(MoneyWatch) Thursday saw the end of Andrew Mason's tenure as CEO of Groupon (GRPN). The iconoclastic Mason was as unconventional in his announcing his removal -- a tweet on Twitter that led to a public letter -- as he often was in acting as head of the largest of the daily deal sites, which he helped found.
The markets reacted positively, sending the stock up more than 7 percent to $4.85 in midday trading. However, that's far below the $20 IPO price in November 2011. The company faces significant challenges because of the business model and approach it took to operations. All of those were overseen an apparently blessed by the board. The question for investors now is whether Groupon can shore up its finances, create a solid profit, and grow revenue with the same board that has been in place since the company's inception.
Mason was an outspoken, controversial CEO in ways that chief executives of publicly-traded companies typically avoid for reasons ranging from public relations to regulatory compliance. However, the disappointing financial results that have stalked Groupon, which early on was seen as holding strong promise, may be beyond simply changing the person at the helm.
Rounding up the customers
One underlying problem of Groupon has been the need to constantly replenish both the consumers who buy the deals and the merchants who offer them. Early on, Groupon made metrics available in its public filings that enabled calculation of the average deals bought per active customer over the previous 12 months.
That number kept declining and suggested that the heavy users of Groupon were the ones new to daily deals. People who had received marketing from the company over time became less responsive and active. Sustaining growth meant that Groupon had to continue finding new customers. That drove up marketing costs and increased losses.
Groupon eventually stopped providing all the detail necessary for the calculation. It did show, for a time, average revenue per customer, but stopped providing that as well because "due to the increase in direct revenue as a percentage of total revenue in the current year, we no longer consider this metric to be as meaningful an indication of those trends because direct revenues are presented on a gross basis."
The company still shows gross billings per customer. Even though a higher percentage of total revenue means more money to Groupon from the deals, the trend over the last few years -- $160.05 per active customer in 2010; $186.75 in 2011 when Groupon was at the height of its hype; and $143.88 last year -- suggests that either people are buying fewer of the company's daily deals or that merchants are choosing to offer smaller deals. In either case, it continues a troubling trend even as the economy has seen a tepid recovery.
According to Sterne Agee analyst Arvind Bhatia, in the fourth quarter of 2012, Groupon's billings (the total money paid for deals) were $1.52 billion, sharply above Wall Street expectations of $1.33 billion. However, revenue -- the portion of billings that go to Groupon -- only met expectations. As Bhatia wrote:
This was, in part, due to the company's strategy to accept lower take rates in order to attract higher quality merchants. Take rate was down 469 bps sequentially. We expect the take rates to stabilize and improve in the coming quarters.
But that gets to the need to replenish merchants. Small companies have become savvier about dealing with Groupon and other daily deal companies. They know they can ask for a higher percentage of deals because the Groupons of the world need them more than they need the Groupons. Contrary to Bhatia, dropping rates may not be a strategy to attract higher quality merchants but a reaction to the demands of the market.
The board's responsibility
A board is ultimately as responsible for the strategic direction of a company as the CEO, and in the case of Groupon, for the business model. Groupon co-founders Eric Lefkofsky and Brad Keywell both serve on the board and both were instrumental in turning the company in the direction it has gone. (Mason's original concept was a social initiatives platform called The Point, which eventually morphed into Groupon.)
To effectively blame Mason for the company's problems seems to border on scapegoating. As Notre Dame Professor of Management Timothy Judge, who researches management psychology and leadership personality, put it in an email to MoneyWatch:
After all, Mason started the company, but it seems as if that is, in a real sense, being used against him. Moreover, it seems odd to me that the board, who bought into Mason and his plan, not exit with him. Why are they less responsible than he?
Furthermore, Groupon's inner circle has demonstrated judgment that has seemed questionable in the past. Botheven as they served on its board.
In a nearly $1.1 billion round of funding, Groupon directors, officers, and major shareholders -- including Lefkofsky and Mason -- took 86 percent of the total, putting Groupon in urgent need of an IPO to maintain cash flow.
In his resignation letter, Mason wrote that by getting out of the way, he hoped he would make room for the company to have a second chance. But a real second chance may need much more than Mason's departure.