Herman Leung, an analyst at Susquehanna, wrote in a research note detailing the survey results.

Groupon and LivingSocial recently unveiled instant deals, which are location-based offers that are usually run by merchants for a few hours only. Groupon has touted its version of this service, known as Groupon NOW, as a potential source of growth in the future.

The survey by Susquehanna and Yipit found that only 10 percent of merchants polled have considered running an instant deal with Groupon or LivingSocial.

Still, Jeffrey Houston, an analyst at Barrington Research Associates, said Groupon has a large backlog of merchants waiting to run deals.

"I suspect that the stock will be very volatile for the next six months or so; but it will outperform the market by the end of the year," Houston added.

LivingSocial said the survey was good news for the daily deal industry.

"It shows the vast majority of merchants who have run deals are happy with their experience, and nearly half plan to run another deal in the immediate future, with a quarter planning to run multiple deals," a LivingSocial spokesman said. "You'd be hard-pressed to find an 80 percent satisfaction rate among merchants for any other marketing channel in use today."

A Groupon spokesman declined to comment.

(Reporting by Alistair Barr, editing by Dave Zimmerman and Tim Dobbyn)

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