Adam Hartung

Adam Hartung, Contributor

I cover business growth & overcoming organizational obstacles.

8/15/2012 @ 4:48PM |6,016 views

Groupon Needs a New CEO - NOW!!

CHICAGO, IL - NOVEMBER 30:  A sign marks the l...

Rumors are circulating that Google is close to reaching a deal to buy Groupon for a reported $5.3 billion. (Image credit: Getty Images via @daylife)

In August, 2010 Forbes magazine labeled Groupon the world’s fastest growing corporation.  And that didn’t hurt the company’s valuation when it went public in November, 2011.

But after trading up for a couple of months, at the beginning of March Groupon turned down and has since lost 75% of its market capitalization.  Groupon is now valued at about $3.6B – approaching half of what Google offered to pay for the company in 2011 before leadership decided to go public.

And nobody, absolutely nobody, can be happy about that.

Groupon Is the Leader in a Growing Market

Groupon pioneered the use of digital coupons in a way that created an explosive new market for local business.  Paper coupon use had been declining for years.  But when Groupon made it possible for on-line individuals to achieve deep discounts on products in local stores using emailed coupons masses of people started buying. From nothing in June, 2009, by June, 2010 revenues grew to an astonishing $100M. Then, between June, 2010 and June, 2011 revenues exploded 10-fold, reaching the magical $1B.  Forbes was not wrong – as this was an astonishing growth accomplishment.

Google, Yahoo, Amazon and other suitors quickly recognized that this was not a fad – but a true growth market:

  • People like deals, and coupons could be successful when updated to modern technology
  • Local programs were extremely hard for internet-wide companies like Google, and Groupon had “cracked the code” for acquiring local-market customers
  • Some Groupon programs had simply astounding results – far exceeding the offerer’s expectations.  The downside was the businesses complained about how much the discounts cost them as success exceeded expectations.  The upside was it demonstrated the business had remarkable reach and success.
  • As mobile use grows Groupon can interact with location apps like Foursquare to allow local merchants to target local customers for rapid sales.  Combine that with Twitter distribution and you could have extremely effective local store targeted marketing programs – previously unavailable on the web.
  • Groupon reached a scale allowing it to potentially work with national consumer goods companies like PepsiCo or P&G and their local retailers on new product launches or market specific sales programs, something not previously done via digital networks.

Ah, but problems have emerged at Groupon (although none of them really change the above market attractiveness:)

Groupon Gross billings drop Aug 2012
Source:  Business Insider August 13, 2012 Permission to reproduce: Jay Yarrow, Silicon Alley Insider Editor

Groupon has a leadership problem, not a market problem

This last point is extremely deadly.  Groupon’s growth rate has fallen from 1,000% to about 35%!  Further, Groupon is dangerously close to a growth stall, which is 2 consecutive quarters of declining revenue.  Only 7% of companies that incur a growth stall maintain a consistent growth rate of even 2%!! Groupon’s value is completely based upon maintaining high growth.  So regardless of anything else – including profitability – unless Groupon can find its growth mojo then investors are screwed!

No wonder investment advisors are writing down their Groupon price objectives 50% – or more!

Has the market for daily deals declined?  Not according to Yelp and Amazon, which continue growing their markets.  Consumers are still smarting from a bad economy, and love digital coupons.  The problems at Groupon do not appear to be that the market is disappearing – but rather that leadership simply does not know what to do next.

Groupon needs a new CEO that will drive growth

Groupon was a rocket ship of growth, and founding CEO Andrew Mason deserves a lot of credit for building the sales machine that outperformed everyone else – including Google and Amazon.  But the other side of his performance was complete inexperience in how to manage finances, operations or any other part of a large publicly traded corporation.  Unprofessional analyst presentations, executive turnover, disrespectful comments to investors and chronic unprofitableness all were acceptable if – and only if – he kept up that torrid growth pace.  If he can’t drive sales, what’s the benefit of keeping him in the top job?

Groupon is a remarkable company, in a remarkable market.  But it has incredibly tough competition.  Seasoned tech investors know that as fast as Groupon sales went up, they can go down.  With smart, well managed competitors in their markets there is no room for error – and no time.  Groupon has to keep the growth going, or it will quickly be overwhelmed by bigger, smarter companies – remember Palm?

It’s not too late for Groupon. It is #1 in its market.  Groupon has the most users, the most customers and by far the most salespeople.  Groupon has other products in the pipeline which solve new needs and can extend sales into other emerging market opportunities.  But Groupon will not survive if it does not recapture growth – and it’s time for a CEO with the experience to do just that.  Mr. Mason does not appear to be the next Jeff Bezos or Steve Jobs, so Groupon’s Board better go find one!

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  • Hugo Morizot Hugo Morizot 3 months ago

    Yes, Groupon have a MARKET problem !

    First the entire business plan is not profitable in long term because it is not possible for a merchant to loose 75% of is original price and still live is business normally; the merchant is loosing money that is why most of them are cheating there price so they can do 75% and survive …

    BUT what append when the customers find out the croop ? There are not happy .. and if the merchant is not cheating he is very disapointed …

    At the end or the merchant cheated and the customer is scamed, or the merchant is loyal and do a fairly 75% discount and he will never do that mistake again ..

    To go further Groupon is not paying the deals that are sold but not used, for exemple in 200 deals are sold and only 170 customers came in, Groupon will keep 100% the money from the thirtee unused coupon’s !!

    Also Groupon is today working very hard cuting advertising, retaining all the money they can to show up a positive quarter (as you’ve seen on Q2 the little profitability was du to an advert rigourous cut)

    The fact to retain money could be a prouf of good business keeping, at the exeption when you kill your reputation, and destroy your partners business ! Tel me what Groupon will do when no one restaurant will accept those unlawfull conditions ?

    But anyway, this “business killing” is not new from Groupon .. We all remember this cupcake maker who lost 20 000£ in England because of Groupon … And so many, so many others …

    Groupon is not really profitable because there partners are obliged to cheat there original price to discount 50% (+ 50% Groupon commission witch is finaly 75% + lost coupons in there pocket, say an average of 80% (!!)

    Conclusion : groupon is like a very long rope that burn on each side, burning it’s reputation everyday, one side of the rope is the unhappy customers, on the other side the unhappy partners (that we have an exemple in this post), now just answer the question : a much time is left t’il the rope is entirely burned from both sides ?

    The next Q3 will be the time of truth for Groupon because there sales will be lower by 35% due to the two month vacation time in Europe and Russia (july+august) and also because Groupon is not anymore “the new thing” added to this that there is no more free advertising on the worldwide TV 8pm news …

    And maybe the shareholders may attemp a justice action because it is evident that if Groupon would not have cheated on there acconting the IPO would not have been possible …

    Groupon and all the Daily Deals websites hold a NON-PROFITABLE business, to be conviced by that you simply have to watch all the DD site that have crached …

    Groupon did the IPO only because it was a good way to feed the “snowball scam”, if you want to compare Groupon you can do it with Madoff …

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  • Adam Hartung Adam Hartung, Contributor 3 months ago

    Thanks for commenting Hugo Morizot. Your complaints about Groupon seem to originate from the offerer position. What strikes me about this is that the offerer has total control of the coupon offer – how the discount will be applied, how deep the discount and how many people can participate. Why would the business then complain if the offer accomplishes its goal – or oversubscribes the goal? It seems like businesses were so used to the poor performance of paper coupons that they were victim of their own low expectations for the digital offering – which would not seem to be Groupon’s fault.

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  • Ani Torosyan Ani Torosyan 2 months ago

    In Resopnse to Adam, you know I hear that a lot from analysts, that “why does a business complain and still offer such a unprofitable deal on Groupon”. The easy answer is that most small business owners are not too savvy on calculating profit margins and cost of business, ROI, etc. When you couple that with greedy, pushy Groupon sales agents, these poor business owners cave in (when they know the deal they are going to be offering is way below market value and will be a loss for them). Many of these business owners also opened their business during this horrible recession, and to be able to “compete”within their markets, they are persuaded by Groupon sales guys that groupon will bring them an onslaught of new customers. The reality is that Groupon customers are coupon clippers, and are not loyal, returning customers. Therefore, the theoretical strategy positioned by Groupon to its merchants fails almost every time. And the business loses on the deal and on costs associated with the deal (ESPECIALLY on payroll costs to service the deals).

    Groupon won’t be able to maintain this strategy by diservicing merchants in this manner, which is evident in Groupon growth decline.

    Also, quick note, that my business doesn’t and will never do Groupon. We do dabble into the deal / voucher market via more upscale, elite deal sites in order to capture clientelle with more disposable income and those who understand quality of service, and more importantly, are willing to pay full price for it.

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  • Wei-Min Chu Wei-Min Chu 3 months ago

    Prepaid discount coupons have huge potential, but not in the form of daily deals that drive merchants into bankruptcy. Merchants want to sell excess inventory at a discount. Users want discounts on quality merchants. Unfortunately, Groupon does not serve either constituency.

    Groupon has magically combined a poor business model with poor management. Other than that it is a great company.

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  • Adam Hartung Adam Hartung, Contributor 3 months ago

    Thanks for commenting Wei-Min Chu. I don’t follow the logic that Groupon is the cause of coupons which drive merchants into bankruptcy. Businesspeople have complete control over the Groupon – they pick the products to discount, price and limits. It’s up to merchants to create an offering which induces customers in, while not giving away the store. That is certainly possible, and Groupon offers the distribution method to make the offer a success. That’s why this has grown rapidly – and can continue if management helps merchants create offerings which are win/win between merchant and customer.

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  • Wei-Min Chu Wei-Min Chu 3 months ago

    Adam, thanks for the kind response.

    Merchants want to increase profitably by selling excess inventory at a discount. Airlines do this everyday. But Groupon only features a small number of merchants each day, and if you want to be a featured merchant, you cannot limit the number you sell. Groupon wants to use its limited bandwidth for merchant deals that can maximize sales. Deals with capacity limits don’t maximize sales.

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  • Adam Hartung Adam Hartung, Contributor 3 months ago

    Great comment Wei-Min Chu!! What you are pointing out is that Groupon needs to change its model! Groupon needs to adapt to its customer’s needs! The concept seems to work, and the first 2 year roll-out has been a smashing success – but if Groupon doesn’t change its model to achieve goals which are win/win for consumer and merchant —- well no wonder their growth has slowed. Groupon needs a leader that can understand how to use the distribution to pay off for everyone – and hopefully find a way to make your work with them profitable!

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  • Wei-Min Chu Wei-Min Chu 3 months ago

    Adam, Groupon cannot change its model.

    Selling a small number of featured deals is a high gross margin, low volume business. Despite the high gross margins, costs are high, so net margins are vanishingly small. Selling a large number of limited-capacity deals is a low gross margin, high-volume business. Despite the low gross margins, self-service efficiency and automation drive high net margins.

    A key metric for Groupon in the eyes of wall street is their gross margins or “take rate.” Groupon cannot change its model without decimating its take rate, causing its stock to collapse entirely. Furthermore, Groupon would have to change its DNA and embrace automation. Recall that Andrew Mason came on 60minutes to say that his company was better than his Silicon Valley brethren since Groupon used real people not algorithms.

    We have seen this movie before. Yahoo’s display ad biz has high gross margins, low volume, low automation, hence low net margins. Google’s search ad business has low gross margins, high volume, high automation, hence high net margins.

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  • S P S P 3 months ago

    Revenue did not decline….

    Whatever this is, a blog or an article, at least do some research on Groupon’s investor website instead of posting false information.

    Billings declined.

    NA billings grew, only Europe billings declined. And I don’t blame them on the billings declined. If people feel that the economy is doing quite poorly; they are not gonna be buying stuff, with or without Groupon. And this was the sentiment for all of Q2 2012 with the European mess and slowdown of global growth.

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  • Adam Hartung Adam Hartung, Contributor 3 months ago

    Thanks for commenting S P. I write frequently about financial machinations. All CEOs have the ability to shift revenue and costs around to make any particular quarterly P&L meet their needs. Groupon was already attacked for using accounting methods which were less than transparent even before the IPO. What’s important from this article is the undisputed chart that in the company’s primary revenue driver billings growth has slowed – and turned negative. Without a good explanation for a seasonal impact (which has not historically been the norm) investors have plenty to fear about future billings and that does affect revenue, regardless of when it is reported.

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