Groupon States Its Case
In an unusual letter to potential stockholders in its IPO filing, Andrew Mason, Groupon’s chief executive officer, listed five "long-term focused principles" that have guided and will continue to guide the daily deal coupon provider’s growth.
1) Â We aggressively invest in growth: Subscriber-acquisition costs of $241.5 million in the first quarter helped drive worldwide subscribers to 83.1 million as of March 31 from 3.4 million a year ago, but also led to a loss of $102.7 million on sales of $644.7 million in the quarter. Wrote Mr. Mason. "When we see opportunities to invest in long-term growth, expect that we will pursue them regardless of certain short-term consequences."
2) Â We are always reinventing ourselves: After its initial focus on one deal per day led to nine-month waiting lists for merchants in some markets, minions of Groupon clones, and "too many customers" for deals, Groupon released deal targeting, enabling different deals for different subscribers in the same market based on their personal preferences. Groupon NOW, which rolled out last week in San Francisco and New York, gives subscribers hours to both buy the deal and cash it in. Wrote Mr. Mason, "Expect us to make ambitious bets on our future that distract us from our current business. Some bets we’ll get right, and others we’ll get wrong, but we think it’s the only way to continuously build disruptive products."
3) Â We are unusual and we like it that way: Examples included fire dancing classes and a marketing campaign, such as Grouspawn, which awards college scholarships to babies whose parents used a Groupon on their first date. Wrote Mason, "While weighted toward the measurable, our decision-making process also considers what we feel in our gut to be great for our customers and merchants, even if it can’t be quantified over a short time horizon."
4) Â Our customers and merchants are all we care about: This includes an open refund policy, a "sophisticated, multi-stage process" for picking deals and "vigorously fact-checked" editorial content. Wrote Mason, "We believe that when once-great companies fall, they don’t lose to competitors, they lose to themselves — and that happens when they stop focusing on making people happy."
5) Â We don’t measure ourselves in conventional ways: Gross profit is seen as "the best proxy for the value we’re creating." Second, free cash flow is measured as an indication of long-term financial stability. Third, income before subscriber acquisition costs is viewed as "operating profitability before marketing costs incurred for long-term growth."
Mr. Mason concluded, "If you’re thinking about investing, hopefully it’s because, like me, you believe that Groupon is better positioned than any company in history to reshape local commerce. The speed of our growth reflects the enormous opportunity before us to create a more efficient local marketplace. As with any business in a 30-month-old industry, the path to success will have twists and turns, moments of brilliance and other moments of sheer stupidity. Knowing that this will at times be a bumpy ride, we thank you for considering joining us."
- Groupon’s S1 filing – Securities & Exchange Commission
- Groupon IPO: 3 Reasons to Worry – The Wall Street Journal
- Groupon IPO: It’s Here! – The Wall Street Journal
- Groupon’s $540 Million in Losses May Leave Investors Leery of Share Sale – Bloomberg News
- Groupon: From The Ashes Of A Dead Startup To A Billion-Dollar Company In 2 Years – San Francisco Chronicle
Discussion Questions
Discussion Question: What do you think of Groupon’s long-term strategy, core principles and growth potential?
I used to think Groupon was a brilliant strategy — and I still do, for Groupon that is. Our colleague Bob Phibbs wrote a short and punchy ebook on the reality of Groupon that totally changed my mind. His central message to businesses is “You can’t afford it!” Groupon’s “core principle” that they care about the merchant’s wellbeing is, at best, suspect.
I also used to think that selling my books on Amazon was a brilliant strategy and it was — for Amazon. Very few authors make any money selling through Amazon. What I learned from Phibbs is you’ve got to look at the whole picture before assigning value. Merchants beware.
“Our customers and merchants are all we care about!” proclaims Mr. Mason. Really? In their 30 month history which coincidentally coincides with the worst recession since the great depression their build your business with something for almost nothing strategy seems to ring true with some desperate and poorly managed businesses. Saying that their model is the new retail paradigm is not only wrong it is terrifying! Businesses need to make a profit to be sustainable and throwing around huge discounts may bring in a few bottom feeders, but in the long run will only serve to destroy brand equity and customer loyalty…exactly the things the purport to improve.
IMO, the Groupon business has short legs as it is too easy to duplicate–and we have seen a lot of duplication both nationally and locally. Bargain hunters will subscribe to all of them, as well as to sites such as frankdeals.com and restaurant.com. But then, if I am so smart, why ain’t I rich?
Groupon should have taken the buyout offer. It is building a sizeable business, but will have withering competition from multiple other companies. I don’t think this story ends well.
Cash flow is no doubt an issue for Groupon. And, they have a model that gets the cash to the merchant 60 days out–so they have to watch that issue.
The positive play for them is the fact that they do have 83 million people taking a look at their site–some for value, some of idol curiosity, some as treasure hunters, etc.
This is a model that has legs provided they continue to “Imovate” (Innovate / Imitate) to meet the consumers’ interests and demands.
In terms of cash flow–moving to a public offering is a way to both raise cash, and establish a market value for Mason and his early supporters and associates.
Sorry, but I don’t see Groupon as a huge growth stock, as there are plenty of internet sites doing this, and some of them at no charge. We’ll see, but I would sell the stock now.
The company made a big mistake in not selling to Google. There are now many and a growing number of imitators. Like generic products of the past, some of these offers will have lower quality than others and the petals will wilt on this rose.
In addition, there will be more choices for advertisers and the margins will slip while selling costs will rise.
Groupon Now is made possible because the distribution cost is so low but it is loaded with unintended consequences, one being the loading of mail boxes to the point of annoyance. After being out for a week, I am not happy with all of the Groupon and Living Social emails that I have to delete.
In the future, look for retailers with web sites to use variations on this technique, adding to the static on the airwaves.
If cash flow is a 60 day pay to the retailer as someone earlier wrote, there is a problem. It will not improve unless there is another large intake of liquid cash. If they find a way, please let me know. I would like to use that method in my business. Wouldn’t we all?
As a ‘long-term’ subscriber to Groupon, it gets boring after awhile. Who has time or the inclination to read all of the nonsense ‘edtorial’ content describing each offer? And, the average consumer no doubt notices, as I have, that most of the offers tend to come from retailers and restaurants who probably aren’t “best in class.” Then there is the issue of expiring offers. Once a consumer buys four or five of these, they have to keep track of when they expire and make sure to use them. It all becomes too much work to keep up with the various offers and expiration dates.
And, all of our e-mail boxes are cluttered as is, so I expect a big shake out of Groupon-like companies. Whether Groupon itself makes it in the long run depends on its creativity and ability to position itself as something fun that everyone needs to get in on–ala Facebook or Twitter–instead of a discounter of last resort for failing businesses.
Or to be more concise: “trust us.” Of course that brevity would have denied Mr. Mason the opportunity to offer up such gems as “Groupon is better positioned than any company in history to reshape local commerce”…really? Suffice it to say, Mr. Mason’s immodesty will find little favor with the many of us who (already) regard this as a fad.
Groupon has some great concepts, however, their #1 rule should NOT be that they invest in growth, but that they invest in making their customers happy. It is customer service and the end result (customer happiness) that drives a thriving company and enables many of their other rules to work, including creating a profitable relationship (which Groupon has yet to do).
I have tried hard to care about the offers crowding my inbox from Groupon and LivingSocial, but in truth, I haven’t been motivated to redeem a single one. Maybe as a hard-case analyst type, I’m not really part of the target audience.
Despite the amount of press and audience that Groupon has garnered so far, my instincts tell me it is not so much of a business as a feature. It’s “local-ness” doesn’t truly reach down to the neighborhood level. Its ability to aggregate consumer data for the purpose of behavioral targeting will depend on the capture of much more than just redemption patterns.
Growing audience notwithstanding, Groupon still needs to prove it is a business on its own.
I’m a bit surprised by the negativity of my fellow panelists. Yes, Groupon has risks. Yes, they are not always on the side of the retailer. But they have changed the nature of retailing. They kicked off a wave of deep discounting. They developed a system for local merchants to effectively reach and activate consumers other than community newspapers and direct mail.
Were some the the deals losers for retailers? Yes. Were all of the deals losers? No.
Groupon has changed the retail landscape around the world. I look forward to seeing how they fine-tune the service and enhance local retail.