The Groupon IPO – just too soon

Andrew Mason Groupon CEO - Fast Company profile

I like the Groupon concept and have tremendous respect for Andrew Mason who reinvigorated retail with a new channel and caught the intersection of social media, ecommerce, local shopping and time sensitive value, all at the right time. It’s been the perfect blend of social commerce online with real world experience, issuing in a new era for digital. Last Thursday, after only 2 1/2 years in business, they filed to go public, looking to raise $750 million (£460 m) you can read the filing here.   But it was only January of this year where Groupon raised capital of $950 million,  spending virtually all of it – $810 million – to pay back early investors, leaving the company cash strapped to fuel it’s phenomenal growth.  More than anything else, this is what has everyone buzzing.  Sometime at the beginning of last year, they made a choice to abandon a profitable growth strategy and move to a hyper growth top line revenue play with no profitability in sight.

From the numbers, and Conor Sen does a nice recap in Groupon is Effectively Insolvent, this is a company which is burning through cash at a jaw dropping rate.  It would be impossible to predict it’s results next month, let alone at any point in the future.

To me, these are separate issues from the underlying business concept.  A company can choose to get it’s costs under control and with these levels of revenues, there is no reason it couldn’t happen relatively soon.  You can make strategic choices about where to expand and how to profitably do it.  The problem is that when you grow to 8,000 employees in just over 2 years, it’s virtually impossible to be efficient or to focus on refining your proposition as the marketplace matures.  The real future facing issues fall into two categories:  Merchant/Customer fatigue and Competition.

There has been a lot of comment that Groupon isn’t really good for merchants in spite of it’s claims – it’s expensive (merchants receive as little as 25% for a customer sale) and doesn’t prove to drive long term new business.  But we simply don’t know this and shouldn’t blame Groupon for their first pass at pricing.  Most of the Groupon merchants are small retailers – restaurants, beauty boutiques, spas, hotels, etc.  These are not savvy marketers who calculate an ROI on every advertising channel they try or have sophisticated CRM systems for understanding churn or true customer acquisition cost over time.  They take out an ad somewhere for the going rate, hopefully customers come through the door, they try to showcase their service in such a way that the customer comes back and becomes loyal.  At best, they might do a back of the envelope calculation about how much new business they made from the ad during a short time frame.  And then they move on to their day – it’s all about footfall and what was in the till yesterday.  We do know that Groupon is driving footfall to these local businesses, it’s up to the retailers to make them loyal customers and the advertising work for them.  Groupon may be expensive at this point, but only the merchant can truly decide this after looking at other local advertising options open to them, which have been dwindling with the demise of local newspapers.  And we will never know the true value of Groupon over time to these merchants, because that calculation simply does not exist except in rare isolated cases.  What Groupon currently doesn’t provide to make it less of a broad reach is the ability to tell potential merchants what types of customers they will be reaching, except in very general terms.  And this must be a key innovation for the future – using their data to target the right people at the right time with the right offer.  This will come in time and I expect the pricing models will then change too.

Which leads to the other future considerations of end customer proposition and competition.  Customers have choice and only so much budget for these types of services.  There are Groupon clones, many very good ones like LivingSocial and of course Google, Facebook, Amazon and eBay who have entered the offers world having relationships with retailers and vast experience in using data for personalisation.

Groupon is the leader by being first mover and there is an appetite from merchants and consumers for this service which isn’t going away.  But they have to innovate, refine and turn this hyper growth into something sustainable before burning out.  I think that makes it too soon for going public and adding those particular pressures.  As I wrote back in December, I wasn’t sure it was the right decision to turn down Google and now that we have transparency on just how much cash they need, it’s even less clear.

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