Oh Groupon, where art thou headed?

In the last weeks, Groupon, the infamous mother of all deal sites, has got a lot of flak because of the way their business operates – or rather doesn’t operate as some might say. As always, there is a multitude of voices in this discussion, and in order for you to catch the gist of this Groupon brouhaha, I’ll try to sum up the most important facts.

The numbers

As you may know, Groupon has scheduled its IPO for June 2012. In the course of this procedure, some business figures had to be put on the table. And those do not look too rosy. For sure, the growth of the customer base (which essentially is a big fat mailing list that Groupon can market its offers to) has been impressive: a whopping 83 million users have been registered until the end of March 2011. And it’s getting even better: in 2010, Groupon’s revenue grew more than 22,000% to $713 million, and gross profits rose from $11 million to an amazing $280 million. Unfortunately, these figures come with a price. Groupon invests in marketing at such high levels that the operating profit is negative. This effectively means that the company is losing money, and we’re not talking petty cash here. Groupon has lost more than $456 million in 2010 and $147 million in the first quarter of 2011. No surprise that there’s a heated discussion. In a report that was published by WSJ today (IPO? Groupon Plans in Flux), the authors refer to an internal source saying that the timing of the IPO would be reassessed because of the current high volatility of the markets. To me, the question is: Is Groupon getting second thoughts about their business model and financial situation or is it really the recent Dow Jones turmoil that keeps Mason and his crew from stepping through their planned schedule?

The CEO

Andrew Mason, CEO of Groupon and mostly known for the fact that he has declined a $6 billion offer from Google, takes an entirely differently stance – surprise! In a carefully crafted yet emotional internal memo sent out only to the Groupon team and yet found its way into the public, he cites a number of examples to prove that the Groupon train still goes full steam ahead. He points out successes in overseas countries as well as advantages compared to competitors such as Google Offers, Living Social and Yelp and concludes:

Amidst all this, I hope you remember what we’re doing here — we are making history together. I guess you don’t get to build something that reshapes the local commerce ecosytem without getting a few bruises. I’m so proud of the work we’re doing, and I feel extraordinarily lucky to work on what I think is the best thing that’s happened to small businesses since the telephone We’ve invented something that is catalyzing millions of dollars of local commerce every single day in 45 countries and fills the lives of millions of customers with unforgettable experiences — it’s pretty remarkable.

The business model

Despite all these complex financial and technical details, a simple question remains: Does Groupon have a sustainable business model? Right now, they employ an army of salespeople approaching local businesses to offer their products and services for a considerable discount which are then marketed to 80+ million subscribers/customers. These get a daily email and can order the coupons via the website. As Mason explains in the aforementioned internal memo, right now the aim is to massively invest in building this audience and that in the long run, Groupon offers can be marketed virtually for free because there are no customer acquisition costs involved anymore. In other words, the email list should work as an ATM that can be consulted whenever necessary. I don’t buy this mainly for three reasons:

  1. There are numerous stories in which the local businesses involved actually lose money because the discounts are so outrageous. And even if those businesses get more attention by means of Groupon and more potential customers show up, those are mostly not the ones the business was looking for in the first place. Take brand experience: How can somebody who wants to invite more clients into his small restaurant – offering carefully produced and lovingly arranged Italian food for example – convey what Mediterranean cuisine really is when all people care about is ultra-cheap pizza?
  2. Although Groupon is good in scaling their business to include many countries worldwide, their business model is easily copied. What keeps a local company from offering their own coupon service aimed only at the local audience? What keeps a local business from offering great discounts on their own?
  3. The Groupon deals themselves are not sustainable – one cannot be offering crazy discounts into all eternity. We can already see cases in which the discounts themselves become less and less attractive and draw near the types of discounts we can see in other places.

I wonder: Seeing these recent developments – how often has Andrew Mason regretted to have brushed off Google that bluntly …

5 Responses to Oh Groupon, where art thou headed?

  1. Rico Neitzel says:

    Groupon has delayed its IPO to an unspecified date ;)

    Best,
    Rico

  2. Alex says:

    how often has Andrew Mason regretted to have brushed off Google that bluntly

    I guess, about as often as Jerry Yang regrets to have turned down Microsoft back in 2008.

  3. Pingback: eCommerce-Podcast #5 | eCommerce-Podcast

  4. Pingback: Groupon’s IPO: Short-lived success? « ecomPunk

  5. Pingback: 2011 – What a year it has been! « ecomPunk

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s