Whiter teeth, Swarovski earrings and a romantic break in Reading are among the deals being offered in the Oxford area by leading daily discount company Groupon today. Yet you might be right to wonder not only about the quality of the offers, but about the basic business model of these increasingly popular websites (especially if you saw the episode which featured them in the last series of The Apprentice). Harnessing the marketing power of email and social media, these companies flog coupon deals to the public, taking as much as fifty per cent commission for their services, while already offering these goods and services for significantly slashed prices.
The merchants see a huge, sometimes impossible to execute, rise in orders but are paid slowly – the coupon sellers see an immediate cash injection. It is this liquidity in terms of cash flow, as well as the association with tech and social media companies, such as successfully-floated social network/careers service Linkedin, which led to excitement at market-leader Groupon’s listing on the NASDAQ stock exchange last November. The markets responded well. Shares were priced at $20, rising to $28 at the end of the day’s trading, valuing the company at approximately $13billion.
Ten months later, the picture is very different. With shares currently priced at approximately $5, major investors are jumping ship, including those who invested heavily in Groupon, prior to its IPO (initial public offering or stock market launch). These include Marc Andreeson, multi-millionaire entrepreneur, investor and software developer, whose Silicon Valley venture capital firm Andreessen Horowitz invested $40million in Groupon in the months leading up to its flotation. Hedge fund Maverick Capital is reported to have cut its Groupon shares from over six million in March to fewer than two million by the end of June.
What has changed to spark such a widespread loss of trust in the business?
1. Groupon is suffering both from its association with, and division from, technology firms. Following the disastrous the Facebook IPO, lots of tech stocks are struggling. Groupon has been affected by this loss of confidence in the industry as a whole. On top of this, however, the increased competition Groupon is facing has made it clear that the company has no intrinsic advantage over its competitors – they use technology, rather than produce it. Investors bought into a futuristic vision of e-commerce and are now realising this is ultimately a coupon company.
2. The novelty is wearing off. Not only for investors, but for business partners and consumers too. Merchants are starting to consider the real costs involved in offering such massive discounts and paying a middle man. Customers are starting to question the quality of the end products (something outside of Groupon’s direct control) and questioning how good a bargain they might be getting after all. The company is even facing litigation from consumers claiming the coupons’ expiry dates are illegal as they should be considered gift cards (and thus valid over a five year period).
3. Growth brings competition. As Groupon looks to expand into new areas, competition becomes a bigger issue. Its Groupon Goods section for instance (delivering electronics and other household items to American customers) puts it in competition with retail Goliaths such as Amazon and Wal-mart. With Amazon announcing its first UK daily discount service in the last few weeks, initially targeting the London market, Groupon needs to respond quickly and decisively.
4. Groupon hasn’t helped itself. Concern over the company’s accounting practices, following a revision of its fourth quarter financial results, has yet to be allayed. Groupon has bolstered its credentials by appointing Deloitte vice-chairman Robert Bass and Chief Financial Officer of American Express Daniel Henry to its board this May, but the market needs convincing that Groupon is ready to grow into the internet giant it was supposed to be.