Bad News For Groupon

Groupon has had to re-value it’s upcoming IPO, cutting it by more than 50%. Part of this was due to Groupon allegedly counting it’s revenue incorrectly. Revenue, originally stated at about $1.1 billion was revised to just over $600 million. Businesses using the service are complaining about losing money, and competitors have made the on-line deal space crowded. Customers are starting to complain about the e-mail deals, some getting tired of the repetition and a slew of deals that are of little interest to them. A few have started to liken Groupon deal notices as spam.

First, let’s talk about the businesses using the service: they really needed to do some homework before offering any kind of “awesome deal” coupon. History shows that they just don’t work. Giving away product or services for 50% off is great for the customer, but rarely (if ever) results in any ‘stickiness’ in terms of customer retention. For some businesses, it cheapens the brand, sometimes irreparably. Make a deal attractive enough, and just about anyone will take advantage of it, knowing they have no intention of coming back for more.

Small discounts appear to have a better history, because it is enough to get people interested. They tend to appeal to a smaller and more realistic group of potential customers. Smaller deals keeps the losses lower for the business when not all of the coupon users convert to regular customers. I can grant that some businesses couldn’t have anticipated the out-sized response to their deals in the early days of Groupon, but now, there is no excuse. Use Google, search around and get some info before committing anything to any deal site. There is no excuse for anyone to say “I didn’t know”.

Then there’s the value of the IPO: this isn’t 1999. I’m not sure who is underwriting Groupon’s IPO, but they need to give their head a shake if they think that Groupon is worth $11 billion, let alone the original $25 billion. The multiples don’t make sense: before the restated revenue, the original IPO would have been worth nearly 25-times revenue. The restated IPO would be about 10-times revenue. Most IPO’s are valued on earnings, particularly in the post-bubble (ie. more normal) IPO environment. The days of out-sized IPOs based on potential and promise, and not actual profits, are gone.

Let’s look at another company with traditionally smaller margins, and thus one heavily dependent on volume and repeat business: Amazon. Amazon currently has a market cap of $106 billion, sees revenue around $35 billion and earnings of $320 million. So it has a multiple of about 3-times revenue but a huge multiple on earnings: about 30-times. But this is a going business, the major player in its market with varying degrees of competition but a very, very strong brand. It has a solid, proven history and strong, dependable prospects for the immediate future.

Groupon has none of these things. Instead, Groupon has a vocal and dissatisfied partner base (providing the coupons) and an increasingly disaffected customer base. These, in addition to allegedly strong-arm or misleading tactics when signing up businesses, are not good news. Groupon’s brand isn’t damaged beyond repair, but it has some dents in it. Frankly, I thought they were nuts to not take the original $6 billion offer from Google. It was cash in the bank, and they could still build their business and personal wealth for future growth. Instead, now they have Google as a competitor, a company with a bigger and better-recognized brand, a large and established base of customers using their other services, a significant advertising service to promote their own product, and more money available to them to out-spend someone like Groupon.

Is Groupon in trouble? Not at the moment, but the current trajectory isn’t encouraging. Personally, I would suggest revisiting the the IPO and postponing it, and look at other avenues to raise some cash to grow the business. They need to revisit how they get and value coupons, and work to repair the relationship with partners and customers. If they continue act is if nothing is wrong, and that everything is “business as usual”, the I can see them on a collision course with failure. The next offer to take them over may not be nearly as rich as the original Google offer.

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