Groupon's perversions

As you know , last Thursday, Groupon filled out an S-1 format for the initial listing of securities on the NASDAQ. This event was more than expected, because the company, which will be discussed, resembles a stove for cash, with a pipe of which several individuals and investment funds warm their hands. The information that the company had to disclose to the SEC (Securities Commission) illuminates interesting indicators of how the kitchen of this extremely aggressive company is arranged. There is something to see, with interest, bordering on bewilderment.

And the point here is not even that Groupon, according to her own statements, is growing on biologically modified yeast. The whole business of selling coupons today begins to exude a persistent smell of hopelessness, even despite very steep growth rates: 13575% in revenue growth as compared with the previous year, despite the fact that only the first quarter of reporting was closed in the current year - the company had already “earned $ 644 million. Last year, the company's revenue grew at a rate of 22,000%, making a “profit” of $ 713 million.

And everything would be fine if you do not take into account the fact that Groupon ... still remains unprofitable, primarily because of its intercontinental growth strategy. Last year, $ 456 million was burned in the coupon stove; in the first quarter of this year, already $ 147 million. You should not even expect that the minus will soon be replaced by a plus. As Andrew Mason, the company's CEO, says: “We are aggressively investing in growth and spending a lot of money on acquiring new subscribers.” About 54% of operating expenses are related to marketing activities, the remaining 46% are in sales departments, where almost 3,500 people work today, worldwide.


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As can be seen from the table, most of the sellers are dispersed outside the US, where Groupon and loses most of its profits. This is the reason why Mason and the rest of the company love to talk so much about fantastic, just going through the roof, growth rates. Unfortunately for all of them, Wall Street is well aware that companies (and its securities) should be valued primarily by how much of a company’s gross income can be left on its bank accounts in the form of net profit. And while there is still a bit of finance (about 200 million left after the buyout of shares of early investors - more on that below), the totals of financial activity dive very deep.



The reason why investors around the world today assess their chances in this extremely risky game is very simple - companies urgently need money to sustain growth, since practically the only real indicator that plays a role when entering the stock exchange looks very bad: Groupon spends $ 1.43 to attract every $ 1. And as soon as the funds received during the IPO, get into the company's accounts - it will eagerly, with champing, devour them. Very, very fast. It is very risky, but can be extremely profitable. Warning: maybe .

Feudal land

Therefore, all the praises that Mason sings are so unpleasant to my ear. And I absolutely agree with the words of Eric Schonfeld (TechCrunch browser), saying that: “The reason why Groupon’s IPO looks like a scam is that there are no profits even on the horizon, the founders say“ Believe us ”, filling their pockets with dollars.”

In January, Groupon closed the last (7th) round of investment, rescuing about a billion evergreens. As I already mentioned, of all the funds received by the company, to date, only $ 208 million is deposited in its accounts. What was the rest of the money spent on? On payments to insiders and early investors in Groupon. With the current rate of "burning" of these funds is barely enough for the next two quarters, and this is the first reason to fill in the entry form to the stock market. Venture capitalists who jumped aboard Groupon in January with all this money now very much, I would even say very much, expect to remove at least some cream from this in the upcoming IPO.

“Here is a billion dollars, but in a year we should have several times more!”

Who are the lucky ones? The list is not very long.



This is the reason why many analysts and observers are now comparing Groupon with the Ponzi pyramid . She, no matter how funny it sounded, was also built on coupons.

It turns out that most of the funds received by the company in a series of investment rounds were spent solely on the income of the earlier investors of the same company, and those who invested last hoped to exit through a round or two by removing the cream. The life experiences of such characters as Bernie Meddoff, Ponzi and Enron show that you can fool a few people once or twice, but not all the time. Millions of subscribers, and tens of thousands of local business representatives who are not involved in unwinding the stock market, have not fully understood everything until the end.

Long term loss strategy

What does the coupon look like from the inside?

50% is the average discount to the final buyer of the coupon from the business owner.
25% gets a business owner.
25% receives the operator of the transaction, in our case - Groupon.

Of course, in some situations, the percentages will vary, but the figures given remain true for most situations. There are very few types of business activities that can afford to cut the price in half, give half of the remaining amount, while remaining positive.

Therefore, the entire business of Groupon - a game of "zero" with three participants. The money gets either a consumer, or a business, or Groupon. Most often, of course, the last one, which leaves the first two participants either at zero or at minus.

If a business wants to make a small profit from a knowingly unprofitable transaction, then it is necessary to either reduce the commission of the transaction operator (which will reduce its margin), or reduce the discount for the consumer (which will reduce the attractiveness of the transaction as such).

“Don't worry about the profit from the deal,” says Groupon to the business, “it's all about acquiring new customers! You will get new, loyal customers / clients and will be able to earn much more money on them in the foreseeable future. ” It sounds good, if not a few “but”:

1. A part of potential consumers of a product or service are not new consumers.

You have just reached a margin of 75%. Imagine that you are offering a deal in which you feed a visitor $ 40 food for a coupon he bought for $ 20. You sell 2,000 coupons. 25% of visitors are regular customers of your establishment. This is $ 15,000 from regular customers that you just lost (25% is even slightly lower than what is heard from business representatives who tried to work with Groupon - the higher this figure, the worse the result. One of the respondents said that 90% Coupon owners have already been regular customers). In addition, there is one more thing here, which consists in a long-term reduction in price expectations and a feeling that the consumer may not want to pay the full cost in the future.

2. Many consumers generally fall out of your primary market.

For example, for local restaurants, the “comfort zone” is about 10 km. Even with the sufficient localization of Groupon, he is not able to target so narrowly. And if someone wants to drive 30-50 km in order to save a couple of units of currency in your institution, then most likely, such a client is not at all interesting to you, as a business owner. Of course, there are places where people travel for an hour or two and are willing to pay double the price, but they do not need any coupons or deals.

The operator of the transaction must convince the representative of the business that the whole system works for his benefit. Today, echoes of efficiency, and simply echoes of Groupon, say only that it is “popular” and not that each CFO painstakingly counted ROI (return on investment, profit / investment ratio) for a transaction with a consumer, if he generally knows what it is.

This is a very subtle point, which may be able to quantify and qualitatively within Groupon, but this information will never be published. Rice School of Business conducted several surveys and found that 42% of those who offered deals on Groupon are never going to do it again. And this number will grow until Groupon moves from a quantitative growth phase to a qualitative one. But this, it seems, is not included in his plans at all.

The lion's majority of sellers can not provide discounts above 10%. Some may be ready to provide a 25% discount for a spherical horse in a vacuum. But 75% or more, on which Groupon rests, are simply unrealistic in the long run. Therefore, if all the places in your district start working on this model, then the transaction operator will not be able to generate an inflow not only of loyal customers, but of customers in principle - these will be hunters for discounts. It follows from this that as long as Groupon expands, the business will increasingly take root in the idea that the company's main argument does not work (if it ever worked at all) and Groupon cannot generate a stream of loyal consumers of goods or services.

By the way, Facebook Group Deals today offers deals with a commission of the operator at 0%

Free fall

The company Yipit , which is a competitor of Groupon in the US market, conducted an interesting study and found that Groupon is losing ground in the markets where it managed to gain a foothold.

So, in Boston - the second largest city for this company (where Groupon came right after the conquest of Chicago), the cost of acquiring a subscriber has already begun to rest on the ceiling, while income to the buyer is going down. It can never be a good signal. That's probably why Groupon is starting to invent its own economic indicators, which turn out to be positive almost in any conditions, such as Adjusted CSOI - a ratio that considers the company's profitability without regard to marketing expenses. I’m sure that I’m not the only one who starts to laugh hysterically at the sight of such tricks with my ears, since Groupon without marketing is not Groupon at all, just a “regular website” on the Internet.

All this is the lyrics. The real, bloody events will begin to evolve rapidly on the day of the IPO. Credit Suiss, Morgan Stanley and Goldman Sachs have already entered their good names in the list of "assistants". There is no doubt that trading on this day will be closed as a plus - the guys know how to pump money with what they need to pump. I just do not let go of the dark feeling that throwing a stack of money into the fire, Groupon will recover with carbon monoxide gas.

In preparing the material were used publications of the following publications: TC , Wired , Betabeat , Shortlogic , Knewton , Minyanville , NYT