Last week Andrew Mason, the 31-year-old CEO of newly public Groupon conducted an interview with Leslie Stahl of 60 Minutes. I was excited to get to see for myself just how crazy this newly minted multimillionaire could show himself. Groupon is know for its wild culture, and Andy did not disappoint. The words, the look and the attitude were just what I was expecting. Lesley, to her credit, seemed taken back, not that she hasn’t interviewed a number of crazies over the years, but this was a masterpiece of craziness.
Crazy how? Crazy in that Groupon continues to struggle to achieve real relevance since going public. As the biggest tech IPO in some time it was to be a real bellwether of things to come for others seeking to go public. The price was set relatively high at $20 per share, and it hit the mid-thirties in the first day, but then retreated. The bloom quickly faded from the rose and it continued to slog along in the low 20’s, sometimes dipping below.
One thing for sure Mason was still high on the ‘juice’ of their success, though smarting from the comedown of having to restate their earnings. They had forgotten to include things like ‘sales expenses’ that included the returns back to the advertisers after sales had been booked. Ouch!
Started in 2008, Groupon was one of the few businesses that actually took advantage of the economic downturn. Blessed with a large pool of available talent, many recently displaced from their current jobs, they were able to build a solid team to blanket the market with a novel concept. Pay nothing up front, get a lot of customers in your doors, and get around 50% back when the customers pay Groupon. Groupon gets all of the money upfront, and the clients have to collect from Groupon.
In the existing advertising world a number of clients have tried to negotiate these deals with newspapers and others, but this was generally for remnants that the newspaper knew would go unsold anyway. This did not happen often, though more today, and Groupon created a new model for the financial transaction. Would it work? Yes, but there are catches. This is built on the model of getting new customers, and the goal of building loyal customers. This has been the real sore point from my research with a number of Groupon advertisers.
Most of the Groupon advertisers have found that redeemers of Groupon offers are not returners later. Having found one deal they get hooked, and then search for the next deal. Others have found the process somewhat confusing and hard to understand and are not flocking back for more of the same medicine. The last factor is the holdouts that have not jumped on the bandwagon for ‘daily deals’. This is the sector that, in the tight economy, has shut down their discretionary spending. They are not enticed to buy something they didn’t really need just because it was 50% off. Tight times mean tight wallets for many, and enticing offers just won’t work well with this group.
What does this mean for Groupon? Groupon will continue, and will continue to produce some great results for some types of businesses. For many though they will burn and churn through a number of clients who will never do a Groupon deal again. Competition will continue to grow, why because the barrier to entry is low. Existing forms of advertising will also offer daily deals, most already have just on that bandwagon. The churn and the increased competition will make it hard for Groupon to be the 800 lb gorilla many had thought.
What does this all mean? Groupon will continue, but it will not become the growth stock many had hoped. Those who bought the initial offering will come out ok, but those who bought in the 30’s will never recoup their full investment. This could change if Groupon evolves beyond its existing concept, demonstrates solid growth, and solid customer retention through great sales results at the advertiser level.
I wouldn’t bet on it. I also don’t believe that monkeys can fly, even if Andrew Mason thinks they can. Time for Andrew to grow up, put on a tie and be responsible. I’ll be reading the results weekly to see how it goes. And regarding the interview? It was classified as a PR nightmare the next day. The stock price went up for a couple of days and then declined back to around 20 again. I guess that proves the old adage – ‘buy on the bad news, and sell on the good news.’ It’s Monday, and the price remains about the same. Put on the tie Mr. Mason!
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