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4 Reasons Groupon is Like Goldman Sachs and 1 Reason It's Not

The problem with being the center of attention like Groupon is that strong light shows up every flaw. Bizarro accounting is bad enough, though investors can see the numbers in front of them. However, small businesses that use Groupon often get screwed.

My BNET colleague Jim Edwards says Groupon is the crack cocaine of small business. I see his point, but think there's a better analogy: Groupon is the Goldman Sachs (GS) of small business marketing. Only, no matter how much money merchants throw at it, the company can't make a penny.

A deep hole for money
You can go through the analysis of why Groupon is such bad news for a small business. You can also get an encapsulation from the poignant story of the woman who owns Posie's Bakery & Café and, in the final analysis, lost $8,000 because of a Groupon promotion:

Groupon's just another word for Goldman Sachs
Why compare Groupon to Goldman? Because the similarities in the two companies can be downright scary:

  • Groupon makes the deal process opaque so business owners have a difficult time understanding exactly what is going on or what to expect.
  • Groupon's success depends on an unsustainable trend: a steady supply of new merchants to lose money on deals.
  • Groupon over leverages money it gets from the deals. As the company's S-1 notes, the company uses "the operating cash flow provided by our merchant payment terms and revenue growth to fund our working capital needs," and needs 60 days to pay the last third, even though it gets the case up front through credit card payments. Once the new deals end, good luck.
  • Unlike a normal advertising medium that charges a fixed amount, Groupon uses a variable payment scheme. Given that the deals often seem to lose money for the merchant, Groupon's short-term self interest is completely at odds with those of its clients. The more money Groupon makes, the more money the clients lose.
To make money, you have to lose money. A lot of it

So, how isn't Groupon like Goldman Sachs? Simple: no matter how many deals they do and how much pain many of their clients feel, they haven't been able to make a single penny. In fact, last quarter the company managed to lose $114 million on actual revenue of $270 million. OK, technically the company calls that $270 million gross profit, even though that's really its gross revenue on the $645 million it took in, after the merchants got their share.

A $114 million loss on $270 million "gross profit." If that isn't enough number bending to sound like Goldman, I don't know what else would qualify.