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Rise and Fall of Groupon
Ashwin MalsheESSEC Business School
October 16, 2011
Sources of DataO All financial data are obtained from
the latest S-1 filing (as of October 16th 2011) by Groupon to the SEC
Market for Deals!
Business Model
Small Buyers and Sellers
Disorganized
Groupon
Structured
ProcessA local daily
deal is displayed on
Groupon
Buyer pays for the deal
Groupon collects the
payment
The deal is valid if a
minimum no. of people buy
Groupon splits revenue with
the seller
Seller is paid within 60 days
in the USA
Buyer may use the deal in
prespecified time
Buyer may return to the seller without
Groupon
Groupon ProductsO Featured Daily DealsO Deals NearbyO National DealsO Groupon NowO Deal ChannelO Self-Service Deals
For description click on this link
What Groupon Brings to the Table
Guaranty
Purchased
Deals
Minimum
Group
Size
Buyers Sellers
Groupon Advantage
Groupon has more than 100 million emails in the
database
Groupon has partnered with more than 75,000 merchantsGroupon has more than 100
million emails on the file
Groupon
Advantage
Value CreationO By facilitating trade
O Bringing together small sellers and individual buyers
O Giving small businesses visibility to large audiences locally
O Exposing individual consumers to a wide selection of daily deals to choose from
Benefits to SellersO Wide exposureO Higher trial rates as compared to
traditional advertisingO Opportunity to induce repeat
businessO A minimum number of customers
are guaranteed when a deal goes on live
Benefits to BuyersO A wide selection of dealsO Large discountsO Opportunity to try out
services/products that are usually expensive
O Groupon guarantees the validity of the deal
How Has it Worked Out for Groupon?
Revenues (Mil. $)
Jun-
09
Aug-
09
Oct-0
9
Dec-0
9
Feb-
10
Apr-1
0
Jun-
10
Aug-
10
Oct-1
0
Dec-1
0
Feb-
11
Apr-1
1
Jun-
110
50
100
150
200
250
300
350
400
450
Revenue Growth Q-o-Q
Sep-
09
Nov-0
9
Jan-
10
Mar
-10
May
-10
Jul-1
0
Sep-
10
Nov-1
0
Jan-
11
Mar
-11
May
-11
0%
50%
100%
150%
200%
250%
Operating Income (Mil. $)
Jun-
09
Aug-
09
Oct-0
9
Dec-0
9
Feb-
10
Apr-1
0
Jun-
10
Aug-
10
Oct-1
0
Dec-1
0
Feb-
11
Apr-1
1
Jun-
11-400
-350
-300
-250
-200
-150
-100
-50
0
50
North American Deals
Activities23%
Events6%
Food & Drinks26%
Health & Beauty
17%
Retail17%
Services11%
International DealsActivities
11%
Events16%
Food & Drinks23%
Health & Beauty
34%
Retail4%
Services12%
Marketing 101SWOT and BCG Matrix
Strengths and Weaknesses
O StrengthsO Brand equity among the consumers
as well as merchantsO A large established customer as well
as merchant baseO Ability to innovate to offer different
dealsO Weaknesses
O Highly unprofitableO Running out of cashO Corporate governance is an issue
Opportunities and Threats
O OpportunitiesO Entering international markets via
partnerships or M&AsO Offering a wider selection of dealsO Offering location-based dealsO Increasing the merchant base
O ThreatsO Fierce competition in international
marketsO May not find investors to fund operationsO Employee lawsuits
BCG Matrix
Groupon ?
Cash Cow Dog
Relative Market Share
High Low
Mark
et
Gro
wth
Rate
Hig
hLo
w
Groupon- The StarO Groupon commands a large market
share in daily deals marketO It is also in a market that is growing
leaps and boundsO However, can we label Groupon as a
Star?O The next few slides explain why we
can’t
Groupon ValuationBubble 2.0
Offer Too Good To Refuse?
O The last year in November, Google offered to buy Groupon for $6 billion
O Groupon refused this massive offerO they believed their potential was
much moreO here is more information about it
O This was the first time Groupon’s valuation came into focus
IPO FrenzyO Just before Groupon filed for S-1
with the SEC, the rumors put a value of $25 billion to Groupon
O On June 2, 2011 Groupon files for an IPO at a valuation of $30 billion
O Experts keep on questioning Groupon’s high valuation
Attacks on ValuationO Rocky Agrawal wrote a series of
articles on his own blog and other tech blogs such as TechCrunch analyzing Groupon
O Academicians likewise pointed out the issues with accounting at Groupon
O Salespeople lawsuit signals cash problems at Groupon
O Groupon shows increasing cash problems
Criticisms and Controversies
Business DevelopmentO For Groupon “marketing expenses”
mean money spent to acquire subscribers
O Selling, general, and administrative expenses (SG&A) mostly include the money spent on acquiring merchants
O Combined marketing and SG&A have been much larger than the revenue so far
Buying Revenue
2008 2009 20100
50
100
150
200
250
300
350
RevenueMarketingSG&A
Small Business Suffer
O Daily deals actually lead to losses to small businessesO can’t handle the large influx of
customers with large discountsO most customers don’t returnO Groupon takes a large chunk (up to
50%) of the already discounted revenue
O Groupon pays only over sixty days, thus creating liquidity crunch for merchants
Price Promotion vs. Branding
O Although price promotions may increase revenues in the short term, they dilute brand equity
O Regular customers may start using Groupon thus reducing the revenue premium that the merchant obtains from such loyal customers
Read more here
Quality of SubscribersO Groupon subscriber database has
poor qualityO only about 20% subscribers have
ever purchased a GrouponO half of these purchasers never
bought another GrouponO this translates into large acquisition
costs per buying subscriber for Groupon compared to the small revenue these customers generate
Competitive AdvantageO Many critics claim that Groupon’s
business is easily replicableO currently, however, only LivingSocial has
emerged as a major competitorO Facebook and many others dropped outO this perhaps indicates that many don’t
think that the business is profitableO in China, Groupon is struggling due to local
competitionO Google and Amazon have entered this
space
Corporate GovernanceO Groupon used a non-GAAP accounting
metric ACSOI to inflate its earningsO Groupon also reported gross revenue
instead of net revenue thereby inflating the sales
O The top management is not respectful of the SEC quiet period, see here and here
O SEC has forced them to amend the S-1 filing 3 times so far, delaying their IPO substantially
O Early investors cashed out without leaving adequate cash for operations
Groupon TodayHumbled
Pre IPO ValuationO It is still very difficult to value
Groupon, but still the current valuation is lower than expected
O Wall Street Journal reports average valuation by analysts at around $10 billion
O Steven Davidoff gives a nice summary of Groupon saga showing how the valuations dropped so much
IPOO Groupon first set the IPO price at
$18 per share and then subsequently increased it to $20 per share
O The IPO had a nice 30% pop at the end of the opening day. The stock closed at $26
O The price has been volatile ever since. At one point the shares traded at as low as $15
Stock Performance
The End