Groupon Files for IPO: Rapid Development, No Gains
Launched in Chicago at November 2008, Groupon filed to go public after allegedly rejecting a $6 billion takeover offer from Google last December. Like other recent filings by ecommerce companies, a few surprises emerged. Groupon is a pioneering advertising and marketing company that has achieved spectacular growth in a brief time period. The subscriber base grew from 152,200 as of June 30, 2009 to 83.1 million worldwide as of March 31, 2011. The business sold 116,231 Groupons in the second quarter of 2009 compared to 28.1 million in the first quarter of 2011. The amount of participating merchants increased from 212 in the second quarter of 2009 to 56,781 from the first quarter of 2011.
Andrew D. Mason, Groupon's CEO, took the unusual step of adding a letter filled with bravado from the S-1 filing stating,"We do not measure ourselves in traditional ways," and"We're unusual and we like it like that." We'll soon see if investors enjoy it like that.
Our products:
Business Model
Each day Groupon sends email subscribers deeply discounted offers for products and services tailored to their geographical locations and individual preferences. Consumers may also access deals straight through the Groupon site and mobile applications. Merchants sign up with Groupon and give a discount -- usually 50 percent -- to a certain number of individuals for a limited timeframe. Groupon creates a feeling of immediacy by requiring a minimum number of customers purchase the bargain within a specified timeframe, or the price is canceled. All earnings are divided between the merchant and Groupon, usually 50/50.
Groupon home page, for the Denver, Colorado market.
Financials
Groupon expects to raise a minimum of $750 million with the stock exchange. The business could be valued at $30 billion in its public introduction, over Google's $12 billion initial-public-offering valuation. Revenue grew from $3.3 million in the second quarter of 2009 to $644.7 million in the first quarter of 2011. Total 2010 earnings was $713.4 million. But, Groupon hasn't turned a profit. The business spent $263.2 million on advertising in 2010, an enormous increase (5,687 percentage ) over the $4.5 million it reported for 2009. Marketing expenditures as a percentage of earnings for the years ended December 31, 2009 and 2010 were 14.9 percent and 36.8 percent respectively. The company attributed the substantial increase to more aggressive internet marketing, especially on social networking sites and search engines as part of a new subscriber acquisition plan.
In keeping with its pledge to measure itself in unconventional ways, Groupon has made up its own metric -- something called"adjusted consolidated segment operating income" -- which excludes acquisition and marketing costs. This metric, which isn't compliant with generally accepted accounting principles (GAAP), allows the company to show an operating profit when, in actuality, it had a net loss of $413.4 million in 2010 and $113.9 million in the first quarter of 2011. Google, in contrast, was highly profitable as it went public.
Take the Money and Run
Some interesting events have happened over the last seven months. Following Groupon spurned Google's bid, it received a new round of venture capital financing in January worth $950 million. Just $136 million of the money was directed towards the company. The remainder was used to purchase stocks from CEO and co-founder Andrew Mason, co-founder Eric Lefkofsky, and many others. Lefkofsky received over $300 million. Mason still possesses around eight percent of the business, while board chairman Lefkofsky is the principal shareholder with nearly 22 percent. Robert Solomon, president and chief operating officer, left the business in March, redeeming some inventory but keeping over 1.6 million shares.
That was curious time for a business that probably decided it'd go public as it rejected the Google offer. Shares would be worth more after the IPO. One conclusion that may be drawn is that the insiders realize the valuation of this company has surpassed its real worth or its possible. Groupon is a business which may not find a profit for a lengthy time. It took Amazon seven years to attain a profitable quarter but investors now aren't quite as patient.
The S-1 filing says,"We expect that our operating expenses will increase substantially in the near future as we continue to invest to improve our subscriber base, increase the quantity and wide variety of deals we offer every day, expand our marketing channels, expand our operations, hire additional employees and develop our technology platform. These efforts may prove more expensive than we currently anticipate, and we might not succeed in raising our earnings sufficiently to offset these high costs."
Competitors
Living Social, which works on a similar model but requires just a 40 percent share of earnings from merchants, has been growing steadily and will most likely issue its IPO soon.
Google and Facebook will probably enter the voucher business and have enough money to scale quickly. They could probably offer merchants a larger proportion of revenues too, thereby taking merchants from Groupon.
Merchant Problems
1 element of this model which has burnt some merchants is that the more effective the marketing, the more money the merchant loses due to the deep discount Groupon supports. A blog post by Posies Bakery and Café in Portland, Oregon informs of the owner's experience. The store's competitive deal ($13 value of product for $6 with a 50/50 split) over three months cost the company $8,000.
Rice University's Jones School of Business conducted a study of 150 companies that engaged in a Groupon advertising. The voucher campaigns were unprofitable for 32 percent of those companies that conducted them. Over 40 percent of the response group said they wouldn't run another social coupon marketing again. For these efforts to be effective, according to the study's author, clients redeeming the coupons need to invest more than the voucher amount, and return again to shop with no coupon offer.
That is the purpose proponents of Groupon claim: The merchant's voucher cost is best seen as advertisements, customer-acquisition expense. Viewed in this light, the proponents say, using Groupon to obtain new clients can succeed, and, indeed, that's the perspective of Murat Goker, a Groupon client that we profiled last month, at "One Merchant's Experience with LivingSocial and Groupon."
Groupon's Challenges
- Shrinking margins. The cost to get new subscribers is growing enormously and Groupon's margins are already declining.
- Want new merchants. To continue to grow, Groupon should add new merchants. If more merchants have disappointing experiences with Groupon, the business will stall. The S-1 filing states,"We rely on our ability to attract and retain merchants that are ready to supply services or products on persuasive terms through our market. We don't have long-term arrangements to ensure the access to deals that provide appealing quality, value and variety to customers or favorable payment terms to us. We have to continue to attract and keep merchants so as to raise revenue and achieve profitability."
- Few barriers to entry exist. Groupon can anticipate fresh start-ups to spring up and face new competition from companies with a great deal of money to burn such as Facebook and Google.
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