Merchant Alert: The Groupon Grope Gets Exposed

Groupon, Inc. has been under the microscope since it went public in November, but now the percentage Groupon pays its merchants is under scrutiny.

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