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Tuesday, October 25, 2011

Groupon's Big Bowl of Problems

Posted By on Tue, Oct 25, 2011 at 11:15 AM

Groupon, it appears, means to get rich or die tryin'.

On Friday, it updated a regulatory filing indicating that it is scaling back its IPO plans. Less than five months ago, when it first filed, the company said it planned to raise about $750 million. Now that's been reduced to $540 million. The expected valuation of Groupon had been between $25 billion and $30 billion. Now it's around $11.4 billion, assuming an $18 share price.

Part of the reason for scaling down is, no doubt, the soft market for new companies in the still volatile and uncertain U.S. equity markets. Several companies have withdrawn IPO plans altogether. But Groupon perseveres. Insistently. This week, it's on its IPO road show, trying to sell Wall Street on the idea that the time is now for a public offering.

But there are plenty of other reasons that help explain the partial retreat, all of them having to do with Groupon itself. It's just a big bowl of problems. To wit:

  • It's losing money. Not that this is unheard of for Internet IPO companies of course, even now. But Groupon lost $574 million in the year ending on September 30. Friday's filing shows that the company cut losses to $10.6 million in its third quarter from $49 million a year ago. But that improvement came mostly from cuts to overhead expenses, which can only go so far.
  • Revenue growth is flat. Over the last two quarters, revenue growth grew at the same pace, about 26 percent.
  • Questionable (at best) accounting practices. These include removing online marketing expenses and payments to online vendors in an effort to make its losses appear less bad. When the company was called on these funky practices, it changed its accounting methods, cutting reported revenue in half.
  • CEO Andrew Mason violated the IPO "quiet period" rule. Mason issued a memo "to employees" which -- shockingly! -- got leaked to the media. While the quiet period might be an arcane, pointless rule, it's still a rule, and Mason either had to know he was violating it or he simply showed that both he and his company are still too callow and unlearned to be taken seriously by serious investors.
  • COO Margo Georgiadis stepped down. After just five months on the job, and just as the company was prepping an IPO that might have enriched her greatly, the sales chief opted for the safer, more stable confines of Google. Maybe she just didn't want to face the coming Chicago winter. (Not necessarily related Georgiadis' departure, Groupon this week filed lawsuits against two former sales managers the company accuses of taking trade secrets with them to their new employer -- Google.)
  • Groupon's very business is shaky. For all the sensational deliciousness of some of the foregoing bullet points, Groupon's core problems rest on two crucial facts. First, many of the small-business owners that are vital to the company's business model complain that they lose money on coupon sales (which is sort of the point) but don't get repeat business from Groupon customers (which is supposed to be the point). Second, and more fundamentally, Groupon has no natural marketplace advantage. Yes, it's the first big mover in local deals, but there are very few barriers to entry in Groupon's industry. Just about anybody can start such a business - and they have, all over the place. Which helps explain why revenues have stayed flat despite Groupon spending huge on marketing. It also explains why companies Facebook like Yelp and have both retreated from the business.

While online coupons surely make for a viable business, it seems less and less likely every day that they will ever make for a business big enough that it should trade on a major U.S. stock exchange. Clearly, though, this won't stop Groupon from trying.

Dan Mitchell has written for Fortune, The New York Times, Slate, Wired, National Public Radio, The Chicago Tribune, and many others.

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Dan Mitchell


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