
Why Groupon Is Poised For Collapse - charlief
http://techcrunch.com/2011/06/13/why-groupon-is-poised-for-collapse/
======
cletus
This is one of the best and most damning analyses of Groupon I've seen yet,
which is kinda surprising coming from TC but I guess it is a guest post.

The biggest parts of this are the account risk, the needing to grow revenue to
pay existing liabilities (which is and should be a _huge_ warning flag for any
enterprise) and just how much room there is for someone to do this better.

My only fear is that a collapse of Groupon--which I actually see as a non
unrealistic possibility--will taint other Internet/tech IPOs and, even worse,
prompt the Federal government into more kneejerk regulation even stupider and
more onerous than Sarbanes-Oxley.

~~~
ChuckFrank
Based upon the mounting evidence about the condition of Groupon, cletus' fear
"that a collapse of Groupon--which I actually see as a non unrealistic
possibility--will taint other Internet/tech IPOs and, even worse, prompt the
Federal government into more kneejerk regulation even stupider and more
onerous than Sarbanes-Oxley." makes absolutely no sense.

Suggesting that a poorly performing companies weak IPO, or otherwise, will
taint other IPOs and prompt regulations makes no sense whatsoever. For the
health and vigor of the tech markets, Groupon's IPO should be a spectacular
failure based upon the poor business model and weaker financial position.

~~~
cletus
Imagine a worst case scenario where Groupon files for Chapter 11 and defaults
on all outstanding debts to merchants, which by that stage could amount to
over a billion dollars (IIRC it's currently $280 million). Imagine that
because of that lost revenue many small businesses end up collapsing.

At the same time it becomes more public knowledge that 2010 funding rounds
were to buy out early investors, who made out like bandits, and retail
investors, pension funds and so on lose a huge stack of money.

Now look at that (admittedly pessimistic) picture and try and tell me there
won't at least be calls for "reform".

~~~
justin_vanw
This is just 'the sky is falling' thinking.

If groupon defaults, the businesses will just not honor the groupon coupons.
After all, they haven't been paid for.

The entire hypothesis of this article is that Groupon amounts to a marketing
firm where you pay most of the cost in kind much later, instead of paying up
front for a big marketing campaign. The 'in kind and later' part makes your
scenario absurd.

However, I this article basically misses the point. Lots of businesses have
excess capacity that costs them nothing to utilize. For example, a hair salon
which employs 4 stylists will have several hours per week, and perhaps many
more, where a stylist is idle. Giving someone a very cheap haircut when
otherwise idle is a chance to win a future paying customer, and has basically
no cost. It's a win for the customer and a win for the stylist, and of course
groupon is getting a fee for that.

The same is true of items, like designer clothing and food, that have absurd
markups. Selling it for closer to cost will cannibalize some future purchases,
but overall isn't really that harmful, and may generate recurring income from
newly converted customers. It is certainly MUCH lower risk than an advertising
campaign, in that all the cost is baked in to people who actually show up in
your store, instead of spread to the wind in the hopes of hitting the right
people.

The _problem_ with groupon is that it has no moat.
[http://37signals.com/svn/posts/333-warren-buffett-on-
castles...](http://37signals.com/svn/posts/333-warren-buffett-on-castles-and-
moats) Any competitor can come along and set up an identical business, and
there is basically no network effect to speak of to keep customers coming to
groupon instead of living social or any other competitor, and no risk for
retailers or customers of trying another competing site. This is why there is
1 classified site in the US (craigslist) and 1 auction site (ebay), but
innumerable comparison shopping sites all sharing the same retailers (amazon,
half, cnet, shopping.com, pricegrabber, etc etc).

~~~
cletus
> Lots of businesses have excess capacity that costs them nothing to utilize.

I dispute this assertion or, in the very least, see this as being far more
complex than you suggest, for two reasons:

1\. Customers who might otherwise pay full price will end up using these
deals, which is a direct loss to the business; and

2\. The inventory may be used up by such offers to such an extent that
customers who might otherwise pay full price may not be able to do so.

> The problem with groupon is that it has no moat.

On this point you are I agree.

As for being "win win", apart from the above, you have to look at a number of
factors:

\- Do Groupon customers return?

\- What word-of-mouth do they give to businesses as a result?

\- How much do they spend (initially and on repeat visits)?

\- Are they people brought in by Groupon representative of your existing or
desired customer base? There is plenty of _anecdotal_ evidence suggestings
"Grouponers" are "cheap" (both in spending habits and tips).

The "offer marketplace" providers (Groupon, LivingSocial or whoever) seem to
be missing a golden opportunity to mine useful data here by tying an offer
redemption to an actual person.

~~~
joe_the_user
_"Lots of businesses have excess capacity that costs them nothing to utilize"_

Yes, This is one of the most dubious Groupon "sells".

There are a very small class of businesses that excess capacity which costs
nothing to use. These mostly the type of business where you're just consuming
an "experience" - adult classes, skydiving school, etc. Unfortunately, a big
part of business, classes, is already competing with the Internet. And so the
rest is skydiving schools, martial arts schools, and yoga schools, the few
places where you just have to be there. But those are pretty marginal.

 _Restaurants_ certainly aren't in that class. Food is _expensive_. Food is a
significant share of cost for anything but the most expensive restaurants.
Sure, restaurants may throw food away each day BUT the only way to profit from
that optimizing that is to sell food cheap on the contingency that its
available. That's far from the Groupon model and clearly would "cheapen" the
feel of any given restaurant.

I heard of a restaurant in France years ago that priced by the hour. That
could actually cut waste to nearly zero - but it would destroy "the feeling of
specialness" which many higher end restaurants cultivate.

~~~
wisty
Not really. Often, food is 30%, staff is 30%, rent is 30% and 10% goes to the
owners (who are paying for a 300k fitout). Coffee markups can be even crazier.
Obviously, it depends on the restaurant. A good value steak-house might sell a
steak, chips, and veggies where the food costs 70% of the meal; but they have
large volumes and hope to sell lots of drinks.

Anyway ... the staff and building sit idle for a lot of the time. On a Friday
night, there's lots of people. But on a Tuesday at 4pm, there won't be a lot
of customers.

I guess you could look for chefs that only wants to work from 11-2 and 5-8,
Friday and Saturday, but most chefs want to work 5 days a week.

~~~
nkurz
You sound very authoritative, but some of your numbers seem odd. Do you have a
source for your 30% rent figure? Most sources I see suggest a much lower
number: <http://www.4hoteliers.com/4hots_fshw.php?mwi=1661>

~~~
encoderer
I'm not a restaurant guy but I am known to be able to read income statements
with my eyes closed :)

Assuming the GP was generalizing "Rent" to include all expenses associated
with the physical plant and presence, the sample income statement linked is
close enough to that 30% number.

But your call on whether my assumption is too generous :)

~~~
joe_the_user
I wasn't.

A pan may be a fixed expense but it is to a significant-extend used up at the
rate that people consume food, so it's not really "free" if fewer people are
in the restaurant. Only "rent rent" and wages if fewer people in the
restaurant.

Essentially, economies of scale might be possible in operating a restaurant
but the place would need to be organized for this from the beginning - the
simple ability to get people in the door is worth less than a _large_ share of
the receipts.

~~~
encoderer
Actually i meant the GP to _my_ post -- wisty. Not that it matters, of course,
I'm just clarifying so my post makes more sense to you.

I generally disagree with your sentiments in your post but had nothing to add
that really interested me to say.

------
justin_vanw
It's almost absurd how closely Groupon is following the classic 'tech bubble'
road to disaster.

1\. Hype (check)

2\. IPO talk (check)

3\. Turn down acquisition at incredibly high P/E (check)

4\. Superbowl Advert (check)

5\. IPO just in time to avoid running out of money (on the way)

6\. Market goes rational (inevitable, forces pushing it irrational can't do so
forever), valuation plumets

7\. Unable to raise money by selling stock, and a business model of 'sell
stock to pay bills while making no profit', bankruptcy is announced

8\. The talking heads repeat the mantra "nobody saw it coming" for the next 6
months.

~~~
encoderer
You left out "generate massive sums of actual revenue from real, paying
customers, and become the fastest growing company by revenue in history."

I think a bunch of armchair analysts on this thread are going overboard with
their predictions of imminent failure.

~~~
rsynnott
Ah, revenue. Yes, I remember this from last time round; revenue is what
matters, regardless of the costs involved in producing that revenue, or its
uncertain future footing. Right.

~~~
cte
From Groupon's S-1:

"To demonstrate the economics of our business model, we have compared the
revenue and gross profit generated from the North American subscribers we
acquired in the second quarter of 2010, which we refer to as our Q2 2010
cohort, to the online marketing expenses incurred to acquire such subscribers.
The Q2 2010 cohort is illustrative of trends we have seen among our North
American subscriber base. The Q2 2010 cohort included 3.7 million subscribers
that we initially spent $18.0 million in online marketing to acquire in the
second quarter of 2010. In that quarter, we generated $29.8 million in revenue
and $12.8 million in gross profit from the sale of approximately 1.2 million
Groupons to these subscribers. Through March 31, 2011, we generated an
aggregate of $145.3 million in revenue and $61.7 million in gross profit from
the sale of approximately 6.3 million Groupons to the Q2 2010 cohort. In
summary, we spent $18.0 million in online marketing expense to acquire
subscribers in the Q2 2010 cohort and generated $61.7 million in gross profit
from this group of subscribers over four quarters."

They are seeing >3x profit on typical cohorts, so they decided to buy as many
users as possible (which is smart).

------
tokenadult
I think this is the most interesting paragraph in the submitted article: "As
critical as I am of Groupon, the slam dunk case is to sign up with Groupon if
you’re going bankrupt. I strongly encourage every business that is about to go
under to call Groupon. (Don’t tell them Rocky sent you.) It makes total
financial sense--as a Hail Mary play. If you’re lucky, the upfront cash will
be enough to help you stay afloat. If not, well, you were already going out of
business. It may be your best option. In the short term, you’re actually
helping Groupon because they’re being valued on revenue and no one is taking
into account risk."

If word of this gets around, the incentives set up by the typical Groupon
agreement with a merchant will be responded to by merchants for whom those
incentives are the most perverse. Groupon may discover that it is inexorably
moving into the business of last-ditch financing for failing businesses.

------
edw
Here's the money quote:

> If Groupon matches these payment terms, they’ll need cash faster and need to
> grow faster. (Google Offers accelerates the rate at which Groupon’s scheme
> has to draw in new suckers.) If Groupon doesn’t match, it gives Google a key
> differentiator to win deals. If those businesses go with Google’s more
> generous terms, that too will starve Groupon of the cash it needs to pay
> earlier merchants.

I found myself laughing villainously as I read that. Google offers to by
Groupon. Groupon demurs. Google destroys Groupon by forcing the Ponzi scheme
into overdrive. Oh, it feels so good! Google, I forgive you everything!

By the way, didn't we all flip the scam bit on Groupon months ago when this
article showed up here on Hacker News:

Groupon in Retrospect (posiescafe.com)
<http://news.ycombinator.com/item?id=1698833>

------
ajays
One thing that a lot of analyses fail to account for are the number of
Groupons that go unused. I would love to see some figures on how many Groupons
are never redeemed (for whatever reason).

I had some friends visiting SF, and they had bought Groupons from various
outfits for the trip. But they ended up not using a few of them, and gave them
to me. Chances are I'll end up using them, but I wonder: how many such
Groupons expire unused?

~~~
gojomo
They make a lot from vouchers that are never used. (The term of art for such
revenues is 'breakage'.)

For a stored-value medium that's like a gift card, many states prohibit an
expiration-to-zero-value. Groupon has been sued a bunch of times over this; at
least in those states, I think their current policy is that the business must
still honor the Groupon for the original purchase price (but not the ~2X face
value).

This blog post by Andrew Mason suggested lawsuits were unnecessary because
customers unhappy for any reason, including expiration policies, could always
rely on 'the Groupon Promise' for a full refund:

[http://www.groupon.com/blog/cities/groupon-organizes-
class-a...](http://www.groupon.com/blog/cities/groupon-organizes-class-action-
against-itself/)

However, if you try to get a refund on an expired Groupon, they'll reject your
request. So Mason's blog post and 'the Groupon Promise' are deceptive... and
Groupon probably deserves to be sued over the gap between the unequivocalness
of their 'promise' and the way they carve out exceptions in practice. They
talk the talk of a 'customer is always right' retailer, but their model seems
to require them to be stingy with refunds.

~~~
sunchild
It would be very poor business to count that money as revenue. If anything,
that money is in escrow. The float value might be significant at Groupon's
volumes, but it's just plain sleazy to count unredeemed voucher proceeds as
revenue.

Also, it sounds like you're saying that the Groupon Promise is not honored. I
wouldn't be at all surprised to see that tested in court soon, too.

~~~
jacques_chester
I am not an accountant, but I imagine it has to be booked as revenue in an
accrual system on a per-period basis. To satisfy double-entry, it would
originally be booked as cash and a liability.

Take magazine subscriptions. You pay $240 for an annual subscription to
_Frisbee Fancier's Magazine_ at the start of the year. They book this:

    
    
        Cash at Bank:    $240   -
        Magazines Owed:    -   $240
    

Then they send you the January edition ("Gold Plated Frisbee Showdown!") and
do this:

    
    
        Revenue from Subscription: $20   -
        Magazines Owed:             -   $20
    

That is, they move $20 from liability to revenue. Cash at bank is unaffected
by this transaction.

How Groupon chooses to recognise the timing of revenue will affect their
apparent numbers. I would prefer a conservative magazine-style model as above,
but it might be possible for them to book the revenue up front and then use
that as their basis of their projections.

I don't know enough about Groupon or accounting to be certain. Seek
professional advice before investing etc.

~~~
sunchild
Accounting tap-dancing. It still nets to zero income unless the contingency is
lifted.

~~~
jacques_chester
It's not really tap dancing. Accounting aims to give a meaningful account of
the life of the business. Dividing up subscriptions into parts and recognising
that a pre-payment is also a liability more accurately represents the nature
of subscription than merely booking a single payment up front.

In this scenario, income is appearing each time the magazine is sent out, but
the cash is in hand all along. The hardest part of understanding accrual
accounting is to learn that a sales event is not necessarily a cash event.

~~~
sunchild
I don't mean to diminish accounting as a discipline. I'm sorry if I came
across that way. My point was that the cash position doesn't reflect real
revenue until the contingency is cleared. At best, you can "gamble" with the
money while you have it.

~~~
jacques_chester
I only did one unit of accounting to see what the fuss was about. Quite
enlightening really.

Cash positions are a different beast from revenue -- and indeed that's why
Income Statements (aka P&L) and Cashflow Statements are both produced -- to
give that two-way perspective on a business, along with the Balance Sheet.

All three are connected and you can, given a sample, derive them from each
other. But to understand how a business is behaving you need to study all
three.

That being said, accounting is all about devilish details. If Groupon are
booking their revenue as being immediate upon the deal, rather than a
subscription style cash+liability, then they can make quarterly revenue appear
much higher than it might otherwise be seen as in retrospect.

~~~
sunchild
I reiterate: if you treat the proceeds as revenue before the contingency is
lifted, you are effectively gambling with the funds.

~~~
jacques_chester
Sure. If they're doing that, I'd be tempted to call shennanigans.

------
ig1
All these attacks rest on the assumption that Groupon aren't going to change
their business model at all. It's seems a near certainty that they're going to
move into the dynamic yield management business which is likely to be highly
profitable.

For a lot of businesses their excess capacity is a lost cost anyway. They have
to pay their staff regardless or not they do work. A customer might cost $X to
service, but that completely ignores the fact that the company would have to
pay $X even if that customer wasn't there.

Sure Groupon might not be matching that spare inventory to it's deals with
great precision at the moment, but it's only going to be a matter of time.

Look for example at GrouponLive, their partnership with Livenation who are the
largest entertainment ticketing company in the world. Does anyone seriously
think Livenation are having wool pulled over their eyes ? - they know that
yield management is important and Groupon are probably going to become the
leaders in that space.

~~~
powera
I'm sorry, but justifying a $15 Billion (with a B) valuation on a business
that Groupon isn't even in yet is pointless. It smacks of Enron, to be honest.

~~~
ig1
What percentage of Amazon's income comes from Book sales ?

A large amount of Amazon's valuation came from the fact that they'd be able to
extend and become the dominant online retailer in a huge number of product
categories.

~~~
ig1
Are people really down-voting a comment made in good faith purely because they
disagree with it, or is there somethingly fundamentally wrong with my
statement which I'm just completely missing ?

~~~
jbellis
I can't speak for others, but I downvoted because the time to figure out your
business model is long before IPO. So a claim that an "attack" isn't valid
because it ignores the possibility of radical business model changes isn't
worth discussing.

~~~
ig1
From the beginning Groupon has been about Yield Management, most of the
business who use Groupon are doing so because they've got excess capacity
which they're not using rather than to grow their business.

Even Agrawal (who wrote this series of anti-groupon articles) refers to
Groupon as a yield management play.

Extending this to be more dynamic isn't a radical shift, but rather an obvious
one. And their partnership with Livenation to compete against ScoreBig is a
clear sign they're moving in that direction.

Competitor LivingSocial has already launched a real-time yield management
offering called LivingSocial Instant.

------
JacobAldridge
I don't know if it convinces me that Groupon is "poised for collapse", but it
certainly exposes several risks in the business model (for Groupon, the
merchant, and the consumer), as well as how competitors can take advantage of
those.

~~~
Spyplane
When you look at the $1bil they made last year in funding, and what amount
they listed in their IPO paperwork, they certainly look and feel like a ponzi
scheme. I hope they are not, but it feels that way. I'm staying as far away
from that stock as possible.

~~~
encoderer
This is true only if you make up a new definition of "ponzi scheme."

I disputed this same point last week:
<http://news.ycombinator.com/item?id=2617760>

------
kul
Very interested to see how this plays out, because there's a faltering
consensus around Groupon, and it's getting closer to their IPO.

See: [http://www.guardian.co.uk/business/2011/jun/10/only-fool-
inv...](http://www.guardian.co.uk/business/2011/jun/10/only-fool-invest-
groupon-analyst)

It reminds me a little of when there were a few dissenting voices claiming the
US housing market was due a correction and yet prices kept going up.

~~~
rwmj
Good to see at least one article about this in the mainstream media. Have
there been any others?

------
dr_
Not sure if I entirely agree with this analysis. There's an element of
inventory management which Groupon allows for, which has previously been
unheard of for most small businesses. Maybe if you realize you are definitely
getting x number of customers or x number of dollars), you can better manage
your cash flow. Take the photo of the receipt provided in the article. A coke
costs $2.00, and presumably it's a fountain drink, cause it mentions the
refill is free. We've all been exposed to this, and let's face it, it's a
blatant ripoff, but on some level its understandable - it's a way for the
restaurant to make some additional cash, perhaps because the traffic is
sporadic or perhaps to save up for a rainy day. But does coke really need to
cost $2.00, if you have a better expectation of how much product you are
definitely going to sell?

My guess is, probably not.

------
edanm
This article has some serious problems. There's a _huge_ anti-Groupon bias
(apparently shared with most of HN). This is fine, it's ok not to like
Groupon, but some of the points this article makes are absolutely terrible.

For example, take this: "I had been struggling to understand why some
businesses ran repeat Groupons or cycled among the various daily deal vendors,
given that the economics clearly suck if you can’t drive repeat traffic. Some
let the same customer buy 3 or more of the same deal. That’s a clear no-no for
a loss-leader designed to acquire new customers.

A conversation with Forkfly (a Groupon Now competitor) CEO Paul Wagner was
enlightening. He suggested that they were doing what struggling families do
when they max out a credit card—they get another one."

Let's look at what's happening here. There's actual, real-world evidence that
the author may be wrong - small businesses are _returning_ to Groupon. This
doesn't make sense if Groupon is really such a terrible deal. So the author
tries to explain this evidence.

What's the best way to do this? Go talk to the business owners who return to
Groupon, and ask them why. That's what most people would do when trying to
understand their behavior.

But instead, what does the author present? He talks to _one of Groupon's
competitors_! The competitor, non-surprisingly, tries to dismiss this
evidence. And he specifically tries to imply that the businesses doing this
are not acting properly, comparing them to people who habitually overspend.

I'm not saying the author is wrong - but this is _not_ the right way to make
this point, and is simply a way to take a dig at Groupon, and dismiss the
people who might prove that Groupon is worthwhile.

Or take this: "I’ve also heard from merchants who say Groupon has changed
their deals at the last minute to make them more profitable for Groupon."

This is a cheap-shot, thrown in at the end of an (otherwise legitimate)
paragraph. Either there are real cases or there aren't, but just saying "I've
heard some people complaining" is just terrible reporting. If you think
Groupon's done something wrong here, talk about it, don't just mention it
offhand to tarnish their reputation.

Conclusion: Like I said, I don't know whether Groupon is good or bad for
businesses. I don't know if many people truly know, actually. But articles
like this, which go out of their way to bash Groupon, are not the right way
forward.

~~~
pja
Right, because _obviously_ a small business owner is going to be happy to tell
some random journalist who phones them up, "Yeah, we did that third GroupOn
deal because otherwise we weren't going to be able to pay the rent".

They'll make up some waffle that regurgitates GroupOn talking points in order
to justify their actions to an outsider without giving away the fact that the
company is on the verge of bankruptcy & if word gets out all their staff will
walk.

~~~
edanm
Do you realize that by that same logic, you're basically saying journalism
can't exist, _period_? It's _always_ a case of some "random journalist"
phoning people up and asking them tough questions.

Journalism does exist, of course, so obviously there are ways around this
problem. They're pretty easy to see even in this case - journalistic
confidentiality, i.e. the journalist won't reveal the source, therefore no one
will know anything about which company is on the verge of bankruptcy.

~~~
pja
Sorry, I don't see the contradiction at all. Of course journalism is about
asking "tough questions" but there's nothing that compels the interviewee to
answer those questions, and even if they do answer truthfully their "truth"
may differ from yours.

As the original article makes clear, how you classify the way a small business
interacts with GroupOn is very much a matter of perception: through one lens
it looks like a small business loan with a weird structure. A small business
owner might see it differently & GroupOn itself has a vested interest in not
having their customers view GroupOn deals in that way of course.

~~~
edanm
"Sorry, I don't see the contradiction at all. Of course journalism is about
asking "tough questions" but there's nothing that compels the interviewee to
answer those questions, and even if they do answer truthfully their "truth"
may differ from yours."

Sorry, I guess I wasn't being very clear earlier.

What I meant was, by the same argument as to why the author couldn't talk to
store owners, by that very same logic, journalists can never talk to primary
sources. Because I can take any journalistic piece, and say "the source that
the jouranlist talked to is just making up answers because XYZ".

And like I tried to explain, the way out of this mess is a few things - the
journalist can interrogate and try to get past the bias of the source, and
they can also promise to keep conversations off the record.

But saying "well I can't talk to primary sources, I'll just talk to other
people" is a cop-out. Especially when the other people _also_ have a clear
bias in this story.

~~~
pja
Hmm. I think my counter-point would be that in this particular case the
interviewee has a direct incentive not to tell the truth _and_ a plausible
alternative story provided for them by GroupOn's PR machine. Plus they know
that whatever they tell the journalist can't easily be checked: it's not as if
the journalist is going to get access to the books, at least not until after
any bankruptcy at which point the whole thing will be moot.

I would surmise that these properties don't usually apply to most journalistic
interviews. In this particular case it becomes difficult to know whether
you're getting a true picture from interviewing GroupOn client businesses
because the alternative explanation put forward by the author of the original
piece gives the SBO a strong incentive to lie about their motivations.
(Whether to an interviewer or to themselves is an open question!)

Another thought occurs to me: As you say, a good journalist can often find a
way round these problems but in this particular case, where we're talking
about a whole business model, it seems to me that a few counter-anecdotes will
not have much impact: Believers in the GroupOn story will (rightly) be able to
say, "well of course there are a few people mis-using GroupOn in this way, but
they're a tiny minority & the vast majority of GroupOn customers are very
happy with their experience dot dot dot" (I'm sure you can fill in the rest of
the PR guff yourself).

------
ChuckFrank
With mounting evidence of Groupon's weak financials and long term business
sustainability, we should all advocate against investing in Groupon. The
better our market segment wisdom, the better for all of us. If we let crap
float to the top, then top performing companies will always have their market
stigma to overcome. See biotech 2000-2005. Besides Mason has already told us
that Groupon is a joke when he told Charlie Rose that Groupon is to tech what
Nsync was to pop. High-flying, fast - crashing products poised for brief
nostalgia, and obscurity. <http://techcrunch.com/2010/12/10/groupon-mason-
charlie-rose/> O

ps. my favorite quote of this emerging IPO debacle has been thus far..

"Groupon's IPO prospectus should raise several red flags in a sensible
investor's mind. Factor in Lefkofsky's checkered past, and this IPO is waving
more red flags than a May Day parade."

Now that's a great visual.

[http://tech.fortune.cnn.com/2011/06/10/groupon-eric-
lefkofsk...](http://tech.fortune.cnn.com/2011/06/10/groupon-eric-lefkofsky/)

------
mcdowall
Having dealt with the local advertising model myself (restaurant virtual
tours) I can testify how god damn hard it is to get money out of small
business owners so the success of Groupon is a surprise to me.

From a consumer perspective I unsubscribed a few months ago as I really didnt
want to hear about a Botox or Massage deal each and every morning. It was good
for xmas presents I will admit but in my local area the variety of the offers
was somewhat limited (and Its by no means a small town), I shouldnt imagine I
will check the site until around mid December again.

~~~
raganwald
_I can testify how god damn hard it is to get money out of small business
owners so the success of Groupon is a surprise to me._

Well, now we know how to get $62,500 out of a small business: Offer them
$7,000 within about 5 days. This is the salient point of the article: Groupon
is more than just a marketing vehicle, it has a financing angle to it that
should be evaluated in terms of risk.

~~~
larrys
True and there is also (and I can't think of the name) a psychological
principle for this which is how someone will pay money to insure against an
event with a negative outcome but not to wager on something. Umm. I think it
might be called "Prospect Theory" or some variation like that.

------
arturadib
Insightful article, but notice that the business model being criticized is in
many ways well known (and successful): namely, that of book publishers.

When an author deals with a book publisher, he/she gives up some of their
future revenues in exchange for cash in advance and publicity.

Likewise, when a local business deals with Groupon, they are giving up part of
their revenue in exchange for upfront cash and publicity.

The main difference might be in the actual numbers (cash upfront, revenue
share %, etc).

The risks pointed out remain, and are very real though.

~~~
tomp
Except for the upfront payment, which is obviously a sunk cost, book
publishers have no other liability.

Unlike Groupon, which might have to reimburse its customers if a client
business goes under.

Furthermore, AFAIK author deals are screened/filtered, a bad book will not get
published (not that this is a 100% accurate process, see for example 4 Hour
Work Week).

Judging from the article, Groupon does little screening, so their risk is much
greater.

~~~
commandar
>(not that this is a 100% accurate process, see for example 4 Hour Work Week).

While I got a chuckle out of this, given the financial success of the book,
it's a _good_ book from the publisher's perspective.

~~~
tomp
Actually, that's exactly what I meant. I can't remeber where I read it, but
Tim claimed that many publishers rejected him, before he found that one that
wouldn't. Or am I thinking of the wrong title?

------
qeorge
It seems his main point is this:

Google Offers pays merchants faster (80% of the money goes to the merchant
right away, vs 33% with Groupon). The OP expects this will force Groupon to
make the same deal with merchants, which will change their business model,
which will put them out of business. That or Groupon won't change its business
model, and Google Offers will run them out of business by virtue of this
better deal.

IMHO, going from that small point to "Groupon is poised for collapse" is just
a _bit_ hyperbolic.

~~~
jacques_chester
No small business worth its salt is going to turn down favourable terms like
80% in 4 days. Cash flow is life or death on a weekly basis for small
businesses.

------
bostonvaulter2
The part about how groupon will refund the price of the groupon if the
business goes of out of business is interesting because Living Social
specifically does not do that.

~~~
ilkandi
I've been refunded a couple of times from other deal sites when the business
went bankrupt. It's just good customer service to do so.

------
lichichen
HN: just out of curiosity is there any examples of companies that have tanked
based on speculation of failure regardless of track records?

Ie: Speculation leads to lower investor confidence leading to pulling out of
investments and so on so forth

~~~
raganwald
When you say "regardless of track record," what is being discussed Ad Nauseum
is whether Groupon has a track record of success or not. This is different
than a company that has a consensus track record of success but is battling
some unrelated speculation.

It's almost the other way around: Groupon spends $1.43 to buy $1.00 of
revenue, but boosters are speculating that they can pivot their model or
harvest more revenue from their merchants and email list to make $1.44 revenue
from every $1.43 they spend.

------
Terry_B
I got stung the other day by a Groupon clone here in Australia. My wife asked
me to buy the daily deal, which I did, without checking it properly. The
business in question doesn't exist.

Looks like the daily deal company did absolutely no checking that it was legit
or the business did as this article suggests and knew they were going bankrupt
anyway.

I started asking around and found a few similar stories from friends and
colleagues. Hoping to see all of this hit the news soon.

~~~
forgingahead
Well that's fraud on an entirely different level from what this article
suggests, but that's still crummy.

Which clone was it?

~~~
Terry_B
Absolutely, but it's quite likely that it highlights a systemic problem with
this type of business which the article discusses. Shadier business owners can
abuse it.

Rhymes with Groupon.

------
uptown
I think that Groupon is likely to adjust their vig if they start to see their
momentum decline. Instead of 50%, they take 40% or 30% …. at which point they
can circle-back and offer their services to all of the business that may have
declined their services due to the steep percentage of the offer they
demanded. Sure, this means less revenue coming out of each deal, but it seems
to give them a quick way adapt.

------
mostlycarbon
Given Rocky's claim that investing a large amount up front for a traditional
advert placement is equivalent to receiving a short-term loan from Groupon for
running a deal on the site, then Groupon is merely like all other direct
marketing/direct response operations. So you can probably predict how
successful Groupon could be by comparing it to something like Valpak.

Despite the fact that Groupon shifts the marketing costs from the merchant to
the customer, it probably won't affect couponing behavior in the long run. To
me this is like chess where the players have switched sides after a match.
It's the same game, but a new player gets the first-move advantage this time
around.

Groupon Now! seems slightly more interesting and possibly has more potential.

My wild, unsubstantiated prediction is that they'll IPO, fizzle out and be
bought out by some media/new media conglomerate by 2014.

------
Bricejm
If the numbers in the article are correct, an IPO might be the beginning of
the end. As a public company they will have to submit to outside audits. Based
on their business model and cash situation they might not be of 'Going
Concern' much longer.

------
bennyk
I have to say that there was interesting thinking going into the Groupon
model.It seems that the business may use it as a lost leader to show and
showcase other products and services. For the business warm bodies mean
opportunity.Each system has flaws this one has been very well pointed out in
the article and the risks seem worth it for many companies.How to eliminate
abuse. That is the question

------
gfodor
The bottom line is I have yet to hear Groupon share any metrics with the
public on how much their product is, you know, actually successful. Regardless
of the reason, be it that they can't measure it, or, more sinisterly, don't
want to share it, you have to assume their business sucks or elthey're
incompetent or else they'd be trumpeting the upside for businesses everywhere.

------
linuxhansl
Yep.

When Google offered $6bn for Groupon I was... surprised. What surprised me
more at that time was that Groupon declined the - already exceedingly
overpriced - offer.

Then again, LinkedIn was at one point worth $12bn and still is an insane $7bn
(P/E of 1,139.40!!). Facebook is said to be worth $100bn.

I think we collectively lost our value judgment when it comes to Internet
companies.

------
elb0w
Anyone else getting tired of these? Why are these companies not being held
responsible for their own negligence? If you do not do the math and cannot
afford to lose the money then how dare you agree to the terms.

This is not on Groupon or any other Daily Deal service. It solely relies on
the Small Business owner that does not do his due diligence.

This model is no different than bulk purchasing from a supplier. However, the
supplier still makes money because they have figured out how much they can
give to still turn a profit.

Small business owners need to either look at how much they stand to lose or
take this as a advertising expense that they can afford.

The whole get money now and cry about it when people actually expect to
collect what they were promised is ridiculous, where do they think the money
comes from?

If you want to say that this model is only sustainable as long as small
business owners are incompetent then yes, lets say that. However, to say that
this business model is bad based on Groupons lies is just ridiculous. No one
is holding a gun to your head and saying, give us coupons for all your stuff.

~~~
ahi
A mark's gullibility does not absolve the scammer.

------
rsheridan6
Is it even established that companies lose money on Groupon customers? I
usually spend over the face value on a Groupon, so the restaurant gets (bill -
(value of groupon/2)). If the profit on a dinner for two is more than half the
value of the groupon, which seems plausible, they're not losing money.

Then there are the people who never redeem their groupons. I'm about to move
to another and leave two groupons that I never got around to using unredeemed.

------
lsc
take another look at that recipt.

1\. veggie scramble: at costco, you can get a 50 pack of eggs for less than
ten bucks. round up and call it ten cents worth of stuff. Veggies aren't free,
but they are pretty cheap in bulk.

2\. bagel with cream cheese: at costco, I think it's two dozen bagels for five
bucks. round up and call it a quarter. Cream cheese in the giant tubs is
similarly cheap, call it another quarter.

3\. o.j. I don't know the bulk price for O.J, but I know I can get a flat of
cans of o.j. for fifty cents per.

4\. Coke. figure a quarter. (I can get a can of coke in a flat for about that,
I figure there are some savings using a fountan. call it a quarter for two
glasses of diet coke syrup.)

so we're at a buck thirty five in materials at costco prices. Of course, you
have to pay the rent, and you have to pay some kid to assemble it, you have to
pay for insurance, etc... but as a business owner, I'm not going to go with
groupon unless I'm in a situation where I've overinvested in fixed costs.

I mean, renting buildings isn't like spinning up a cloud server; Usually,
you've gotta sign a multi-year lease, and usually you've gotta pay for
expensive cooking equipment; equipment that costs you the same regardless of
usage.

Employees are a little bit more flexible, but there is a training period. New
people provide negative productivity for a time, and if you don't give your
old people enough hours, or if you jerk them around on what hours they work
too much, your people who are good enough to get work elsewhere will do so.

Further, I think most valuations of groupon are assuming that groupon will
provide some 'this deal only good during the less busy times' solutions. If
I'm paying all my fixed costs and the building and employees are idle, the
marginal cost of another customer is not very much more than the cost of the
food, and in this case, the cost of the food isn't much at all. Heck, I know
times in my business when I overbought capacity when it would have made sense
to take a 75% price cut to move product and salvage something from the
situation, rather than just paying for capacity I wasn't using.

Now, personally, I still think the groupon is massively over valued. I'm just
saying, it's not any more massively over valued than linkedin or facebook. All
of these companies are being evaluated in unrealistically favorable light; I
think if you shine that same light on groupon, it looks pretty goddamn good.

What I find scary about the groupon hate is that a lot of it seems to be
because the founders cashed out early; this means that cashing out early will
be more difficult for founders the next time around.

~~~
qq66
And it's not even the founders who cashed out early, it's the investors!
Andrew Mason only cashed out $10m, which is probably under 1% of his stake in
the company.

------
suking
Almost starting to feel bad for Groupon... then I read their S-1.

------
Apocryphon
What are better alternatives to Groupon? shopkick, perhaps?

------
ilkandi
On the plus side, Groupon has high name recognition, an international rolodex
of contacts with small businesses clients (whether or not deals were made), an
international rolodex of customer names with contact info and preferences,
huge number of international offices and sales staff, a large profit margin
from the business clients, interest-free loans from customers in exchange for
a pdf coupon, the clients handles delivery/fulfillment to the customer months
to a year later (assuming the customer remembers the coupon exists). And more.
They've got a TON of room to grow if they can plug any revenue leaks. Sure, a
lot of places can handle local deals. What if Groupon starts synchronizing
deals? Every hair salon 10km apart in every city and country gives a touchup
for $20? All dance schools, first salsa lesson free? It could drive trends. A
mobile app that tracks all customer clicks? Tied to a recommendation service
that tells the customer to wait for an upcoming deal within a week, or tells
the Groupon office the kind of deals they should pursue that month? A service
to tell retail entrepreneurs the sales demographics per area and business?
Sell retailer data to financial and IT services to help them manage and
modernize their businesses? I see a lot of possibilities for a big network.

------
wccrawford
Oh look, another 'Groupon isn't magic' post.

Yes, you have to actually work to maintain those new customers, just like
always. In fact, you'll probably have to work a little harder than normal,
since their first experience at your business is at a huge discount.

But treat them right and let them know what they're in for and it's no
different than other other coupon scheme designed to lure customers in. Oh,
except for being a huge buzzword right now and attracting more customers than
would normally be possible.

Yes, you heard that right, I'm saying that Groupon can be a really good thing
for your business if you jump on now. But ONLY if you have properly prepared
for it, and negotiated with Groupon correctly.

Don't let them badger you into a bad deal for your business. You would be
better with no deal than a bad deal.

~~~
saddino
The problem is that there is no guarantee any of those customers are actually
new. It appears that in many cases, most are ALREADY your customers and you're
simply giving them discounts.

~~~
wccrawford
That's almost always the case with coupons, though. Sure, you can exclude
current customers under some coupon schemes, but you risk alienating them...
And losing an existing customer is costly, since you put so much into gaining
them in the first place.

~~~
brk
Right, but a "$2 off your next $20 order" coupon is much much different than a
"$19 off your next $20 order" Groupon.

~~~
wccrawford
If you don't like the terms, don't sign up for it. As I said, Groupon isn't
magic. Making a bad deal with them will not magically turn into a good deal.
You have to use Groupon as a tool, not a genie.

