Groupon.com is slated to have an IPO of stock this summer. The experts value the company at around $15 billion.
Expert = “X” is unknown value in mathematics.
“Spurt” = a drip under pressure.
XSpurt = Unknown drip under pressure.
Here’s why Groupon.com, and all the others like it, will fail with the same plodding thuds not heard since the dotcom bubble bursting days.
And I hate it. I hate it because I love a deal. And there used to always be fantastic deals on Groupon.com and the others.
First: Groupon.com was too successful in the early days. Somehow the sales chicks at Groupon.com convinced CMOs and CEOs that there was value in heavily discounting their core merchandise to get a huge crowd through the doors. They fell for the old bromide: “I lose money on every sale, but I make it up in volume.”
“They contacted me more or less out of the blue. Thirty-nine dollars for $100 worth of services — people can’t look past that that easily. As a matter of fact, it’s a loss for me. But dollar for dollar, as far as advertising goes, it’s brought in 10 times the new clients as we would normally expect, which has resulted in the salon revenue practically doubling.”
Yup, revenue is through the roof, but the styling salon is losing money on every sale. And true to form, the hair stylist overlooked the fact that Groupon.com took a cut of that $39.
Second: The Deals Cause Ill Will. When a thousand people slam into a cupcake joint looking for the deal and the cupcake joint can’t handle the traffic, people go away mad. Or quality and service suffer. The early Groupons were practically unlimited as to the number of customers that could grab up the deal. Now Groupon is counseling their sales babes to set a low limit to match the physical and fiscal resources of a business.
Third: The Deals Are Not Sustainable. Because of the early success, merchants (and Groupon) are learning to tone down the wild deals that marked the early days. Gone are the days of six tanning sessions for $26 – a $135 value. Gone are the deals of $20 worth of fast food for $10. The deals were too good, the redemption rate was phenomenal, the loses were too large. Now the deals are much more subdued as Groupon and merchants learn that too much business can be a bad thing. And that means people like me, who would never blow money on tanning sessions unless the deal was too good to resist, will resist. The deals are getting lame: X % off framing services or 1/2 price limo service or $20 off lawn treatment, $45 off language lessons. ($165 value.) All very resistable…
Fourth: The Deals May Never Expire. Some states have laws that prohibit “gift certificates” from expiring – ever. A lawsuit is pending saying
13. Defendant Groupon’s systematic placement of expiration dates on its gift certificates is deceptive and harmful to consumers. Consumers must act quickly to purchase gift certificates–usually within a 24-hour period.
14. As such, consumers, like Plaintiff, feel pressured and are rushed into buying the gift certificates and unwittingly become subject to the onerous sales conditions imposed by Defendants, including illegal expiration terms that are unconscionably short–often just a few months.
A merchant can temporarily go insane – or fall under the spell of the sales honey – and offer a super-dooper deal, only to have it show up a year later.
Fifth: The field is getting very crowded. Entry into the email deal coupon business is very easy. Competitors are springing up like spores on dog shit. I can’t name them all, but here are a few:
- Living Social
- Buy With Me
And everyday somebody else enters the market – people with sales staff already in place and doing business with many of the merchants.
- Newspapers came late to the game, but they are coming in droves.
- Yellow Pages will be rolling out their version soon.
- Chambers of Commerce are setting up local deal email blasts.
- Radio and Television giants are pushing local imitators.
And then there are the others just waiting in the wings: Google, Facebook, Amazon, Microsoft maybe you have heard of them?
Smaller Merchants don’t follow-up. Losing money during a sale is OK sometimes. If a merchant can capture email information and will use it to do follow-up sales and marketing. Trouble is, this is spam. Small merchants don’t like spam because they see it all the time. Customers don’t like spam. Nobody likes email marketing anymore.
Somebody is going to make a fortune when Groupon.com launches their IPO. I’m betting it will be the bankers and the stock-spectulators.
About the only deal that is a sure thing with Groupon.com is wait for the IPO, short the stock and wait. That will be the best deal they offer.
If you’re paying full price – you’re paying too much. Groupon.com et al will make it pleasant to be a bargain-hunter for the short term. But long term, as an investment, Groupon.com is destined to fail dramatically.
UPDATE: Bloomberg Business did a nice piece which adds some more case studies to failed Groupon.com events.
A Groupon promotion that Brian and Lisa Wood ran for their Big Ass Sandwiches food cart in Portland, Ore., last spring was decidedly unprofitable. The couple says their business lost $16,000 when they budgeted for 400 half-off coupons but sold 2,000 in 48 hours. “There were a couple days where we had 100 sandwiches go out the window and we grossed $150. I still have a nervous twitch from it,” Lisa says.
Groupons for restaurants just got a little less appealing in Massachusetts. The Massachusetts Alcoholic Beverages Control Commission has deemed Groupon to be not in compliance with state alcohol laws which forbid discounted alcoholic drinks.
100% of operating expenses goes toward sales and marketing. Whuck? Really? How is this possible?
About 54 percent of its operating expenses goes towards marketing. The other 46 percent goes towards sales (half of its workforce of about 8,000 people are in sales).
Anyhoo, lets assume these numbers are correct from TechCrunch.com
Groupon lost $456 million last year, and another $147 million last quarter.
The bubble is BACK!
UPDATE 4: Seems the “other” founder of Groupon, likes to pump and dump.
The piece’s author Kevin Kelleher says investors in Groupon should be concerned that Lefkofsky and his family have already cashed out $382 million from Groupon before the IPO filing. (The other founders, Brad Keywell and his family cashed out $156 million, Andrew Mason, $10 million).
The risk is that Groupon will follow in the footsteps of Lefkofsky’s earlier company InnerWorkings’ “…and start trading with a small float. Then a few months later, after demand has pushed up the stock price, insiders will unload more shares in a follow-on offering. That could dilute the stock and weigh down Groupon’s longer term price.”
After three months of Groupons coming through the door, I started to see the results really hurting us financially. There came a time when we literally could not make payroll because at that point in time we had lost nearly $8,000 with our Groupon campaign.
Analyst Rocky Agrawal, who has previously written on VentureBeat about Groupon’s “tricky” math in SEC filings, said that Groupon stock was “a terrible investment”but that he would still be buying it. [emphasis mine]
“Unless the company substantially changes its business model, investing in Groupon will be like investing in a leaky bucket,” he wrote yesterday in a column.
“All of that said, I’ve put in my request with my broker for shares in the IPO because Groupon has scientifically engineered its IPO to inflate share prices.”
UPDATE 6: 82% of retailers running a Groupon said they failed.
82% of retailers running a Groupon promotion were “Unsatisfied with the Level of Repeat Business.”
This is not surprising. People will come to a new story — any store — for a really good deal, but that does not mean they become devoted customers. One could argue that that’s the merchant’s fault. What are they doing around the deal to bring people back?
Groupon was riding high because its most important constituency—the small businesses who slashed their prices to entice Groupon’s customers—was getting ripped off. [emphasis mine] When Groupon runs a deal with a local business, it demands very unfavorable terms. First, the merchant is asked to substantially reduce his prices. Then he has to agree to give Groupon a huge split—often 50 percent—of the tiny amount that he does make from each Groupon sale. For instance, if my fast-food shack normally sells a burger-and-shake combo for $10, Groupon will want me to offer it for $5, and then take half of the $5 sale—so I’ve just sold $10 of merchandise for $2.50.
The trouble is—as Agrawal and many small business owners have documented—there’s ample evidence that Groupon’s sales reps never adequately explain the risks, and really exaggerate the rewards, of signing up for a deal.
UPDATE: Groupon stock falls to all time low just in time for first anniversary. Groupon went public at $20 a share on Nov. 4, 2011.
UPDATE: Groupon is hovering in the $4 to $10 range, suggesting that it is a favorite for short sellers.