T.J. Prebil

All Eyes On Groupon

It’s troubling that without an IPO, Chicago-based Groupon may not survive more than a few months. As the company begins its road show, average investors should be wary.

The VCs will make their money, investment bankers seem to be ignoring basic fundamentals knowing their involvement will generate millions in fees and the company founders…well, the company founders have already had their payday.

A while back, Groupon’s numbers were irresistible – 50+ MM users, thousands of business customers, 400+ markets and $760 MM in sales in 2010. Heck, it’s the fastest growing company in the history of technology companies, so you can’t blame anyone for eying early retirement when conducting due diligence. But numbers rarely tell the entire story and here a few of my observations about the company…

Lopsided Model
As an evolutionary promotional tool, Groupon has massive sales and it has saved consumers $980+ MM. But how much money has the company made its customers – you know, local businesses? This information isn’t paraded around on the Groupon’s website or in its press kits, and there’s a reason for this!

As reported time and time again, only two of the three parties involved are guaranteed to come out ahead with each transaction. Groupon is great for making money for Groupon, and saving money for consumers, but the company has been lousy at helping its “real” customers generate revenue.

To maintain its position as a worthwhile promotional tool, Groupon must find more balance between every party involved in the transaction.

Wrong Customers
Forrester analyst Sucharita Mulpuru noted “the winner in this space will not win because it has the largest list but the best list…the customers are who will spend more than the value of the deal and who will come back to frequent a business.”

“Grouponers,” paradoxically, are notorious for spending the absolute minimum possible when exchanging a promotion, as the owner of Posies Bakery recounted. A few months ago a local sandwich shop near me threw a end-of-a-year-of-Groupon-misery party, complete with six mini kegs of premium beer to celebrate the end of a promotion that nearly put them out of business.

Without evidence to prove consumers will return to make future purchases, how many business owners will continue to sacrifice narrow margins to acquire these types of customers? The reality here is that when it comes to the delivering the “right” customers, Groupon’s model is still completely unproven.

Fool Me Once…
Groupon-like models have been existed for years – and successfully at that – but only within certain verticals. Priceline and Woot help businesses clear excess inventory whereas BitsDuJour and others have built comfortable models selling software. But local businesses, those with tangible overhead, limited bandwidth and honest valuations, must be more realistic.

It’s expected that Groupon will continue to grow for a bit in the U.S. as well as abroad but what happens when businesses start saying no, or start demanding more favorable terms, and investors keep demanding returns on par with 2010? To survive, Groupon will lower its commission rates, create more restrictions on promotions and focus on higher margin items (e.g. museum memberships). As deals lose luster, Groupon will find itself in unfamiliar territory.

In a race to grow as fast as possible, add eyeballs and fully exploit every transaction, Groupon may have forgotten that it too is a business. And if a Rice University study holds true – where upwards of 40% businesses that have used Groupon are unlikely to return – the writing may already be on the wall. Groupon, in all its media glory, could easily find itself on a downward trajectory steeper than its meteoric rise.

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