“People of Groupon, after four and a half intense and wonderful years as CEO of Groupon, I’ve decided that I’d like to spend more time with my family. Just kidding—I was fired today. If you’re wondering why … you haven’t been paying attention. From controversial metrics in our S1 to our material weakness to two quarters of missing our own expectations and a stock price that’s hovering around one quarter of our listing price, the events of the last year and a half speak for themselves. As CEO, I am accountable” Mason smirked between salty tears of a half-price Brazilian wax job.

Besides, the usual told-you-so’s, there’s something serious to ponder here: Groupon’s fundamental model is to make money easily off the sweat of mom & pop businesses. In return for access to Groupon’s marketing muscle and exposure, small businesses are expected to not only cut their prices in half or more, they are forced to split the revenue generated through Groupon with Groupon. 

Yet… Big YET… Groupon supposedly loses money on these transactions, loses shareholder value, loses investor confidence, loses Wall Street confidence, loses repeat business, loses, loses, loses. This sounds more like a pyramid scheme than a serious long-term venture.  

Now go back and read Mason’s departure statement. Not once does he mention the small businesses that Groupon is built upon. Perhaps it is something he can think about when he is out looking for a job.

Trust? Really? Let’s look at the facts:

•Groupon’s own business model is now shifting toward the repeat customer. This means that the list of possible businesses jumping into the social coupon pool is diminishing. So naturally they are offering more bells and whistles to their offerings in hopes of extracting further revenue from their increasingly dissatisfied and skeptical merchant base.

•Groupon does not share its own customer information with participating merchants. Deal purchasers are simply encoded numbers and it is still up to the merchant to extract the identity of the customer when they redeem their deal.

•Why would Groupon want to be completely transparent with its merchants and potentially cut themselves out of their own future business?

Analysts at Raymond James released a survey Monday showing one-third of Groupon’s merchants either unsatisfied or very unsatisfied with the Chicago company’s promotions, known as Groupons, and 39 percent unlikely to run another Groupon deal for the next couple of years. The top complaints were a high commission rate and a low rate of repeat customers, according to the survey report.

The Raymond James survey of 115 Groupon merchant customers revealed that only 4 percent of the merchants said their Groupon promotion was “highly profitable. Thirty-seven percent said it was slightly/modestly profitable; 26 percent said they broke even and 32 percent lost money on the deal.

Not exactly the formula for repeat business. Groupon stock debuted at $20 a share last November. Today it sits at $4.82. How’s that for a 75% off deal?

To offload a coupon, sellers download a PDF of the deal from their coupon site, then upload it to CoupFlip. Payment then comes via Paypal or in a mailed check. People who buy the coupons after that will save a couple dollars or so off what they would have paid by buying it directly from ‘group buying’ sites like Groupon or LivingSocial.

However, if you look closely at LivingSocial’s Terms of Service, it expressly forbids the reselling of their coupons. But will LivingSocial really go after their own customers? After all, LivingSocial gets paid whether or not their coupons get redeemed.

Groupon and Living Social have sold tens of millions of daily deals and are now a major force in retail. But they rely heavily on getting businesses to offer their goods and services at deep discounts. In exchange, businesses hope for payoff in the form of return customers. Sometimes, though, the flood of extra business causes more problems than it solves.

Deal-Hungry Crowd

Ailie Ham had just opened Creative Hands Massage in Washington, D.C., when she decided to offer deals through Living Social and Groupon last year. Within an hour, 900 vouchers were sold; soon, all 4,000 massages were gone. ”We got to the point where, literally, we [had] eight phone lines and every single day, every single mailbox was full,” she says. “While we were answering the phone lines, the phone was ringing.” Initially, that seemed great. Ham split the sales with the dealmakers and received her cut — a quarter of the normal massage price — up front. Then, it was off to the races. Ham and two dozen other masseuses worked around the clock, massaging new clients. They swapped out their break-room table for a massage table. She says about one-fifth of the daily-deal clients returned again and paid full price. ”But I think the crowd that is attracted to a deal is attracted to a deal,” Ham says. “It really sets a standard for how you sell your product, meaning … this is the crowd you’re going to draw, and that’s going to be the expectation.”
The deals also put her deeply in the red. Each voucher left her $50 short after she paid for rent, labor, laundry and massage cream. Ham had to borrow $150,000 from banks, friends and family to cover the costs of running her business.
But that’s not even what bothers Ham. She says that to handle the volume, she pulled multiple all-nighters, writing down all the phone numbers of Groupon customers seeking appointments by hand, only to be berated for not responding to calls sooner. ”I woke up crying,” she says. “Many, many, many mornings, I woke up crying.”

‘Unequivocally Good’

Contrast that with Joel Mehr’s experience. He owns Pete’s Apizza, a gourmet pizza restaurant that has used Groupon twice to draw customers to new locations in the D.C. area. ”For us, I really think it’s unequivocally good,” he says.

Mehr says the typical Groupon user spent more than the coupon. And although he can’t prove it, he says it seems to have increased foot traffic.
But the deal came with one notable downside: Fewer stars from customer reviews on Yelp.
“Generally, the Groupon customers that comment on Yelp are not very good, actually,” Mehr says.

Worse, More Influential Yelp Ratings

This, it turns out, is common. John Byers, a professor of computer science at Boston University, recently researched millions of reviews written about many thousands of businesses that ran Groupon offers.

“The Yelp star rating was 10 percent lower for Groupon users than people who had visited the merchant prior to the Groupon offer,” he says.
Byers says Groupon buyers are not only vocal, but they also test businesses with a keener, more discriminating eye.
“Their reviews are longer than typical reviewers, their reviews are more widely cited, so their reviews carry more power, more weight, than just the typical run-of-the-mill review,” he says.

Groupon: Be Prepared

For their part, Groupon and Living Social say they offer on-the-ground support and online analysis tools to help businesses manage the flow of traffic and to help them structure the best deal.

Groupon says a lot of businesses do make it work and that a quarter of its customers are repeat business.
“It’s up to you to make sure that your staff is consistently delivering excellent results and that you’re capturing the attention of that traffic that comes in your door,” says Julie Mossler, a spokeswoman for Groupon. “So I’d say far and away the issues that merchants see are not capacity — but it’s that they’re not prepared.”

Source: Yuki Noguchi, NPR Morning Edition 7/6/12

Accrued merchant payables — what Groupon owes its merchants from running daily deals — have been growing faster than revenue, suggesting a drag on Groupon’s profit margins.

Groupon has lost more than half its market value this year on concern about waning demand for its daily deals and the company’s accounting troubles.

The company recently revised fourth-quarter results, admitting to “material weakness” in its financial statements — a disclosure that triggered the latest decline in its share price.

On April 30, Groupon appointed two new directors to the audit committee of its board to stave off criticism of its accounting practices.

However, on the same day, Groupon was named on a North America Biggest Concerns List with 23 other companies by the Center for Financial Research & Analysis, a forensic accounting research firm.

According to analystis, Groupon’s accrued merchant payables jumped 23 percent to $572 million in the fourth quarter, compared to the third quarter. Meanwhile, net revenue grew 14 percent to $492 million over the same period.

If merchant payables increase faster than revenue, that may suggest merchants are asking for a bigger cut of the money Groupon collects from its daily deals, the CFRA analyst added.

Groupon has traditionally taken about 40 percent of this money, something known as the take rate. Merchants keep about 60 percent, but are paid over about 60 days after a deal runs in the U.S. (and longer in international markets).

This take rate will be a major focus when Groupon reports first-quarter results on May 14.

If merchants negotiate a more favorable take rate, for example 70 percent to the merchant and 30 percent to Groupon, revenue would fall and merchant payables would rise. In the case of the $20 discounted coupon, Groupon would recognize $6 in revenue while $14 would be booked to accrued merchant payables, according to CFRA.

“If Groupon’s merchants are taking a bigger cut, that will eat into revenues and make it harder for the company to reach scale,” the CFRA analyst said. “There may not be enough revenue to support Groupon’s operations, including its large sales force and heavy marketing spending.”

Sameet Sinha, an analyst at B. Riley & Company, expects Groupon’s take rate to decline as merchants push for more favorable terms.

Google and Amazon.com which have rival daily deal businesses, are likely offering a bigger cut to merchants and may be paying them more quickly.

So what does this mean for the daily deal giant? The company mentioned the risk in its annual report, filed on March 30.

“To the extent we offer our merchant partners more favorable or accelerated payment terms or our gross billings do not continue to grow in the future, our cash flow could be adversely impacted,” Groupon said in the filing.

Excerpts courtesy Chicago Tribune, ©2012 Reuters

Is Groupon flying without a parachute? Well, let’s just say that the social coupon giant has been plummeting through the cloudy realm of increased competition, nonexistent profit, questions over its accounting practices and a plunging stock price.

Doubts over the operation were heightened last week, when Chicago-based Groupon unexpectedly revised its financial results for the fourth quarter, saying it had overstated its fourth-quarter revenue by $14.3 million. That put its actual loss for the quarter at $65.4 million.

The company blamed the revisions on increased customer returns that it did not anticipate, but one investor filed a lawsuit in federal court, seeking class-action status and accusing Groupon of making false and misleading statements about its financials.

Potentially far more serious is a report, attributed by the Wall Street Journal to unnamed sources, that the Securities and Exchange Commission is investigating the company.

“The jury is still out on the long-term sustainability of the daily deals industry,” said Herman Leung, an analyst at Susquehanna Financial Group. “There is a daily deals fatigue in the marketplace right now.”

There are concerns that partnerships with local merchants will continue in large numbers, Leung said. Many merchants have already been burned by customers who use daily deal coupons for discounted goods or services and never return to buy items at full price.

“The rate for the same customer to come back without a Groupon right now is only 1 in 5,” Leung said. “If merchants don’t fix the model and drive better consumers then they have a definite issue to worry about.”

A major effort by Groupon to not only grow but also differentiate itself from competitors was to venture into much higher-priced offerings — such as laser eye treatments for more than $2,000 — than its usual restaurant or spa treatment deals.

But that effort got the company into hot water. In its filing with the Securities and Exchange Commission that revised revenue, Groupon said it had underestimated the rate at which customers would return such high-end deals. To that end, the company blamed “a material weakness” in its internal controls.

Jordan Rohan, an analyst with Stifel Nicolaus, said that the higher rate of returns may signal that Groupon will have trouble cracking the luxury goods and services market.

“The company just told investors that expanding into more complex and more expensive offers is difficult,” Rohan wrote in a note to investors. “Essentially, more consumers were dissatisfied with big ticket purchases than would have been dissatisfied with a discounted burrito or massage.”

If the company is ultimately unable to persuade shoppers to buy luxury cruises or four-star restaurant dinners, Rohan said, that could be a problem “bigger than an accounting or trust issue.”

Last week’s restating of revenue by Groupon was hardly its first accounting error to come to light. Last summer, the company was forced to tweak its accounting methods after facing criticism that it was inflating profits by excluding marketing costs, customer acquisition costs and stock-based compensation.

Then, in the run-up to its IPO, Groupon was forced to restate its financials after facing scrutiny over an error that counted fees paid to merchants as revenue.

Bottom line: Every business–from big mega corporations to small mom & pops–need repeat full-price customers in order to survive. Small businesses that work with social coupon sites ARE full-price customers, despite their own self-inflicted deep discount. But how many will be repeat customers of Groupon?

Exerpts from Los Angeles Times: http://www.latimes.com/business/la-fi-groupon-growing-pains-20120407,0,3798871.story

In the media’s eyes, social coupon sites have gone from sparkling pillars of a new ecomomy to billowing factories of smoke and mirrors. So, wherein lies the truth? Granted, Groupon and LivingSocial’s fortunes are immense. But so is the quantity of cash they are hemorrhaging. (This, for companies with no warehouses, inventory or distribution?) The sad truth is, social coupon sites are not out to fuel your growth, but theirs. The very reason social coupon sites are burning cash–your cash–at such a staggering rate is that acquisition costs of new customers are skyrocketing and revenue is plummeting. If Groupon or LivingSocial were in the same business as you, wouldn’t they be out of business by now?

In this age of hyper-targeted marketing, social coupon sites are still using a blunderbuss to hit a fly. Although Groupon has recently attempted modernizing itself with geo-targeted deals such as Groupon Now, most users get the same offer as every other Groupon subscriber in their city. Which means Groupon is basically in the business of delivering digital junk: Untargeted, uninterested individuals receiving unopened, unwanted offers. Sure, everybody likes a great deal. But how great is half-off Brazilan waxing offered to my grandmother on the other side of town? (Sorry, Grandma).

In many ways, Groupon is applying the ancient media principle of “tonnage” to making sales. It is spending truckloads of cash to deliver a horse and buggy solution–noncustomized email–to reach tiny groups of consumers inefficiently and ineffectively.

As the economy continues to sputter, money-saving behaviors such as couponing is becoming an ingrained habit with many consumers. Coupon usage has steadily increased for the past five consecutive years, creating a generation of “forever frugals” who plan to continue with their spendthrift ways even when (or if) the economy improves. Bottom line: Scrimping is here to stay.

Does this spell bottom-line bad news for merchants participating in social coupon offers? Perhaps, if one simply looks at the topline discount being offered. But aside from the usual half-off discount being dictated by most social coupon sites, merchants still control 70% of variables in any social coupon offer, including duration, limitations on quantity, purchase requirements and time restrictions.

The entire model of social couponing is built upon the hope of repeat business. Great products and services will always be a primary driver of that end goal. Very few social coupon customers will return after a bad experience, even if their repeat visit is cajoled with another 50% off.

Well, maybe great for deal hunters, but perhaps not-so-great for merchants and Groupon itself. Let’s examine:

Upon launching Groupon Now! in May of this year, Groupon predicted that mobile deals would represent 50% of its sales within two years and have the potential to eclipse its current daily deal business. So far, after 6 months (and despite heavy promotion), Groupon Now! has generated less than $1MM in net revenue (Groupon’s net revenue for the same period is estimated at $200MM) Furthermore, Groupon Now! has a much lower commission rate (15-20% compared to 50% for regular Groupon deals), thus lowering its potential to earn similar revenue as its parent–now or in the future.

But from the merchant’s perspective, doesn’t Groupon Now!’s 15% or 20% commission sound better than Groupon’s usual 50% cut? Certainly, from a numbers standpoint. However, one thing to consider is Groupon’s inability to service and promote Groupon Now! deals with the same vigor as their regular offers because of its limited revenue potential. Without question, the merchant is setting themselves up for quiet disappointment in both awareness, solicitation and perception. In fact, one reason that Groupon Now! has failed to take off is the widespread consumer belief that Now! deals are perceived as being lower quality products and services. Ironic, since the average Groupon deal discount (55% off) is deeper than the average Groupon Now! deal (40% off)

Moral: Never underestimate the power of discounting in terms of your brand.

If the Groupon IPO delivers the kind of investor enthusiasm that they are hoping for, other IPOs waiting in the pipeline will likely grow confident that the world is ready for new companies to enter the public market. If not, we may be in for a long, cold winter–and not just in the daily deal sector.