June 3, 2011

∴ Just Say NO to Groupon's IPO

Short logic:

“What’s so frustrating is that on paper, Groupon appears to be one of the best business ideas in the world. You convince small merchants to give extreme discounts to get access to more customers, and you get to keep half of the revenue yourself. No need for warehouses, distribution, or inventory. Add a recession-battered, coupon-hungry public and presto, the gold faucet is flowing!

If only. The S-1 tells us the reality is far from that ideal. Groupon had to spend $208M on marketing in the first quarter and another $178M on sales people and the rest.”

(Via DF.)

Groupon turned down (Chicago Tribune) an over $5 billion purchase offer from Google late last year, hoovered up more VC money (Venture Beat) since then (the Short Logic piece has those numbers), and now they want to sell themselves to the public for around $750 million. Good luck with that.

(A short disclaimer: my wife and I own a small business, which she has operated full-time for over six years. We have an intimate understanding of how business works, and we hate Groupon. Our reasons why are becoming Groupon’s long-term problem.)

As the Short logic piece says, Groupon sounds like a good idea on the surface. Customers get a deal, businesses get more business, Groupon collects a fee for putting the two together. Dig deeper and you’ll find that Groupon is just bad for business, period.

Groupon-participating businesses are forced to discount well below cost in order to set up a deal, and Groupon takes much of what’s left. So the business will operate at a significant loss for the duration of the deal. The rush of Groupon customers on deal-days means more employees are needed, adding to expenses. The bottom line goes further negative. But at least they’re getting new customers, right? Wrong. Groupon customers share one unifying trait: they’re cheap. Shopping with Groupon is an exercise of that cheapness. They will (by and large) not become return customers after getting their big deal-of-the-day. The merchant is left wondering what hit her.

How long will it be before merchant disillusionment begins to make it more expensive for Groupon to find new victims? I think we’re already seeing it happen. The cost to acquire new merchant customers should be going down for Groupon, given how widely they’re known among consumers. It isn’t (David Sinsky for Yipit). That Yipit analysis is particularly damning, backing up my two points with charted data.

My take: Groupon’s IPO is an act of desperation. The founders should have taken Google’s money and run, and now they know it. The financial numbers are telling the tale, and initial VC funders and company founders are eager for an exit. How lucky for them that inept investors are salivating at opportunities to invest in anything with the words “internet” and “social” in the prospectus. A fool and his money…

This company is going to implode in the next twelve to eighteen months.

Anyone want to buy into that?

UPDATE: validation. This article appeared on Hacker News shortly after my post. Note the word implode in paragraph 13.

The author gives a good overview of why Groupon is unsustainable, too. You don't get something for nothing. Take a big piece out of the retailer's income and someone is going to suffer. Even when that retailer is Wal-Mart.