You probably already know that the company is horribly unprofitable and only appears to be a going concern because of accounting interpretations. But the devil is in the details -- and the details are even worse than the headlines suggest. Here are eight things wrong with Groupon, which the company must cure or address before it crashes and burns.
What's Wrong With Groupon: 8 Reasons the Daily Deal Giant Sucks
1. It's unprofitable, and it's staying that way.
I thought the income accounting trick that made Groupon appear to be profitable was the worst thing about the IPO, but kudos to my colleague Erik Sherman for figuring out that Groupon's "revenues" aren't actually its revenues: They're merely the money Groupon collects from consumers before paying its offering merchants their share. The money Groupon actually keeps through sales -- what it calls its "gross profit" but which is more easily thought of as "net revenues" -- is so much less than the money it spends just to stay in business. Here's a chart showing how Groupon's expenses are growing faster than its net revenues. This trend must be reversed or the company will die.
What's Wrong With Groupon: 8 Reasons the Daily Deal Giant Sucks
2. Management is taking the "investment" money for itself.
You might be forgiven for thinking that when Groupon raised pre-IPO money from investors and venture capitalists that the cash was invested in the business. Wrong! Most of the last round of $1 billion in funding was pocketed by management, per Mashable:
Altogether, $946.8 million, or roughly 86% of the funds raised across the three investments, was paid out to Groupon directors, officers and stockholders. Just $151.4 million was retained by the company to use as working capital and for general corporate purposes.
What's Wrong With Groupon: 8 Reasons the Daily Deal Giant Sucks
3. Groupon's revenues per subscriber are already tanking.
The company is less than four years old and already its customers are dialing down the amount they spend with the operation. Here's a chart showing that the number of dollars Groupon earns in revenues per subscriber has fallen by half since 2009. Currently, each of its 83 million subscribers spends on average just $7.76 with the company, of which Groupon only keeps $3.25. And that's before the rest of its expenses.
What's Wrong With Groupon: 8 Reasons the Daily Deal Giant Sucks
4. Groupon merchants are haggling with the company, and winning.
There's this assumption that a merchant and Groupon split the price of each email deal roughly 50-50. That ain't so, according to Motley Fool, which noticed that last year Groupon kept just 39 percent of the money paid on its deals. Groupon's IPO also notes that its national deals with big brands reduce its margins and profits. The bigger the clients it signs, the worse the terms are for revenue sharing.
What's Wrong With Groupon: 8 Reasons the Daily Deal Giant Sucks
5. Revenues per offer are in decline.
Successful companies with brilliant corporate strategies and strong brands can be identified by one attribute: They can charge higher prices, and then raise them. That is not happening at Groupon. The more email coupons it sells, the less money the company makes per coupon both in total revenue and net revenue. The company currently keeps only $3.25 per Groupon, on average.
What's Wrong With Groupon: 8 Reasons the Daily Deal Giant Sucks
6. Groupon engagement isn't so great.
There are 83.1 million subscribers to Groupon's daily deals, and Groupon sold 28.1 million offers to them in Q1 2011. For most web sites, a 34 percent engagement rate is pretty cool. But the New York Times noticed this factoid:
Only 15.8 million of Groupon's 83.1 million registrants have actually purchased a deal through the site.
What's Wrong With Groupon: 8 Reasons the Daily Deal Giant Sucks
7. Groupon struggles to get money from its penny-ante merchants.
Having a massive client base is generally a plus -- if a few of them leave it won't hurt the business. But Groupon is really a nickles-and-dimes operation. Currently, it keeps only $4,755 from each merchant it works with. Back in 2009, it got nearly $19,000 from each merchant who advertised. There are signs that Groupon is grinding that number back up again, but given the company's overall lack of profitability it's going to have to charge its merchants a lot more, or do more repeat business, than it's currently doing to get into the black.
What's Wrong With Groupon: 8 Reasons the Daily Deal Giant Sucks
8. Groupon's founders will control the company, not its shareholders.
Read page 89 of the prospectus. The company has left blank exactly how many votes Class B shares (for management) will be worth compared to each Class A share (for the plebs). But at least they've been honest about the fact that owning a share in GRPN won't give you any influence over the company or its board of directors:
As a result of this dual class structure, our founders will continue to be able to control all matters submitted to our stockholders for approval even if they come to own less than 50% of the outstanding shares of our common stock.
