yipit

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.

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. 

I don’t follow your logic on #5: there’s no way they would still be able to grow their subscriber base if they were to completely stop marketing.  Marketing costs will not go down and usually increase as time goes on.  

Look at Coca Cola, for example.  They have global brand recognition, yet their marketing costs never go away and they spend billions on marketing, despite more-or-less constant long-term market share.  They don’t spend that money so their marketing folk can use their expense accounts getting drunk at high-end restaurants.  

Groupon’s marketing spend will be used for user acquisition and also to retain existing users, just like in other companies.

I don’t follow your logic on #5: there’s no way they would still be able to grow their subscriber base if they were to completely stop marketing.  Marketing costs will not go down and usually increase as time goes on.  

Look at Coca Cola, for example.  They have global brand recognition, yet their marketing costs never go away and they spend billions on marketing, despite more-or-less constant long-term market share.  They don’t spend that money so their marketing folk can use their expense accounts getting drunk at high-end restaurants.  

Groupon’s marketing spend will be used for user acquisition and also to retain existing users, just like in other companies.

“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.

I think they have lots of challenges but people have been using words like “insolvent”, “ponzi scheme”, “will never be profitable”. Those are “death” terms.

I think they have lots of challenges but people have been using words like “insolvent”, “ponzi scheme”, “will never be profitable”. Those are “death” terms.

I don’t think it’s an issue that the funds to purchase insider shares came from within company or from outsiders.

Increasing customer acquisition costs is a very real challenge. That being said, they already have signed up a massive number of users so it’s an even bigger issue for their competitors who are still trying to scale.

They will always have to do some level of brand marketing. But, their current marketing is way beyond that. Right now, they are aggressively investing in growth.

They will always have to do some level of brand marketing. But, their current marketing is way beyond that. Right now, they are aggressively investing in growth.

Their gross profit hasn’t changed from last year that would indicate their margins are holding up.

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

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

Merchants aren’t choosing one or the other. They’ll do both of them as long as it makes sense financially.

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 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.

You should never put all your eggs in one basket no matter how good that basket looks

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.

your not following. Price competition is coming – thats in the form of reduced margins for the group buyers.

Allow me to jump in here since I am located a mile down the street from Groupon.  We offer discounts to undercut Groupon all the time.  Why? We have less overhead then Groupon does.  But you are right that for now merchants will run all of the sites.  But over-time merchants will goto the low cost provider.  It will become a commodity just like everything else.

Allow me to jump in here since I am located a mile down the street from Groupon.  We offer discounts to undercut Groupon all the time.  Why? We have less overhead then Groupon does.  But you are right that for now merchants will run all of the sites.  But over-time merchants will goto the low cost provider.  It will become a commodity just like everything else.

Great Post I got to disagree with #4 on Groupon building a moat. 

I think they think they are building a “moat” by aquiring a gigantic local sales force and locking up merchants for 150 days (60 days pre the deal running, and 90 days post).  If groupon Now works then yes they have an ongoing relationship with those businesses and therefore a larger strategic advantage.  While I love the concept, (and we are launching a similar one) I think it’s success will be limited to a few highly dense urban markets.  We shall see.

As for asking me or any of the other 400 mini-competitors in the space, there are HUGE BARRIERS TO SCALE!  Trust me we have tried launching in three markets. 

However, huge companies like Goog, FB, Tzoo and others won’t have the same problems cause they already have the reach.  Big long-term competition problem for Groupon.

As for #1 small biz’s love daily deals.  We get 3 unsolicited emails a week to empahsize this point.  It’s a great defined marketing cost for the biz, relative to the old school spray & pray approach.

This is a great point.  Since they have aquired so many users.  It actually just makes it harder for everyone else.  Not impossible but a lot harder.

My guess is that at some point like in Chicago, they will just turn the faucet off and just stop spending on adwords and the like.  It will be interesting to see what impact that has on the biz.