The Reports of Groupon’s Death Are Greatly Exaggerated

The issue is not that the insiders are selling whatever portion of their stake, the issue is that a very large chunk of the money raised went to old shareholders instead of going to the business.

Also a big issue is that acquisition costs are going up for everyone in the industry

Last, which has not been covered enough, is that a large number of groupon offers are scams (and Groupon is closing an eye to this practice). Usually take the form of commodity+expensive addon which gets bundled at a very high list price and then discounted (and still be an overpriced commodity). This novelty will wear off.

no where in your analysis did you address pricing or switching. 

There is absolutely nothing to stop someone from coming along and saying “we’ll take 10% not 50%” – why should groupon get 50%???? 

there are absolutely no switching costs. they dont keep my data, they dont facilitate my relationships – there is nothing to stop people from churning off – en masse once pricing competition starts to heat up. 

no where in your analysis did you address pricing or switching. 

There is absolutely nothing to stop someone from coming along and saying “we’ll take 10% not 50%” – why should groupon get 50%???? 

there are absolutely no switching costs. they dont keep my data, they dont facilitate my relationships – there is nothing to stop people from churning off – en masse once pricing competition starts to heat up. 

“not worth their valuation expectations” does not mean “death”. My question isn’t whether there is a business here but can they keep up the growth and get the profitability needed to justify the EV/R being waved about. I am a skeptic right now.

This is just a biased article, just because you are in the same business as Groupon

“there’s now a barrier to scale and Groupon has scale”.  That is the *big* issue I have with Groupon’s tactics.  Groupon built the scale only by selling below cost.  Selling at a loss in order to prevent competitors from entering the market or to put existing competitors out of business is just a tactic that takes no skill and is one I cannot support.  Makes me disappointed in a business I once held as a success.

Your point 3 does not make sense. If the investors where confident about the company continues high growth then they would not be cashing out 20%! It’s also interesting how Groupon is rushing for the IPO. It seems like the insiders understand that the impressive growth can end any day.

Your point #6 isn’t quite right, as it only scratches the surface of their numbers.  Included in Groupon’s cash flow from operations is 100% of the amount they receive from deal purchasers, including the nearly 50% that must go to merchants.  Instead of putting the 50% that must go to merchants in a restricted cash account, Groupon has spent it (you can tell because the 3/31 cash balance is less than the 3/31 “Accrued Merchant Payable”).  That’s why their true cash flow from operations is overstated–half of that cash isn’t theirs to keep and must be paid out eventually.

Even if Groupon stopped all marketing, hiring, and selling of new deals today, they’d still owe the vast majority of the $290M to merchants for deals consumers will redeem.  Groupon spent money they should have been reserving, and put money into shareholders’ pockets instead of into the business.  If they stick the money from the IPO back on the balance sheet to cover this liability, they’ll be fine.  (That is, if you get excited about paying 10x+ revenues for a business that has to use the IPO cash to sit in the bank to cover its liabilities–rather than investing it in new opportunities)  Otherwise, when sales growth starts to decline, they’ll hit the wall.

Even if growth doesn’t slow, they could still be in trouble if the split with merchants increases from 50% or if they need to pay merchants faster than the 60 days they take now (in the US).  A moat is fine, but consumers are loyal to the merchant, not to Groupon.  I don’t care who delivers a coupon for 50% off my favorite pizza place, and I won’t take a worse deal from Groupon than from someone else for the same restaurant.

The negative working capital should provide float–they can hold merchants money for a couple months and earn interest.  What they can’t do indefinitely is continue to spend the money from last month that they owe to merchants on the premise that more money is coming in next month from an increase in sales.

Also, to your point #2, you should research the margins available in the restaurant business.  Specifically, the “prime cost” (labor + variable cost).  It’s not like a hotel or an airplane–the most profitable restaurants have nowhere near the margin to give away that Groupon has been charging.  Think about it this way–would you hire a salesperson for your data product at a 50% commission and then give him a 50% discount to offer to customers?  My guess is no–and your margins are better than most restaurants, I hope.

Your point #6 isn’t quite right, as it only scratches the surface of their numbers.  Included in Groupon’s cash flow from operations is 100% of the amount they receive from deal purchasers, including the nearly 50% that must go to merchants.  Instead of putting the 50% that must go to merchants in a restricted cash account, Groupon has spent it (you can tell because the 3/31 cash balance is less than the 3/31 “Accrued Merchant Payable”).  That’s why their true cash flow from operations is overstated–half of that cash isn’t theirs to keep and must be paid out eventually.

Even if Groupon stopped all marketing, hiring, and selling of new deals today, they’d still owe the vast majority of the $290M to merchants for deals consumers will redeem.  Groupon spent money they should have been reserving, and put money into shareholders’ pockets instead of into the business.  If they stick the money from the IPO back on the balance sheet to cover this liability, they’ll be fine.  (That is, if you get excited about paying 10x+ revenues for a business that has to use the IPO cash to sit in the bank to cover its liabilities–rather than investing it in new opportunities)  Otherwise, when sales growth starts to decline, they’ll hit the wall.

Even if growth doesn’t slow, they could still be in trouble if the split with merchants increases from 50% or if they need to pay merchants faster than the 60 days they take now (in the US).  A moat is fine, but consumers are loyal to the merchant, not to Groupon.  I don’t care who delivers a coupon for 50% off my favorite pizza place, and I won’t take a worse deal from Groupon than from someone else for the same restaurant.

The negative working capital should provide float–they can hold merchants money for a couple months and earn interest.  What they can’t do indefinitely is continue to spend the money from last month that they owe to merchants on the premise that more money is coming in next month from an increase in sales.

Also, to your point #2, you should research the margins available in the restaurant business.  Specifically, the “prime cost” (labor + variable cost).  It’s not like a hotel or an airplane–the most profitable restaurants have nowhere near the margin to give away that Groupon has been charging.  Think about it this way–would you hire a salesperson for your data product at a 50% commission and then give him a 50% discount to offer to customers?  My guess is no–and your margins are better than most restaurants, I hope.

This statement is nonsensical.  ”Secondly, a business with negative working capital is actually a strong business. It means that Groupon can effectively use its working capital to fund operations. Most businesses are in the unfortunate position of having positive working capital and thus need to pay out funds faster than they are able to collect.”  

I posted the below on Business Insider, but I thought I’d post again.

Background:
I am Loren Fykes, twitter @endymion:disqus , one of the first employees of Japan’s first group buying site, Piku. We started the service before Groupon entered the market in April 2010. They approached us and our competitors (of course) for acquisition, and they bought our competitor, QPOD (for a undisclosed sum with unattractive terms, purportedly).

I don’t think Groupon is dead. The group buying model is not dead. It has been around for eons. Groupon simply melded email marketing with the group buying model, and social networking–i.e. being able to tell your friends about deals, i.e. the pyramid scheme-structure of twitter/facebook where one person tells there 50 friends, and those 50 tell each of their 50, has enabled the speed of uptake of any service to be vastly accelerated. Groupon was spot on in getting ahead of the curve and making their brand synonymous with “online” group buying. But there 50% margins are not sustainable. This is already seen in the S-1 filing. First, why everyone is inflating revenues by suggesting 2011 US$ 3-4 billion are the revenues of the company, when in ACTUALITY the revenues are $270 million for the first quarter 2011 is beyond me. Since when in the “sane” business world an agent business that takes a commission can claim that the “business” (dollars) it generates or brings in for its clients is its “own revenues” is the most mind-boggling point disconnect for me. It’s as if everyone has lost their mind. The company might make $1 billion and change this year, which is still VERY impressive, but we see that their margins(commissions) are already below 50% at 39%-40% for 2010 ($279/$713 million) and 1Q 2011, and they will continue to fall as competition enters the market. They will fall till they reach approximately normal agent rates of anywhere between 15% and 30%, depending on the margins of the business they “represent” through the deals they offer. Restaurants will likely fall to 15%-20%, services will hover higher.

This doesn’t spell the end, but aggressive marketing and spending in the range of millions, even billions for a business whose margins will erode, where there are no barriers to entry and the product/service has no technological advantage is a tough sale. 83 million subs is impressive, but many are not active, and the costs to get those email addresses is prohibitive. There are a lot of companies that already have HUGE numbers of emails/contact info. Google, Facebook, Amazon. And they also have a lot of money. They even have more info on their users to personalize deals and make them more relevant. Groupon has an email list. I would’ve sold to Google.

While claims of “death” are exaggerated, the instinct that many bloggers and observers are noting about Groupon’s model is spot on. They can/will make money; no doubt about this. But the tremendous amounts of dollars necessary to finance that growth (if 85% of the money is used to pad the pockets of early investors after 2 years) is misallocated, or if in an effort to win at all costs, they overspend in online marketing and not take a more prudent approach like Living Social, they may be in trouble. Users are not loyal when price is the variable of heaviest weight; merchants are not loyal either when commissions are draconian and costly.’

Each of the points above:

1. Yes, local merchants do love daily deals, but all merchants are not created equal. The metric that 44% have done a deal before is opaque without understanding what type of merchants are repeating and with what frequency. Also, you cite Groupon is “increasing the number of merchants” it works with, but this is a nominal and non-exclusive number. These100 merchants may equally be “working with” or have worked with a local competitor. Without exclusivity, it has no comparative advantage. Again, merchants are not exclusive or loyal; if they were, we’d be hearing more about it and it would be a valuable metric to look at.

2. Agreed. You are absolutely right. Not that we need to be fair to the Knewton Blog because the assumption is sloppy, but I think the point of the relevant paragraph in that blog is that Groupon’s 75% discount model is unsustainable for local merchants. We find this to be true. 75% cuts below costs for many merchants. Above, restaurants and spas and lessons are all
grouped together, but  margins for each are different. High-end restaurants have higher food costs and overhead than the cheap Thai place down the street. We call these “brand” deals and “fodder” deals respectively. The “brand” deals don’t happen often, or these restaurants refuse outright to advertise with a group-buying site for fear of destroying their brand and added value. The ones that do, prefer a “walled garden”, see Gilt, so that their brand is not compromised and “users” don’t come to expect the discount and wait around for it. In short, the average restaurant costs are 30%-40% and each Groupon’s ticket commission pushes the merchant revenue intake below costs (deal value $100, deal price $50, merchant costs $40, revenue per ticket from Groupon, $25, a $15 loss per coupon sold for the merchant). This also greatly affects their working capital since they don’t see the money (the lost!!) for several weeks. In the slim margin restaurant business, this can be lethal. This is why lessons, spa services, nails and such, which depend solely on the time of the proprietor, can repeat often, and restaurants are instinctively more cautious. They know they can’t handle it more often. There are seat capacity calculations and how many people per day and what % are Groupon and what are full-paying that I could go into, but it’s too long to discuss here. The point is that we’d find a large number of that 44% that have done a deal before, or the TYPE of restaurant that might repeat a Groupon to sustain Groupon’s business needs of having continues “flash 50% and more off” deals is limited to a certain category/class of merchants–the low-cost cheap curry. The other type are the constant stable of nail shops and beauty-related repeat “fodder” deals, but this makes those providers fungible, and commoditizes those services in users’ minds. “I just need to get my nails done; I don’t really care where.” GrouponNow might even exacerbate this, letting users just go in real-time to whatever is nearest and available–true commoditization. But commoditization erodes customer loyalty and ultimately value. I think this is Knewton Blog’s point about not helping to create loyal customers. Once merchants catch wind of this, they may not be so keen. CAVEAT: deep discounting 70%-80% is VERY common in beauty deals even before Groupon for first-time customers.

3. Cashing out is fine; I think everyone is surprised that out of $950 million only a couple hundred was set aside for company working capital. People wonder will this be repeated with funds raised by the IPO. Why should I invest and then see those funds NOT go towards the costs to spur the massive growth the company is saying is necessary to “get to scale”, as you point out.

4. User acquisition is indeed very expensive, but Groupon’s scale is not without threat. As I said above, there are MANY services with massive subscriber bases and existing customer loyalty that have FAR more personalized information and user data to offer more relevant offers as well as have gazillions of dollars to poach every Groupon salesperson in the entire USA overnight. It can happen very quickly, and THAT would boggle everyone’s mind, indeed. Japan’s case is a perfect example. Groupon launched early and quickly, and with its brand became the runaway dominant #1. The media darling. But its missteps in the market and in the USA have put it under intense scrutiny. Japanese company RECRUIT Pomparade has staggeringly kicked Groupon’s butt here. Recruit had an existing sales force that they leveraged, so this helps. But my point is that it’s not about the salesforce. It’s about the money. It takes money to build one, train one and sustain one to get the deals. It takes money (operating capital) to run the business at a loss until the sales force gets up to speed to cover their costs and subs reach a critical level. Recruit has that money. Google, Facebook and Amazon have that money. They all have way more than 83 million email addresses. And once Google Offers/Facebook Deals starts hiring sales people, who’s to say there’s any loyalty for Groupon among its salesforce. Great for Google. They get to poach an entirely well-trained salesforce with existing client relationships. Thank you very much. Great for Groupon sales people, bad for Groupon. Groupon’s salesforce is not a “moat”. It is, simply put, an easily poachable asset.

5. I don’t know why you are justifying losses. This boggles me. “Even if Groupon completely stopped marketing they would still be able to grow their subscriber base.” My question to you is how? That’s a fallacy. You’ve simply argued the opposite without offering proof other than hearsay from insiders that suggest half of sign-ups are non-paid. This is hard to believe, actually. There are still many people worldwide who do not use/buy coupons. They’ve never used Groupon though they’ve heard of it. Initial sign up for these coupons is an impulse buy for most users. The key to growth is to become “top of mind” with users, to be THE brand. Groupon is having to spend tens, hundreds of millions to be THE BRAND in the consumer’s eye, either through aggressive online marketing or acquisitions. You can’t argue that the ONE THING appealing about its growth and strategy is that it has TREMENDOUS potential for growth, but then argue that the costs necessary to maintain that are not necessary and that the company can perform the same. I don’t get this argument. Furthermore, while getting users to sign up for the email is a major online marketing cost, it is only one part of the costs. Getting them to buy is another “marketing” costs, and this is through subsidizing deals to convert them to buyers. Take the GAP deal as a great example. What’s the point of having a huge 80 million subscriber base if no one buys. It’s going to cost the company millions in subsidized deals if they were to stop completely online marketing. You’re right, no online marketing at all wouldn’t kill Groupon, but it wouldn’t avert costs in the least, in my opinion, either to obtain subscribers or getting them to buy. I’m very curious to see data supporting half of sign-ups are non-paid. Where are they possibly coming from? Search?

6. No, no, no. You are mixing and matching. $86 million for 2010 is FREE CASH FLOW, and it is positive because it has not been adjusted to include acquisitions and it’s being padded by the timing difference of holding on to that cash from merchants. At the end of the day, they had negative $420 million in 2010. These costs are necessary for their worldwide domination and to fend off the competition. Don’t argue it away and maintain they don’t need to market. This free cash flow number is also under pressure–as commissions come down from competition, the “negative working capital” from merchant payables will decrease. Not only will commissions be driven down through pressure from merchants and competitors, but also as more players enter the market, overall coupons sold will decrease for Groupon. I call this “Group Buying’s Amazing Race”. Lol.

Your assessed real concerns?

1) Like Groupon Stores, Kaupon Stores in Japan here isn’t taking off. Merchants don’t have a lot of time to do things on their own. And their staff isn’t given responsibility to manage promotions. Managers have a lot on their plate. It’s not practical from an operational perspective.

2) Groupon NOW may commoditize services, so most likely the discount rates for users will have to normalize to 20%-30% just like existing coupons. This is just a coupon play at that point, and not “flash marketing”.

3) If competitive pressures are increasing in older markets, then
they’re going to need those marketing dollars you whisked away so
easily.

4) If I invest, and as a shareholder I have little to say, then am I supposed to just sit around and wait and see….great investment (sarcasm)

5) Lastly, my point above again, the biggest threat is that there are
TONS of companies that have HUGE subscriber bases already, and tons that
have a lot of money. Flipping into this model and using millions in
marketing while building a salesforce is a serious challenge, but Facebook/Google/Amazon are VERY serious contenders.

Groupon is already struggling and possibly losing in Japan to Ponpare.
They are also losing in China. They could fall behind in the USA. And from what I can tell from the S-1 filing, it looks like they don’t’ have enough money to aggressively finance what they need to do. This IPO to me is beginning to look a little desperate.Read more: http://www.businessinsider.com/6-widespread-groupon-concerns-that-are-unfounded-2011-6#ixzz1OT7r7Bjs

I posted the below on Business Insider, but I thought I’d post again.

Background:
I am Loren Fykes, twitter @endymion:disqus , one of the first employees of Japan’s first group buying site, Piku. We started the service before Groupon entered the market in April 2010. They approached us and our competitors (of course) for acquisition, and they bought our competitor, QPOD (for a undisclosed sum with unattractive terms, purportedly).

I don’t think Groupon is dead. The group buying model is not dead. It has been around for eons. Groupon simply melded email marketing with the group buying model, and social networking–i.e. being able to tell your friends about deals, i.e. the pyramid scheme-structure of twitter/facebook where one person tells there 50 friends, and those 50 tell each of their 50, has enabled the speed of uptake of any service to be vastly accelerated. Groupon was spot on in getting ahead of the curve and making their brand synonymous with “online” group buying. But there 50% margins are not sustainable. This is already seen in the S-1 filing. First, why everyone is inflating revenues by suggesting 2011 US$ 3-4 billion are the revenues of the company, when in ACTUALITY the revenues are $270 million for the first quarter 2011 is beyond me. Since when in the “sane” business world an agent business that takes a commission can claim that the “business” (dollars) it generates or brings in for its clients is its “own revenues” is the most mind-boggling point disconnect for me. It’s as if everyone has lost their mind. The company might make $1 billion and change this year, which is still VERY impressive, but we see that their margins(commissions) are already below 50% at 39%-40% for 2010 ($279/$713 million) and 1Q 2011, and they will continue to fall as competition enters the market. They will fall till they reach approximately normal agent rates of anywhere between 15% and 30%, depending on the margins of the business they “represent” through the deals they offer. Restaurants will likely fall to 15%-20%, services will hover higher.

This doesn’t spell the end, but aggressive marketing and spending in the range of millions, even billions for a business whose margins will erode, where there are no barriers to entry and the product/service has no technological advantage is a tough sale. 83 million subs is impressive, but many are not active, and the costs to get those email addresses is prohibitive. There are a lot of companies that already have HUGE numbers of emails/contact info. Google, Facebook, Amazon. And they also have a lot of money. They even have more info on their users to personalize deals and make them more relevant. Groupon has an email list. I would’ve sold to Google.

While claims of “death” are exaggerated, the instinct that many bloggers and observers are noting about Groupon’s model is spot on. They can/will make money; no doubt about this. But the tremendous amounts of dollars necessary to finance that growth (if 85% of the money is used to pad the pockets of early investors after 2 years) is misallocated, or if in an effort to win at all costs, they overspend in online marketing and not take a more prudent approach like Living Social, they may be in trouble. Users are not loyal when price is the variable of heaviest weight; merchants are not loyal either when commissions are draconian and costly.’

Each of the points above:

1. Yes, local merchants do love daily deals, but all merchants are not created equal. The metric that 44% have done a deal before is opaque without understanding what type of merchants are repeating and with what frequency. Also, you cite Groupon is “increasing the number of merchants” it works with, but this is a nominal and non-exclusive number. These100 merchants may equally be “working with” or have worked with a local competitor. Without exclusivity, it has no comparative advantage. Again, merchants are not exclusive or loyal; if they were, we’d be hearing more about it and it would be a valuable metric to look at.

2. Agreed. You are absolutely right. Not that we need to be fair to the Knewton Blog because the assumption is sloppy, but I think the point of the relevant paragraph in that blog is that Groupon’s 75% discount model is unsustainable for local merchants. We find this to be true. 75% cuts below costs for many merchants. Above, restaurants and spas and lessons are all
grouped together, but  margins for each are different. High-end restaurants have higher food costs and overhead than the cheap Thai place down the street. We call these “brand” deals and “fodder” deals respectively. The “brand” deals don’t happen often, or these restaurants refuse outright to advertise with a group-buying site for fear of destroying their brand and added value. The ones that do, prefer a “walled garden”, see Gilt, so that their brand is not compromised and “users” don’t come to expect the discount and wait around for it. In short, the average restaurant costs are 30%-40% and each Groupon’s ticket commission pushes the merchant revenue intake below costs (deal value $100, deal price $50, merchant costs $40, revenue per ticket from Groupon, $25, a $15 loss per coupon sold for the merchant). This also greatly affects their working capital since they don’t see the money (the lost!!) for several weeks. In the slim margin restaurant business, this can be lethal. This is why lessons, spa services, nails and such, which depend solely on the time of the proprietor, can repeat often, and restaurants are instinctively more cautious. They know they can’t handle it more often. There are seat capacity calculations and how many people per day and what % are Groupon and what are full-paying that I could go into, but it’s too long to discuss here. The point is that we’d find a large number of that 44% that have done a deal before, or the TYPE of restaurant that might repeat a Groupon to sustain Groupon’s business needs of having continues “flash 50% and more off” deals is limited to a certain category/class of merchants–the low-cost cheap curry. The other type are the constant stable of nail shops and beauty-related repeat “fodder” deals, but this makes those providers fungible, and commoditizes those services in users’ minds. “I just need to get my nails done; I don’t really care where.” GrouponNow might even exacerbate this, letting users just go in real-time to whatever is nearest and available–true commoditization. But commoditization erodes customer loyalty and ultimately value. I think this is Knewton Blog’s point about not helping to create loyal customers. Once merchants catch wind of this, they may not be so keen. CAVEAT: deep discounting 70%-80% is VERY common in beauty deals even before Groupon for first-time customers.

3. Cashing out is fine; I think everyone is surprised that out of $950 million only a couple hundred was set aside for company working capital. People wonder will this be repeated with funds raised by the IPO. Why should I invest and then see those funds NOT go towards the costs to spur the massive growth the company is saying is necessary to “get to scale”, as you point out.

4. User acquisition is indeed very expensive, but Groupon’s scale is not without threat. As I said above, there are MANY services with massive subscriber bases and existing customer loyalty that have FAR more personalized information and user data to offer more relevant offers as well as have gazillions of dollars to poach every Groupon salesperson in the entire USA overnight. It can happen very quickly, and THAT would boggle everyone’s mind, indeed. Japan’s case is a perfect example. Groupon launched early and quickly, and with its brand became the runaway dominant #1. The media darling. But its missteps in the market and in the USA have put it under intense scrutiny. Japanese company RECRUIT Pomparade has staggeringly kicked Groupon’s butt here. Recruit had an existing sales force that they leveraged, so this helps. But my point is that it’s not about the salesforce. It’s about the money. It takes money to build one, train one and sustain one to get the deals. It takes money (operating capital) to run the business at a loss until the sales force gets up to speed to cover their costs and subs reach a critical level. Recruit has that money. Google, Facebook and Amazon have that money. They all have way more than 83 million email addresses. And once Google Offers/Facebook Deals starts hiring sales people, who’s to say there’s any loyalty for Groupon among its salesforce. Great for Google. They get to poach an entirely well-trained salesforce with existing client relationships. Thank you very much. Great for Groupon sales people, bad for Groupon. Groupon’s salesforce is not a “moat”. It is, simply put, an easily poachable asset.

5. I don’t know why you are justifying losses. This boggles me. “Even if Groupon completely stopped marketing they would still be able to grow their subscriber base.” My question to you is how? That’s a fallacy. You’ve simply argued the opposite without offering proof other than hearsay from insiders that suggest half of sign-ups are non-paid. This is hard to believe, actually. There are still many people worldwide who do not use/buy coupons. They’ve never used Groupon though they’ve heard of it. Initial sign up for these coupons is an impulse buy for most users. The key to growth is to become “top of mind” with users, to be THE brand. Groupon is having to spend tens, hundreds of millions to be THE BRAND in the consumer’s eye, either through aggressive online marketing or acquisitions. You can’t argue that the ONE THING appealing about its growth and strategy is that it has TREMENDOUS potential for growth, but then argue that the costs necessary to maintain that are not necessary and that the company can perform the same. I don’t get this argument. Furthermore, while getting users to sign up for the email is a major online marketing cost, it is only one part of the costs. Getting them to buy is another “marketing” costs, and this is through subsidizing deals to convert them to buyers. Take the GAP deal as a great example. What’s the point of having a huge 80 million subscriber base if no one buys. It’s going to cost the company millions in subsidized deals if they were to stop completely online marketing. You’re right, no online marketing at all wouldn’t kill Groupon, but it wouldn’t avert costs in the least, in my opinion, either to obtain subscribers or getting them to buy. I’m very curious to see data supporting half of sign-ups are non-paid. Where are they possibly coming from? Search?

6. No, no, no. You are mixing and matching. $86 million for 2010 is FREE CASH FLOW, and it is positive because it has not been adjusted to include acquisitions and it’s being padded by the timing difference of holding on to that cash from merchants. At the end of the day, they had negative $420 million in 2010. These costs are necessary for their worldwide domination and to fend off the competition. Don’t argue it away and maintain they don’t need to market. This free cash flow number is also under pressure–as commissions come down from competition, the “negative working capital” from merchant payables will decrease. Not only will commissions be driven down through pressure from merchants and competitors, but also as more players enter the market, overall coupons sold will decrease for Groupon. I call this “Group Buying’s Amazing Race”. Lol.

Your assessed real concerns?

1) Like Groupon Stores, Kaupon Stores in Japan here isn’t taking off. Merchants don’t have a lot of time to do things on their own. And their staff isn’t given responsibility to manage promotions. Managers have a lot on their plate. It’s not practical from an operational perspective.

2) Groupon NOW may commoditize services, so most likely the discount rates for users will have to normalize to 20%-30% just like existing coupons. This is just a coupon play at that point, and not “flash marketing”.

3) If competitive pressures are increasing in older markets, then
they’re going to need those marketing dollars you whisked away so
easily.

4) If I invest, and as a shareholder I have little to say, then am I supposed to just sit around and wait and see….great investment (sarcasm)

5) Lastly, my point above again, the biggest threat is that there are
TONS of companies that have HUGE subscriber bases already, and tons that
have a lot of money. Flipping into this model and using millions in
marketing while building a salesforce is a serious challenge, but Facebook/Google/Amazon are VERY serious contenders.

Groupon is already struggling and possibly losing in Japan to Ponpare.
They are also losing in China. They could fall behind in the USA. And from what I can tell from the S-1 filing, it looks like they don’t’ have enough money to aggressively finance what they need to do. This IPO to me is beginning to look a little desperate.Read more: http://www.businessinsider.com/6-widespread-groupon-concerns-that-are-unfounded-2011-6#ixzz1OT7r7Bjs

Hi Vinicius,

Isn’t it true that a large part of your business ( in fact the entire biz ) is dependent on companies like Groupon doing well ?

Hence you are trying to defend Groupon by responding with this post.

However none of your points really make sense. 

All the so called negativity after their S-1 filing is perfectly justified as everyone via their blogs are trying to bring out the right observations. 

Anyways its high time you pivot your business model instead of tying yourself so tightly with the daily deals sites.

Cheers,

Venugopal.

Vinicius, it’s obvious your strength is not financial analysis. I’m about 75% to the good on my predictions regarding local media but not yet willing to declare Groupon a failure waiting to happen. Having said this, I will keep my money in my pocket for now

Vinicius, it’s obvious your strength is not financial analysis. I’m about 75% to the good on my predictions regarding local media but not yet willing to declare Groupon a failure waiting to happen. Having said this, I will keep my money in my pocket for now

10% is a common net profit margin for restaurants – which is likely where that report extrapolated that number and then generalized out of context.  A nail salon has a much higher net profit margin.

10% is a common net profit margin for restaurants – which is likely where that report extrapolated that number and then generalized out of context.  A nail salon has a much higher net profit margin.