Why Groupon Is Poised For Collapse
techcrunch.com
techcrunch.com
The biggest parts of this are the account risk, the needing to grow revenue to pay existing liabilities (which is and should be a huge warning flag for any enterprise) and just how much room there is for someone to do this better.
My only fear is that a collapse of Groupon--which I actually see as a non unrealistic possibility--will taint other Internet/tech IPOs and, even worse, prompt the Federal government into more kneejerk regulation even stupider and more onerous than Sarbanes-Oxley.
Suggesting that a poorly performing companies weak IPO, or otherwise, will taint other IPOs and prompt regulations makes no sense whatsoever. For the health and vigor of the tech markets, Groupon's IPO should be a spectacular failure based upon the poor business model and weaker financial position.
At the same time it becomes more public knowledge that 2010 funding rounds were to buy out early investors, who made out like bandits, and retail investors, pension funds and so on lose a huge stack of money.
Now look at that (admittedly pessimistic) picture and try and tell me there won't at least be calls for "reform".
One company with a 280 million dollar bankruptcy (or, more realistically, by the time of the IPO it will be a few billion dollars) isn't going to make a big dent in how the markets work. But, a half dozen such companies in the same boat when the bottom falls out of the market and the fallout for all of the companies that they suckered into taking these deals, could very well lead to something scary enough to get regulators and legislators involved.
It's plausible, if not entirely likely, that Groupon, and their ilk, could very well kill IPOs for the rest of us for yet another decade.
As for the worst case scenario, for the sake of all the small business 'investors' in Groupon (though I'm not sure that they actually realize their participation), I certainly hope that something like this doesn't happen.
However, considering the ugly and apparently underhanded 2010 funding play, some investigations may be in order.
Besides which, the chairman of Groupon is already Mr. Class Action Lawsuit. So, based upon previous performance, one can likely predict future results in this case.
The latter two committed actual fraud. As in, this article would be saying "Wow, Groupon is hugely profitable" rather than the press we're seeing now.
shouldnt it be illegal by law to invest pension funds in startups - especially in startups having some of the ugliest balance sheets on earth
If groupon defaults, the businesses will just not honor the groupon coupons. After all, they haven't been paid for.
The entire hypothesis of this article is that Groupon amounts to a marketing firm where you pay most of the cost in kind much later, instead of paying up front for a big marketing campaign. The 'in kind and later' part makes your scenario absurd.
However, I this article basically misses the point. Lots of businesses have excess capacity that costs them nothing to utilize. For example, a hair salon which employs 4 stylists will have several hours per week, and perhaps many more, where a stylist is idle. Giving someone a very cheap haircut when otherwise idle is a chance to win a future paying customer, and has basically no cost. It's a win for the customer and a win for the stylist, and of course groupon is getting a fee for that.
The same is true of items, like designer clothing and food, that have absurd markups. Selling it for closer to cost will cannibalize some future purchases, but overall isn't really that harmful, and may generate recurring income from newly converted customers. It is certainly MUCH lower risk than an advertising campaign, in that all the cost is baked in to people who actually show up in your store, instead of spread to the wind in the hopes of hitting the right people.
The problem with groupon is that it has no moat. http://37signals.com/svn/posts/333-warren-buffett-on-castles... Any competitor can come along and set up an identical business, and there is basically no network effect to speak of to keep customers coming to groupon instead of living social or any other competitor, and no risk for retailers or customers of trying another competing site. This is why there is 1 classified site in the US (craigslist) and 1 auction site (ebay), but innumerable comparison shopping sites all sharing the same retailers (amazon, half, cnet, shopping.com, pricegrabber, etc etc).
I dispute this assertion or, in the very least, see this as being far more complex than you suggest, for two reasons:
1. Customers who might otherwise pay full price will end up using these deals, which is a direct loss to the business; and
2. The inventory may be used up by such offers to such an extent that customers who might otherwise pay full price may not be able to do so.
> The problem with groupon is that it has no moat.
On this point you are I agree.
As for being "win win", apart from the above, you have to look at a number of factors:
- Do Groupon customers return?
- What word-of-mouth do they give to businesses as a result?
- How much do they spend (initially and on repeat visits)?
- Are they people brought in by Groupon representative of your existing or desired customer base? There is plenty of anecdotal evidence suggestings "Grouponers" are "cheap" (both in spending habits and tips).
The "offer marketplace" providers (Groupon, LivingSocial or whoever) seem to be missing a golden opportunity to mine useful data here by tying an offer redemption to an actual person.
Speaking from personal experience, the GP is correct. At my local climbing gym, the groupon special just brings in 30 extra new faces to the already crowded gym during peak hours. The slow times are just as slow as always.
They are now under-staffed during the peak hours (which get busier every time they offer a special) which means that the general state of the gym declines and the new customers just accept it because hey, they got a deal right?
It's a race to the bottom and I can see customers turning to businesses that focus on offering a great experience every day. Those businesses don't use groupon.
Yes, This is one of the most dubious Groupon "sells".
There are a very small class of businesses that excess capacity which costs nothing to use. These mostly the type of business where you're just consuming an "experience" - adult classes, skydiving school, etc. Unfortunately, a big part of business, classes, is already competing with the Internet. And so the rest is skydiving schools, martial arts schools, and yoga schools, the few places where you just have to be there. But those are pretty marginal.
Restaurants certainly aren't in that class. Food is expensive. Food is a significant share of cost for anything but the most expensive restaurants. Sure, restaurants may throw food away each day BUT the only way to profit from that optimizing that is to sell food cheap on the contingency that its available. That's far from the Groupon model and clearly would "cheapen" the feel of any given restaurant.
I heard of a restaurant in France years ago that priced by the hour. That could actually cut waste to nearly zero - but it would destroy "the feeling of specialness" which many higher end restaurants cultivate.
Anyway ... the staff and building sit idle for a lot of the time. On a Friday night, there's lots of people. But on a Tuesday at 4pm, there won't be a lot of customers.
I guess you could look for chefs that only wants to work from 11-2 and 5-8, Friday and Saturday, but most chefs want to work 5 days a week.
Assuming the GP was generalizing "Rent" to include all expenses associated with the physical plant and presence, the sample income statement linked is close enough to that 30% number.
But your call on whether my assumption is too generous :)
A pan may be a fixed expense but it is to a significant-extend used up at the rate that people consume food, so it's not really "free" if fewer people are in the restaurant. Only "rent rent" and wages if fewer people in the restaurant.
Essentially, economies of scale might be possible in operating a restaurant but the place would need to be organized for this from the beginning - the simple ability to get people in the door is worth less than a large share of the receipts.
I generally disagree with your sentiments in your post but had nothing to add that really interested me to say.
A lot of restaurants have under 10% rent.
1. Hype (check)
2. IPO talk (check)
3. Turn down acquisition at incredibly high P/E (check)
4. Superbowl Advert (check)
5. IPO just in time to avoid running out of money (on the way)
6. Market goes rational (inevitable, forces pushing it irrational can't do so forever), valuation plumets
7. Unable to raise money by selling stock, and a business model of 'sell stock to pay bills while making no profit', bankruptcy is announced
8. The talking heads repeat the mantra "nobody saw it coming" for the next 6 months.
The facts of the housing bubble were widely argued during the bubble itself, and yet after the crash, somehow, 'no one saw it coming'.
I think a bunch of armchair analysts on this thread are going overboard with their predictions of imminent failure.
And many of the startups then that DID post revenue were involved in quasi-illegal quid pro quo scams where Startup A invests in Startup B with the understanding that B will use that newfound capital to purchase from A.
"To demonstrate the economics of our business model, we have compared the revenue and gross profit generated from the North American subscribers we acquired in the second quarter of 2010, which we refer to as our Q2 2010 cohort, to the online marketing expenses incurred to acquire such subscribers. The Q2 2010 cohort is illustrative of trends we have seen among our North American subscriber base. The Q2 2010 cohort included 3.7 million subscribers that we initially spent $18.0 million in online marketing to acquire in the second quarter of 2010. In that quarter, we generated $29.8 million in revenue and $12.8 million in gross profit from the sale of approximately 1.2 million Groupons to these subscribers. Through March 31, 2011, we generated an aggregate of $145.3 million in revenue and $61.7 million in gross profit from the sale of approximately 6.3 million Groupons to the Q2 2010 cohort. In summary, we spent $18.0 million in online marketing expense to acquire subscribers in the Q2 2010 cohort and generated $61.7 million in gross profit from this group of subscribers over four quarters."
They are seeing >3x profit on typical cohorts, so they decided to buy as many users as possible (which is smart).
If I raised a few hundred million dollars, I could create a website where you went, and gave your credit card number. I would charge your card $1.00 and then credit your card $1.40. I would be Groupon, except I would be slightly more profitable.
Groupon believes they have a reliable fix on the Customer Lifetime Value. Some very smart investors who have done _actual_ analysis of Groupon (including the team that did due diligence for Google when they made the buyout offer earlier this year) clearly have at least some faith in these CLV numbers.
All of the "armchair analysis" you see here -- including your opinion on the subject -- is looking at a snapshot of Groupon from their S1 backward. That's fine but if you want to leave pro forma out of it, but then quit making pro forma statements about the failure and decay of the business!
All businesses are a money-multiplier machine, right? What you're complaining of is that by your analysis, that multiplier for Groupon is 0.72. Not a very good money machine at all really.
Suppose that when you factor in the CLV, that multiplier falls into the range you'd expect from a company that has low variable product costs and a large sales team: 1.21.
If you run that company, once you have enough data to really believe in the efficacy of those numbers, then you're going to do everything you can to purchase as many customers as possible. And if you're an investor, you're going to encourage management to do just that.
I mean, this is the very handbook on non-seed startup investing. Find a profitable CLV model, and scale it out.
But I'll give you this: you did a good job creating some outrageous, tongue-wagging scenarios.
You were saying that I was wrong, just look at their revenue. I replied, revenue doesn't mean anything, it's easy to build a giant revenue machine. Your point was crap. Now you are coming up with all sorts of other facts and analysis, which is certainly much more valuable than your original "just look at all that juicy revenue" argument. Again, I was pointing out how terrible and stupid the 'look at all that revenue' argument was by showing I could create another company with even more revenue that is even more worthless. If you have an issue with this, I would stop using revenue as a basis for anything since it is a shit indicator.
Again, GM has MASSIVE revenue, that has no bearing on how good of an investment it would be.
And that when I pulled out "other facts and analysis" -- like the fact that Groupon must feel they're doing the right thing by spending a ton of money to grow their customer base (duh) -- you've got nothing to say?
And you really think in your post that you were "showing you could create another company with even more revenue?" Because what you're missing is you made up a fantasy example and you're calling it a counterpoint. It had no merit and was nothing but empty calories.
But people are investing a lot of money in Groupon. And their revenue growth that you dismiss is no small part of that, Justin.
Do you have any idea how rare a billion dollar business is?
Look at my comment history. I've got a long history here of reasonable discussion. But you've brought nothing to the table here. You've made no cogent argument.
It's a nitpick, but the only irrationality that gets checked is unsustainable irrationality. It's a bit of a simplification to say that profits are actually "equilibrium irrationality," but not by much. If the market were actually composed of rational agents, all prices would be driven down to material cost + wages, and there'd be no need for advertising, either. Forces can, and in fact always do, push the market to irrationality. The only thing the market seems to do is moderate the degree of irrational excess.
I'm not really going anywhere with this. I just have a fascination with people's manifold faith in markets and their powers. It's interesting that "free market theory" flatters consumers (as rational) and benefits businesses (via consumer irrationality). I think that this is why the notion survives so well in popular culture.
However, it's not efficient, since there is a lot you can do to make a better guess than assuming it is a completely random process.
While this will make it more efficient, there are plenty of people making random guesses, which reduces the effect your better guesses have on the overall efficiency of the market.
There are also plenty of fools, and they are investing on all sorts of techniques which ignore any of the global considerations, and of course this is how bubbles expand.
1.Mkt isn't like BM. BM permits -ve values & any market index say SPY must be non-negative.
2. We (quants) model market indices like SPY as a log-normal process like so : dS = rSdt + sigmaSdz where S = underlying ( or market index ) dS = change in S, dt = change in time r = risk free interest rate ( about 0.03 % currently ) dz = normally distributed rv with mean 0, std dev sigma
There is an embedded Brownian component in dz, so also in S. But that doesn't make S itself Brownian. More here: http://en.wikipedia.org/wiki/Wiener_process
"No observer could possibly predict which direction it will jump next"
Nobody is trying to do that in the very next instant. OTOH, you can certainly predict where the market will go, say, in a year. Well known econ result: DP ratio regresses positively with return. ie. Dividend-price ratio predicts stock return with high statistical significance. Source: Cochrance, French/Fama, et al. http://dash.harvard.edu/bitstream/handle/1/3122601/campbells...
"there are plenty of people making random guesses...there are also plenty of fools, and they are investing on all sorts of techniques which ignore any of the global considerations, and of course this is how bubbles expand."
Ha ha ha! Very amusing but very inaccurate. I think this is my general problem with geeks on the outside of finance. They happen to think markets are purely stochastic. X has randomness doesn't mean X is unpredictable. Otherwise why have APT, CAPM, covariance matrices, factor models, Heath Jarrow, Black Litterman...you've written off some 100+ years of economics in one breath !
To summarize, there are tons of observers, who predict where the overall market or some portfolio of equities ( or bonds or agencies or munis or treasuries or whatever else ) will go. To get data points for these predictions, you use a historical time window, compute coVar matrices, invert them, build a CAPM....etc. Anyways, its not rocket science. There are tons of CFAs & Finmath engg ( I'm one of them ) who do this sort of work day in and day out. Its our bread & butter. If I said something like "market is a lot like brownian motion & people are making random guesses", I'd be out of a job.
So are you saying you consistently outperform the market? If not, what are you 'modeling'? In 'science', a model is considered useful in how well it predicts the observations of some experiment, especially experiments on effects which were not known when the model was created. What do your bragged about models predict? What are they good for besides talking about with other quants?
That's one reason everybody models log-returns, which map non-negative prices onto the whole real line.
> 2. We (quants) model market indices like SPY as a log-normal process like so : dS = rSdt + sigmaSdz ... But that doesn't make S itself Brownian.
That's a geometric Brownian motion with drift. It is in fact the model developed by Louis Bachelier in his thesis of 1900 that presented the first mathematical description of Brownian motion.
Much of the argument you're trying to make can be made better, in my opinion, simply by pointing people to the Grossman-Stiglitz paradox [1]: markets cannot be fully informationally efficient or no one would have the incentive to provide information to them through trading.
1 - [PDF] http://www.math.ku.dk/kurser/2003-1/invfin/GrossmanStiglitz....
(Micro)-Economics is much more like physics; here is how it tends to work, how it tends to optimize, how it tends to in practice actively subvert attempts to predict what it will do (and thereby actively resisting any attempt to create a macro-economic theory, or at least one that lasts for any period of time). It's a very physics-like definition of "efficiency". The fact that the dam broke in the most energy-efficient manner and the resulting water deluge can be modeled with a high degree of accuracy by assuming it will follow the least-energy course in an efficient manner doesn't make the resulting flood "good" or "desirable"... just... efficient.
On the other hand, start your economics model with anything else and it's like trying to rewrite physics starting with material ether or something. I have "faith in the markets" in much the same way I have faith in physics (which I will remind you contains a lot of similar "merely statistical" theories, what you learned in school is the aberration, not the rule, and also is really strong on the fundamentals and gets progressively weaker as the systems get larger, rather like economics), but that doesn't mean I blindly trust them. Physics will kill you without blinking. But if you want to prevent that, it's a lot better to come to understand the laws of physics than to try to create new rules for the universe by sheer force of denial. Trying to guide the physics while actively refusing to learn about it is doomed to failure, too. Same for microecon.
If word of this gets around, the incentives set up by the typical Groupon agreement with a merchant will be responded to by merchants for whom those incentives are the most perverse. Groupon may discover that it is inexorably moving into the business of last-ditch financing for failing businesses.
> If Groupon matches these payment terms, they’ll need cash faster and need to grow faster. (Google Offers accelerates the rate at which Groupon’s scheme has to draw in new suckers.) If Groupon doesn’t match, it gives Google a key differentiator to win deals. If those businesses go with Google’s more generous terms, that too will starve Groupon of the cash it needs to pay earlier merchants.
I found myself laughing villainously as I read that. Google offers to by Groupon. Groupon demurs. Google destroys Groupon by forcing the Ponzi scheme into overdrive. Oh, it feels so good! Google, I forgive you everything!
By the way, didn't we all flip the scam bit on Groupon months ago when this article showed up here on Hacker News:
Groupon in Retrospect (posiescafe.com) http://news.ycombinator.com/item?id=1698833
I had some friends visiting SF, and they had bought Groupons from various outfits for the trip. But they ended up not using a few of them, and gave them to me. Chances are I'll end up using them, but I wonder: how many such Groupons expire unused?
Because some merchants track redemptions on paper, Groupon has no way of knowing how many unredeemed Groupons are outstanding.
For a stored-value medium that's like a gift card, many states prohibit an expiration-to-zero-value. Groupon has been sued a bunch of times over this; at least in those states, I think their current policy is that the business must still honor the Groupon for the original purchase price (but not the ~2X face value).
This blog post by Andrew Mason suggested lawsuits were unnecessary because customers unhappy for any reason, including expiration policies, could always rely on 'the Groupon Promise' for a full refund:
http://www.groupon.com/blog/cities/groupon-organizes-class-a...
However, if you try to get a refund on an expired Groupon, they'll reject your request. So Mason's blog post and 'the Groupon Promise' are deceptive... and Groupon probably deserves to be sued over the gap between the unequivocalness of their 'promise' and the way they carve out exceptions in practice. They talk the talk of a 'customer is always right' retailer, but their model seems to require them to be stingy with refunds.
Also, it sounds like you're saying that the Groupon Promise is not honored. I wouldn't be at all surprised to see that tested in court soon, too.
Take magazine subscriptions. You pay $240 for an annual subscription to Frisbee Fancier's Magazine at the start of the year. They book this:
Cash at Bank: $240 -
Magazines Owed: - $240
Revenue from Subscription: $20 -
Magazines Owed: - $20
How Groupon chooses to recognise the timing of revenue will affect their apparent numbers. I would prefer a conservative magazine-style model as above, but it might be possible for them to book the revenue up front and then use that as their basis of their projections.
I don't know enough about Groupon or accounting to be certain. Seek professional advice before investing etc.
In this scenario, income is appearing each time the magazine is sent out, but the cash is in hand all along. The hardest part of understanding accrual accounting is to learn that a sales event is not necessarily a cash event.
Cash positions are a different beast from revenue -- and indeed that's why Income Statements (aka P&L) and Cashflow Statements are both produced -- to give that two-way perspective on a business, along with the Balance Sheet.
All three are connected and you can, given a sample, derive them from each other. But to understand how a business is behaving you need to study all three.
That being said, accounting is all about devilish details. If Groupon are booking their revenue as being immediate upon the deal, rather than a subscription style cash+liability, then they can make quarterly revenue appear much higher than it might otherwise be seen as in retrospect.
The root of the problem, and the reason Groupon's model is unsustainablem, is that most of these businesses are not producing a product that is different or so unbelievably valuable that people are going to continue to come in and buy it at a price that is profitable in the long run. People go to a coffee shop because it is close and convenient. All coffee shops serve a commodity that is in a price range that varies by only a few cents. Their only way to differentiate is with location. Period. With restaurants it's a little different because food costs and quality vary a bit more, but I still maintain that the only people who regularly buy Groupons are deal-hunting cheapskates who won't be back regularly. All businesses would do better to focus on their core products and pricing, and let word of mouth do the rest.
For a coffee shop owner to run a Groupon promotion to bring in foot traffic thinking it will pay off is lazy, stupid, and shows very poor business acumen.
For a lot of businesses their excess capacity is a lost cost anyway. They have to pay their staff regardless or not they do work. A customer might cost $X to service, but that completely ignores the fact that the company would have to pay $X even if that customer wasn't there.
Sure Groupon might not be matching that spare inventory to it's deals with great precision at the moment, but it's only going to be a matter of time.
Look for example at GrouponLive, their partnership with Livenation who are the largest entertainment ticketing company in the world. Does anyone seriously think Livenation are having wool pulled over their eyes ? - they know that yield management is important and Groupon are probably going to become the leaders in that space.
A large amount of Amazon's valuation came from the fact that they'd be able to extend and become the dominant online retailer in a huge number of product categories.
Even Agrawal (who wrote this series of anti-groupon articles) refers to Groupon as a yield management play.
Extending this to be more dynamic isn't a radical shift, but rather an obvious one. And their partnership with Livenation to compete against ScoreBig is a clear sign they're moving in that direction.
Competitor LivingSocial has already launched a real-time yield management offering called LivingSocial Instant.
I disputed this same point last week: http://news.ycombinator.com/item?id=2617760
In fact, as someone who has resisted the characterization of Groupon as a "Ponzi scheme" on the grounds that I prefer the term actually mean something specific, this has gone a ways to explaining how that may actually be true. But the interesting scheme isn't so much in the investors, where people have been talking about it, but in the way that businesses are being paid with revenues from the subsequent Groupons, and so on. There's a lot of loan risk in a lot of directions on Groupon's balance sheet. It seems to me they don't have to be off by much for it to crumble. "Collapse" in the title is not just a linkbait word, the author really outlines how the whole thing might very quickly collapse.
See: http://www.guardian.co.uk/business/2011/jun/10/only-fool-inv...
It reminds me a little of when there were a few dissenting voices claiming the US housing market was due a correction and yet prices kept going up.
My guess is, probably not.
For example, take this: "I had been struggling to understand why some businesses ran repeat Groupons or cycled among the various daily deal vendors, given that the economics clearly suck if you can’t drive repeat traffic. Some let the same customer buy 3 or more of the same deal. That’s a clear no-no for a loss-leader designed to acquire new customers.
A conversation with Forkfly (a Groupon Now competitor) CEO Paul Wagner was enlightening. He suggested that they were doing what struggling families do when they max out a credit card—they get another one."
Let's look at what's happening here. There's actual, real-world evidence that the author may be wrong - small businesses are returning to Groupon. This doesn't make sense if Groupon is really such a terrible deal. So the author tries to explain this evidence.
What's the best way to do this? Go talk to the business owners who return to Groupon, and ask them why. That's what most people would do when trying to understand their behavior.
But instead, what does the author present? He talks to one of Groupon's competitors! The competitor, non-surprisingly, tries to dismiss this evidence. And he specifically tries to imply that the businesses doing this are not acting properly, comparing them to people who habitually overspend.
I'm not saying the author is wrong - but this is not the right way to make this point, and is simply a way to take a dig at Groupon, and dismiss the people who might prove that Groupon is worthwhile.
Or take this: "I’ve also heard from merchants who say Groupon has changed their deals at the last minute to make them more profitable for Groupon."
This is a cheap-shot, thrown in at the end of an (otherwise legitimate) paragraph. Either there are real cases or there aren't, but just saying "I've heard some people complaining" is just terrible reporting. If you think Groupon's done something wrong here, talk about it, don't just mention it offhand to tarnish their reputation.
Conclusion: Like I said, I don't know whether Groupon is good or bad for businesses. I don't know if many people truly know, actually. But articles like this, which go out of their way to bash Groupon, are not the right way forward.
They'll make up some waffle that regurgitates GroupOn talking points in order to justify their actions to an outsider without giving away the fact that the company is on the verge of bankruptcy & if word gets out all their staff will walk.
Journalism does exist, of course, so obviously there are ways around this problem. They're pretty easy to see even in this case - journalistic confidentiality, i.e. the journalist won't reveal the source, therefore no one will know anything about which company is on the verge of bankruptcy.
As the original article makes clear, how you classify the way a small business interacts with GroupOn is very much a matter of perception: through one lens it looks like a small business loan with a weird structure. A small business owner might see it differently & GroupOn itself has a vested interest in not having their customers view GroupOn deals in that way of course.
Sorry, I guess I wasn't being very clear earlier.
What I meant was, by the same argument as to why the author couldn't talk to store owners, by that very same logic, journalists can never talk to primary sources. Because I can take any journalistic piece, and say "the source that the jouranlist talked to is just making up answers because XYZ".
And like I tried to explain, the way out of this mess is a few things - the journalist can interrogate and try to get past the bias of the source, and they can also promise to keep conversations off the record.
But saying "well I can't talk to primary sources, I'll just talk to other people" is a cop-out. Especially when the other people also have a clear bias in this story.
I would surmise that these properties don't usually apply to most journalistic interviews. In this particular case it becomes difficult to know whether you're getting a true picture from interviewing GroupOn client businesses because the alternative explanation put forward by the author of the original piece gives the SBO a strong incentive to lie about their motivations. (Whether to an interviewer or to themselves is an open question!)
Another thought occurs to me: As you say, a good journalist can often find a way round these problems but in this particular case, where we're talking about a whole business model, it seems to me that a few counter-anecdotes will not have much impact: Believers in the GroupOn story will (rightly) be able to say, "well of course there are a few people mis-using GroupOn in this way, but they're a tiny minority & the vast majority of GroupOn customers are very happy with their experience dot dot dot" (I'm sure you can fill in the rest of the PR guff yourself).
ps. my favorite quote of this emerging IPO debacle has been thus far..
"Groupon's IPO prospectus should raise several red flags in a sensible investor's mind. Factor in Lefkofsky's checkered past, and this IPO is waving more red flags than a May Day parade."
Now that's a great visual.
http://tech.fortune.cnn.com/2011/06/10/groupon-eric-lefkofsk...
From a consumer perspective I unsubscribed a few months ago as I really didnt want to hear about a Botox or Massage deal each and every morning. It was good for xmas presents I will admit but in my local area the variety of the offers was somewhat limited (and Its by no means a small town), I shouldnt imagine I will check the site until around mid December again.
Well, now we know how to get $62,500 out of a small business: Offer them $7,000 within about 5 days. This is the salient point of the article: Groupon is more than just a marketing vehicle, it has a financing angle to it that should be evaluated in terms of risk.
When an author deals with a book publisher, he/she gives up some of their future revenues in exchange for cash in advance and publicity.
Likewise, when a local business deals with Groupon, they are giving up part of their revenue in exchange for upfront cash and publicity.
The main difference might be in the actual numbers (cash upfront, revenue share %, etc).
The risks pointed out remain, and are very real though.
Unlike Groupon, which might have to reimburse its customers if a client business goes under.
Furthermore, AFAIK author deals are screened/filtered, a bad book will not get published (not that this is a 100% accurate process, see for example 4 Hour Work Week).
Judging from the article, Groupon does little screening, so their risk is much greater.
While I got a chuckle out of this, given the financial success of the book, it's a good book from the publisher's perspective.
It's entirely different, actually. The risk to publishers is much lower because the book publisher, not the author, control the means of printing the books. In Groupon's case, Groupon would be like a publisher paying in advance to a printing company. There's nothing wrong with such an arrangement, but those that invest in the publisher should acknowledge the risk that the printer will go out of business before delivering. It's doubly risky if the payment terms ensure that the printer will lose money on each book printed.
Google Offers pays merchants faster (80% of the money goes to the merchant right away, vs 33% with Groupon). The OP expects this will force Groupon to make the same deal with merchants, which will change their business model, which will put them out of business. That or Groupon won't change its business model, and Google Offers will run them out of business by virtue of this better deal.
IMHO, going from that small point to "Groupon is poised for collapse" is just a bit hyperbolic.
Ie: Speculation leads to lower investor confidence leading to pulling out of investments and so on so forth
It's almost the other way around: Groupon spends $1.43 to buy $1.00 of revenue, but boosters are speculating that they can pivot their model or harvest more revenue from their merchants and email list to make $1.44 revenue from every $1.43 they spend.
Looks like the daily deal company did absolutely no checking that it was legit or the business did as this article suggests and knew they were going bankrupt anyway.
I started asking around and found a few similar stories from friends and colleagues. Hoping to see all of this hit the news soon.
Which clone was it?
Rhymes with Groupon.
Despite the fact that Groupon shifts the marketing costs from the merchant to the customer, it probably won't affect couponing behavior in the long run. To me this is like chess where the players have switched sides after a match. It's the same game, but a new player gets the first-move advantage this time around.
Groupon Now! seems slightly more interesting and possibly has more potential.
My wild, unsubstantiated prediction is that they'll IPO, fizzle out and be bought out by some media/new media conglomerate by 2014.
When Google offered $6bn for Groupon I was... surprised. What surprised me more at that time was that Groupon declined the - already exceedingly overpriced - offer.
Then again, LinkedIn was at one point worth $12bn and still is an insane $7bn (P/E of 1,139.40!!). Facebook is said to be worth $100bn.
I think we collectively lost our value judgment when it comes to Internet companies.
This is not on Groupon or any other Daily Deal service. It solely relies on the Small Business owner that does not do his due diligence.
This model is no different than bulk purchasing from a supplier. However, the supplier still makes money because they have figured out how much they can give to still turn a profit.
Small business owners need to either look at how much they stand to lose or take this as a advertising expense that they can afford.
The whole get money now and cry about it when people actually expect to collect what they were promised is ridiculous, where do they think the money comes from?
If you want to say that this model is only sustainable as long as small business owners are incompetent then yes, lets say that. However, to say that this business model is bad based on Groupons lies is just ridiculous. No one is holding a gun to your head and saying, give us coupons for all your stuff.
Then there are the people who never redeem their groupons. I'm about to move to another and leave two groupons that I never got around to using unredeemed.
1. veggie scramble: at costco, you can get a 50 pack of eggs for less than ten bucks. round up and call it ten cents worth of stuff. Veggies aren't free, but they are pretty cheap in bulk.
2. bagel with cream cheese: at costco, I think it's two dozen bagels for five bucks. round up and call it a quarter. Cream cheese in the giant tubs is similarly cheap, call it another quarter.
3. o.j. I don't know the bulk price for O.J, but I know I can get a flat of cans of o.j. for fifty cents per.
4. Coke. figure a quarter. (I can get a can of coke in a flat for about that, I figure there are some savings using a fountan. call it a quarter for two glasses of diet coke syrup.)
so we're at a buck thirty five in materials at costco prices. Of course, you have to pay the rent, and you have to pay some kid to assemble it, you have to pay for insurance, etc... but as a business owner, I'm not going to go with groupon unless I'm in a situation where I've overinvested in fixed costs.
I mean, renting buildings isn't like spinning up a cloud server; Usually, you've gotta sign a multi-year lease, and usually you've gotta pay for expensive cooking equipment; equipment that costs you the same regardless of usage.
Employees are a little bit more flexible, but there is a training period. New people provide negative productivity for a time, and if you don't give your old people enough hours, or if you jerk them around on what hours they work too much, your people who are good enough to get work elsewhere will do so.
Further, I think most valuations of groupon are assuming that groupon will provide some 'this deal only good during the less busy times' solutions. If I'm paying all my fixed costs and the building and employees are idle, the marginal cost of another customer is not very much more than the cost of the food, and in this case, the cost of the food isn't much at all. Heck, I know times in my business when I overbought capacity when it would have made sense to take a 75% price cut to move product and salvage something from the situation, rather than just paying for capacity I wasn't using.
Now, personally, I still think the groupon is massively over valued. I'm just saying, it's not any more massively over valued than linkedin or facebook. All of these companies are being evaluated in unrealistically favorable light; I think if you shine that same light on groupon, it looks pretty goddamn good.
What I find scary about the groupon hate is that a lot of it seems to be because the founders cashed out early; this means that cashing out early will be more difficult for founders the next time around.
Yes, you have to actually work to maintain those new customers, just like always. In fact, you'll probably have to work a little harder than normal, since their first experience at your business is at a huge discount.
But treat them right and let them know what they're in for and it's no different than other other coupon scheme designed to lure customers in. Oh, except for being a huge buzzword right now and attracting more customers than would normally be possible.
Yes, you heard that right, I'm saying that Groupon can be a really good thing for your business if you jump on now. But ONLY if you have properly prepared for it, and negotiated with Groupon correctly.
Don't let them badger you into a bad deal for your business. You would be better with no deal than a bad deal.