On TechCrunch, Rocky Agrawal has been writing a series of posts about Groupon – which as you surely know recently filed for a $750 million IPO. But Agrawal is not writing about Groupon’s rapid ascent to success, but rather its, in his mind, inevitable downfall. In fact many in the tech industry believe that the company’s growth and business model are completely unsustainable.
In his latest post, “Why Groupon Is Poised for Collapse,” Agrawal argues that Groupon is “the equivalent of a loan sharking business”:
Businesses are being sold incredibly expensive advertising campaigns that are disguised as “no risk” ways to acquire new customers. In reality, there’s a lot of risk. With a newspaper ad, the maximum you can lose is the amount you paid for the ad. With Groupon, your potential losses can increase with every Groupon customer who walks through the door … The $21,000 that the business in this example gets for running a Groupon is essentially a very, very expensive loan. They get the cash up front, but pay for it with deep discounts over time.
Agrawal also believes that some businesses are doing repeat Groupon deals not because the first one worked out in their favor, but to get more quick cash to recover from the previous deal:
A conversation with Forkfly (a Groupon Now competitor) CEO Paul Wagner was enlightening. He suggested that they were doing what struggling families do when they max out a credit card—they get another one.
That makes perfect sense. Revenue from subsequent daily deals help pay for the obligations created by the first one…
Assume that you’re a business that is unscrupulous and you’re looking to make a quick buck. You could create a wildly generous deal that would sell like crazy. In about 30 days, you’ll have 2/3 of your share of the deal. Then you shut down operations.
It also works for businesses that are just having a tough time. As critical as I am of Groupon, the slam dunk case is to sign up with Groupon if you’re going bankrupt.
This argument recalls a post by Jose Ferreira that I shared with you last week, arguing that Groupon is a “straight-up Ponzi scheme”:
Why is Groupon not merely a tech-bubble datum but a Ponzi scheme? Simple: Groupon has found that you can get local merchants to try anything once if it brings them new customers. A few local merchants in Chicago get them started, and Groupon shows good revenues. In fact, Groupon immediately remits half of those “revenues” back to the local merchant — they were never Groupon revenues in any meaningful sense of the word. But, optically, Groupon revenues look high — which they use to raise a financing round at a high valuation. Then they use the proceeds to hire vast armies of salespeople to dig deeper into Chicago’s local merchant community and repeat the trick in other cities.
In both interpretations of the model, Groupon looks good at a cursory level – local merchants are buying in, money is flowing – but upon closer inspection the numbers don’t add up. As Business Insider pointed out recently, Groupon’s revenues are growing rapidly, but so are its net losses, which were 1,301% worse in the first quarter of 2011 than the same time period a year ago.
Additional negative press that the company has racked up in June:
- Conor Sen says “Investors beware” because Groupon “owes $230 million more than it has, appears to be burning through $100 million or more a quarter” and “needs constant infusions of cash to stay afloat as it's hemorrhaging money.”
- The Yipit blog says it looks like Groupon’s business model is “deteriorating.” The blog looks at Boston as a case study and notes that while the firm is offering more deals per day, revenue per subscriber is going down: “Groupon’s business model is predicated on the idea that the company can stomach the ever-increasing customer acquisition costs since an acquired customer should generate a steady flow of high margin revenue. However, this relies on existing customers purchasing several subsequent deals. While existing customers are indeed purchasing subsequent deals, they are doing so at a declining rate, despite Groupon’s recent targeting efforts.” Groupon’s customer acquisition costs are also rising.
- The Observational Epidemiology blog has done multiple posts about Groupon in the past few weeks. In one, they claim the real problem with Groupon is that people are only buying them due to the buzz, which will eventually fade: “[A Groupon offer] is what we would normally think of as a gift card, a really crappy gift card at an exceptionally good price. How crappy? It can be used at only at a specific business (sometimes only at one location). You have to buy it on their schedule. Many if not most have expiration dates. Some even have blackouts on holidays. Finally, it can only be used one-per-visit with any unused balance being sacrificed.” Merchants are buying in despite the fact that it doesn’t really benefit them that much “because Groupon has successfully branded itself as the next big thing.”
- GigaOm relayed a Twitter debate between David Heinemeier Hansson and Joe Stump over the Groupon question, with Hansson arguing that Groupon’s record-setting growth isn’t really impressive if “your losses scale just as bad”: “If your model didn't improve when you went from making a few hundred million to a few billion, your model is broken.”
- Ari Levy of Bloomberg says many investors are “leery of buying shares in a company with a business model so easy to copy that it has spawned 482 imitators.”
What I haven’t seen is a lot of damage control on Groupon’s part. Clearly they are making a case for their spending and their business model to investors. Why aren’t their PR teams getting that message out? I’ve seen a lot of stories about disgruntled small businesses that felt doing a Groupon was a horrible business decision. Even putting financials aside, the company seems to have a behemoth of a reputation management problem on its hands, and it’s something they won’t be able to ignore for much longer – a bad reputation is the anti-buzz.
Do you think Groupon is doomed to fail?
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Have a great weekend.