Thursday, 5 January 2012

Groupon Fails?

It's a real swine when you get something right like a prediction for 2012 but I only made my observations about a  month ago and already it seems one has partially come true. Groupon has suffered a major set back and concerns about its business model are now getting serious. I predicted that Groupon would fail in 2012 and the news of a 46% drop in gross revenue in the lead up to Christmas and after Thanksgiving is a huge warning bell.

Like my blog over Christmas about the massive drop off in social networking activity at family holiday time, it seems that Groupon suffered from the same effect. Retailers in the UK, in the meantime, had strong a Christmas period rescuing a mediocre year with John Lewis reporting bumper sales. So it is not that we have suddenly gone off bargains, there is a real smack of traditionalism at this time of year. TV advertising and viewing peaks, social media goes down. Retailers have strong offers, voucher schemes suffer.

There is not an obvious correlation here and this must be worrying to Groupon's investors. Interestingly, Groupon's travel business continued to perform strongly so this is its core business that is creaking. We should also remember that this is a week's data we are looking at but it is a huge drop by any standards, so the full Christmas picture has not emerged.

But I have my suspicions. If 'social' type interactions decrease sharply during traditional family holiday periods (i.e. whole nations are not working at once) then it seems that Groupon also suffers. This would sort of suggest (anecdotally and not backed with real evidence) that most of the Groupon transactions are being done in working hours by people at work. This is once again a worry for investors in social networking companies. If businesses really get wise to this then I believe that social networking will get suppressed by companies during working hours. And if Groupon really does correlate to social networking, then its model could be at similar risk - given its offers are very transitory.

Whatever the root cause here, it seems that not all is well thought through in the business model. I have highlighted in the past that Groupon is a business of the period (we are in austere times), that it attracts 'discount junkies' and not long term customers, that retailers are not thinking offers through properly and that it is wide open to competition not just from like-minded businesses but from traditional retail. 

The final point here is that I think investors have got deceived by the vanity of the gross sales line. Even collapsing sales by 46% in a week meant that Groupon grossed $26.7million. But this revenue is split with the retailer and then you have the cost of customer acquisition and operating costs to deduct from the residual. There is no doubt that Groupon loses more money the more it sells. Many high growth firms consume cash and lose money heavily in the early stages, but at least those businesses make a good margin per transaction which clearly shows the future profits can overcome the past losses. But Groupon loses money heavily on every transaction and it is not clear when that can end if it takes pastings of this nature in a single week.

I stand by my prediction and this sales drop is evidence that the model invented was wishful thinking. It means that the IPO was vastly over called and investors really should be worried about the future of this business in its current form. In my humble opinion, of course.

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