Posted on 25 February 2012.
Some say that Groupon (NASDAQ: GRPN) is a sad tale of a media darling that expanded too quickly and can be likened to the troubled youth who straightens his/her self out in the end. Optimistic critics and the CEO, Andrew Mason, say that Groupon’s rocky beginning has (or very soon will be) smoothed out and post-IPO, it has now earned its spot at the ‘grown up table.’ I disagree.
This company has too slowly realized its need to seriously change its game to stay competitive. Lack of experience, leadership, and the forthcoming consequences from repeated false-starts will keep this company held down until another company takes them over or does it better.
What Is Happening
Groupon (GRPN) is a local e-commerce marketplace, a hub that connects merchants to consumers by offering goods and services at a discounted price. Traditionally, smaller and local businesses have tried to reach consumers and generate sales through a variety of methods, including newspaper, direct mail, radio, TV, and online advertisements. Groupon creates a new way for local merchants to attract customers and sell goods and services as well as provide consumers with savings.
A great idea, and one that could be profitable, if the system was functioning properly.
Groupon is sitting around $20 per share, and other than some dips and surges, has sat there since its $26 IPO valuation. Amid class-action lawsuits alleging improper expiration dates on its coupons, the company is trying everything it can, including releasing an updated look and new “thumbs up/thumbs down” scoring system for users in order to prevent a mass exodus to such rivals as LivingSocial, CheapToday.com, and Yuupon. While Groupon has successfully mimicked eBay (NASDAQ: EBAY), I don’t see its localized business deals expanding anytime soon.
What Has Happened
Prior to its IPO last November, the company drew criticism for unusual accounting practices, rising marketing costs and the loss of two chief operating officers in a six month span. IPO investors lost interest quickly, forcing Groupon to lower its anticipated valuation from $5 billion to around $3 billion.
Things didn’t get any better post-IPO. Groupon’s financials have been eerily similar to that of a 1990s dot-commer. In 2010, the net loss was $389 million. In 2011, it lost another $40 million, bringing the total losses since inception to nearly half a billion dollars. I don’t predict profits anytime soon, as Groupon has made it clear that its objective is top-line growth, meaning more spending.
This staggering number is coupled with a slow fizzle of customer acquisition. Last year, Groupon spent $179.9 million for online marketing. If anything, the expenditures are likely to continue to spike. After all, many of other competitors will also drive-up ad rates.
Loss of money and high spending is not the only thing keeping Groupon in the trenches. By its own actions, the company is essentially wearing down its own reputation by repeatedly teaming up with merchants that do more to hurt than help. Consumer complaints range from lack of product, wait time, and the aforementioned expiration date have all been blows to the daily-deal giant.
What Will Happen
Groupon will continue to chase its tail and put out fires. I think it will follow the path of true American tradition and attempt to spend its way out of the hole until funds run out completely. As reputation plummets, money dries up, and the young programmers-not-businessmen at the top lose their star status, it is possible someone might buy it out from underneath them, or viciously overtake them with a stronger business model and more business sense.
Why It Will Happen
Though this international empire is working hard at expanding trying to remain competitive, my prediction is that it will be unsuccessful for several reasons.
1) Differentiation. Online daily deal businesses have been popping up almost weekly, some with a stronger business model than Groupon. Businesses differentiate themselves from competition via different ways: Product, Service, Cost, etc. Relying solely on cost to be the differentiating factor, it sets the business up for failure. Someone with deeper pockets will always be able to offer your product or service cheaper – or free.
2) Leadership. I previously stated my opinion about how this company is run and by whom. It would seem current employees see the same. Citing Glassdoor.com, the management review by current employees is a paltry 2.0 out of 5. Employees see firsthand the “management not sure which direction to take” and the “inexperience of some of the higher-ups”.
3) Business Model. I wholeheartedly agree with MSN Money’s assessment:
Groupon urgently needs to get its merchant mix right. focusing more on service-based businesses that will tangibly benefit from daily deals. Merchants also seem to be relatively unaware of the risks involved in running a daily deal, and Groupon must highlight these risks before striking a deal. The company may also need to compromise on the sales pressure it puts on merchants as more failing small businesses simply means more bad PR for Groupon.
4) Finance Handling. Groupon raised a total of $946 million in two funding rounds last winter. It kept $136 million of it help run the money-losing company. The remaining $810 million was paid out, via stock purchases, to CEO Andrew Mason and some of his backers. Its first earnings report as a public company was also a glaring representation of poor management, losing $350 million overall and seeing $137 million in international operating losses due to moving almost 70 percent of its 10,000+ employees are now overseas.
5) Reputation. Groupon seems content with allowing its reputation to wear away amid the assaults of consumers and media alike. Its focus has encouraged bargain hunting and not loyalty either for itself or its merchant affiliates. Mason remains either naively or incompetently hushed about the negatives, and has gone so far as to say, “There are big differences now in Groupon’s business in the U.S. versus internationally, but we’ve seen the model work wherever we take it.” This, combined with the almost non-stop negative press by media for its performance and consumers for its service, will
Don’t hold out hope that Groupon will recover and be your cash cow. I don’t see this stock performing any better than it has in the last three months. Even so, the service it provides is important, especially in today’s more convenience-focused, online-only world. Investors should keep their eyes peeled for a company with more powerful leadership and solid financial experience that will take this idea to where it ought to be.