Why Groupon's "Creative Destruction" Looks More Like "Destructive Creation"
This isn't just an academic issue. Groupon's chairman, Eric Lefkofsky, is a past master at destroying businesses. Serious people who have studied Groupon's numbers are warning investors not to buy in to its Nov. 3 IPO.
Groupon turned in another loss earlier this month on rising revenues. It doesn't earn enough money to pay its bills. A similar company, Coupons.com, which is private, also says its digital business is growing. But CEO Steven Boal said recently, "after taking in $200 million worth of investment, we're not looking to be profitable for the next several quarters."
The effect of those companies -- and their copycats, such as LivingSocial -- has been to take business from old-line coupon businesses such as Valassis (VCI) and Insignia Systems (ISIG). When you are unprofitable, you are by definition selling your services at less than the cost it takes to deliver them. Spending on advertising is generally growing along with the economy, yet both Valassis and Insignia reported declines in revenue:
- Valassis most recent revenues declined 7.7 percent to $528.4 million.
- Insignia's most recent revenues declined 40 percent to $5 million.
Both Valassis and Insignia have recently been profitable businesses. But you can see from this chart (click to enlarge) that at Valassis, which dominates Sunday newspaper coupons for grocery and supermarket goods, it's as if the recession never ended. It's in a secular decline unrelated to the ups and downs of the broader economy. The grip of Groupon, in other words.
There is an argument to be made that all this, in the long term, is a good thing: A slow, old and inefficient business is being replaced by a nimble, modern, technologically advanced one.
But given that none of the new digital coupon companies have yet proved they can actually make a profit, is this really "creative destruction," where the act of innovation sweeps away an old order, as the political economist Joseph Schumpeter would have recognized it?
It's looking more like "destructive creation," the dysfunctional brother of creative destruction, in which financial innovation destroys existing businesses rather than creating functioning new ones.
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