
Groupon updates IPO filing, admits it's unprofitable - silvio
http://money.cnn.com/2011/08/10/technology/groupon_accounting/
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puredemo
Groupon not selling to Google was the dumbest thing I've ever seen a company
do.

Ever.

~~~
hvs
So, does that make Google offering to buy Groupon _also_ one of the dumbest
things you've ever seen a company do?

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enjo
Speculating here, but I don't think Google wanted Groupon as an immediate
profit center. They wanted their considerable mindshare and ready-made sales
and marketing team. I'm guessing that they felt they could merge Googles
ability to optimize with that juggernaut and build something to just dominate
the local marketing space (particularly the real time stuff).

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cletus
Groupon is a fundamentally bad business and I wouldn't touch it with a 10 foot
cattle prod.

Some say that we know they're not profitable but that's really not the point.
By counting customer acquisition as an extraordinary expense they are implying
that:

1\. The value of that customer is AT LEAST as much the cost of acquisition;
and

2\. That cost also accounts for the natural loss of customers.

This is shady because (IMHO) daily deals customers have very little loyalty to
the providers of those services, there is no natural barrier to prevent
customers moving to LivingSocial or whomever and the high margin on deal split
is transitory because increased competition will reduce what is really nothing
more than the artificial scarcity introduced by Groupon's one deal a day (per
market).

But none of that is why Groupon is a bad business (IMHO). Consider: Groupon
offers a deal, people buy it and Groupon and the provider split those proceeds
in some fashion. I believe--but don't know--that the provider has to wait for
some large part of those proceeds too. Basically that delay is Groupon's cash
flow.

So what's the best outcome for Groupon and the provider? One of two things:

1\. The customer doesn't use that coupon. Groupon and the provider pocket the
free money; or

2\. The customer spends above the coupon or is a repeat customer such that the
"marketing cost" (to the provider) of the Groupon offer is amortized over
multiple visits and/or higher spend such that they make a profit.

In the case of (1), many providers really don't want customers to use coupons.
There are plenty of anecdotes from people getting bad reactions when they tell
a proprietor or a waiter or whatever that they're using a coupon, particularly
in restaurants.

Worse, coupon users may be people who are prepared to pay full price anyway or
the influx of coupon users may prevent full-paying customers from being able
to use your service. The propaganda is that you can sell unused capacity.
While true for some businesses I think you'll find that many people try to use
Groupons in, say, restuarants at otherwise peak or busy times.

There are some success stories of (2) but plenty of failures too.

What isn't built into Groupon's financial statements is account risk. There is
a strong argument that a failing business can make one last roll of the dice
with a Groupon offer. If they fail, they were going under anyway.

I actually don't know if Google (disclaimer: I work for Google) tried to buy
Groupon or not and if we did, at what price. The press reports Groupon turned
down a $6 billion offer.

My _personal_ opinion is that Google dodged a huge bullet _if this is true_.

~~~
samstave
There are many of us who have always known groupon was a bad idea. My
information comes from all my friends in SF who own businesses that Groupon
attempted to solicit.

My friends cupcake shop in union square was asked to sell their cupcakes for
25% of retail and at a loss in a very pushy way by groupon.

I have been on groupon for pretty much since they launched. I have bought in
total (1) groupon. And I forgot about it and it expired.

I am not interested in the things they have, which are typically things I
would never frequently buy anyway (skydiving, spas etc). Thus, I have never
seen it being a place I would spend much money. I haven't logged into it for
nearly a year. I stopped all emails way back as well.

~~~
suking
You might want to look into any class actions against groupon for expiring.
California has very favorable gift card laws and I think the court would agree
this is a gift card.

~~~
ianferrel
I believe Groupon's policy is that purchases don't ever expire, just the deal
does.

If you pay $x for some deal, and expires, you still have a credit of $x with
that business.

~~~
suking
I think state law pre-empts groupon's policy (Ca's law states it cannot expire
unless the card is to multiple retailers and then it must clearly list the
expiration date on it).

~~~
ianferrel
Groupon's policy is in accordance with CA state law. I don't see how it's pre-
empted.

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jcampbell1
If you are interested in Groupon's actual performance rather than a reporter's
linkbait, see the filing. I find the table on page 57 rather informative about
the current state of the business.

[http://sec.gov/Archives/edgar/data/1490281/00010474691100717...](http://sec.gov/Archives/edgar/data/1490281/000104746911007178/a2204399zs-1a.htm)

~~~
lusr
What stands out to me: Cost of Revenue is consistently 60% and admin
consistently 30%. Judging from the comments I've been reading about the hit
merchants are taking, I doubt the CoR% will change, and admin sounds about
normal so unlikely to change much either.

That means even if they cut their marketing budget down to 0% they're still
only looking at 10% profit BEFORE taxes. I really don't see how their business
is going to be profitable in the short or long run, given the losses they've
run up getting to this point.

Does anybody think these things are not really about the fundamental business
at all but rather just a very impressive performance designed to make a few
people rich from IPO/mergers?

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Gustomaximus
I'm going with very impressive performance designed to make a few people rich
from IPO/mergers?

On the up side we can take our shot at making some money shorting the stock if
it sells at these planned inflated values.

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yid
The juice that we're all looking for:

> _On that basis, Groupon incurred a $420 million operating loss for 2010 and
> a $117.1 million loss in the first quarter._

So they had a slightly worse amortized 1st quarter this year than last.

~~~
hvs
No worries:

 _We exclude those costs because, unlike our other marketing expenses, they
are an up-front investment to acquire new subscribers that we expect to end
when this period of rapid expansion in our subscriber base concludes_

See? Once they acquire all of their subscribers, they will never have to
acquire subscribers again. Then they can just rake in the dough.

~~~
ZoFreX
I'm surprised so few people are familiar with the "land grab", it seems to me
that's what they are attempting. In the early days Amazon was spending
something like $20 on average per customer acquired and was losing money hand
over fist. That's not to say I think Groupon will be the next Amazon: This is
a risky strategy. But it can pay off massively if you cement yourself as the
only big player in an emerging market.

~~~
r00fus
A land grab only makes sense if you have constructed or inherited barriers to
entry... what are their barriers? They're grabbing land that will be stolen
the next day from them by LivingSocial or Google Offers...

~~~
jonnathanson
Exactly. Amazon's acquired land was defensible, so to speak. Once it acquired
a customer, that customer was likely to stick around.

As the numbers show, Groupon can only get 20% of all _first time_ users to buy
something. And yet, it counts all prospects as "customers." And even for those
who do buy a groupon or two, what reason would they have to stay loyal to
Groupon? At best, Groupon is poised to become one of many big commodity
providers in this market.

(Speaking of Amazon, btw, what's to stop them from getting into this market
eventually?)

~~~
namityadav
_Amazon's acquired land was defensible, so to speak. Once it acquired a
customer, that customer was likely to stick around_

Why?

~~~
potatolicious
Former Amazon employee, my comments do not necessarily reflects the views of
my (former) employer, yadi yada.

Amazon's fulfillment infrastructure is the best in the world, bar none, full
stop. It is _so far ahead_ of every other online retailer that it's pretty
sobering to think about.

Amazon can get items to you faster, more reliably, more cheaply than just
about anyone else, by a pretty ridiculously wide margin. There is a
_tremendous_ amount of extremely non-trivial know-how within Amazon that
permits them to operate like this. Even if you had access to all the money in
the world you'd still have a hard time cloning Amazon's infrastructure... and
at this stage, even if you _had_ the know-how, the amount of money required is
not within the realm of a startup's reach.

Compared with Groupon, whose uniqueness is entirely public knowledge, who have
no capital infrastructure that is hard to clone. Who have no trade-secret
business processes that give them a leg up over the competition. You can do
_exactly_ what Groupon does with a trivial amount of cash and know-how (and
people _do_ , see the ridiculous number of Groupon clones).

Amazon's acquired land is defensible, Groupon's is... really not.

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uptown
What I don't understand is that Google Offers has essentially mimicked the
same type of "deals" that Groupon is offering ... usually NYC restaurants I've
never heard of, or activities I'm not interested in. Today's offer is "$15 for
a tour of the Ground Zero Museum Workshop (up to a $25 value)". So I
unsubscribed.

I feel like Google had/has a tremendous opportunity to do what Groupon does,
but do it with offers that their users will find valuable. Instead they're
just trying to recreate the same cut-rate nail salon discounts and arguably
exploitive 9/11 museum "deal".

~~~
untog
Well I think what you're describing there is exactly the reason Groupon isn't
making a profit- they have to spend a ton of money on marketers, reaching out
to businesses in order to secure deals. Google appears to not be doing that,
and suffers as a result.

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hullo
One interesting number for last quarter, from total sales of $878 million,
$341 million or 39% was actually Groupon's. Which definitely seems to be proof
that the days of 50/50 splits are over, if any merchant prospects about to
talk deal terms hadn't already gotten that memo.

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vaksel
frankly with the status of the current stock market, I don't see Groupon
actually doing an IPO.

I mean today, the market tanked another 519 points. Everyone is busy taking
their money out, not putting it in. And groupon doesn't exactly have the
reputation as being a high quality IPO

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JangoSteve
So, my question is, did Groupon turn down Google's acquisition offer because
they knew it would probably fall through in the due diligence stage? Whereas,
they could then use the hype from the offer to somewhat inflate an IPO?

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int3rnaut
It would be interesting to find out how other coupon sites with similar
business models are fairing--as much as the land grab theory makes sense, I
actually wonder about the current system of offering stuff I normally wouldn't
want for cheap being a viable business.

A little off topic but I've been noticing a lot of "TeamBuy" ads on TV (I live
in Canada)--one can't help but think that until competition like that is
settled there will continue to be tremendous growing pains for Groupon and
company.

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caffeine5150
I think groupon has gotten a huge boost from retailer desperation since the
2008 crash. They haven't existed in a normal economy. Not only might
businesses decide they are not a good solution in hard times, but in the
longer term as the economy recovers, they'll likely have less interest as
well.

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suking
It has always admitted it's unprofitable - they dropped their BS accounting
metric trying to show that with some magic they were making a profit.

To be honest their filing reeked so bad and them trying to slip in that crap
and not account for marketing expenses - I wouldn't trust their executive team
at all.

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timr
I'm left wondering why you can still find the word "ACSOI" in the document --
it's right there in the _"We don't measure ourselves in conventional ways."_
section of the letter to investors.

They do seem to have removed the metric from other places...but is it really
that hard to do a search through the document before filing with the SEC? The
mind boggles.

~~~
suking
I think them using that stat in the first place is at best extreme arrogance
or total cluelessness and at worst outright fraud.

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u48998
Groupon=Bubble

