It’s been years since I got my first penalty flag for piling on, nearly 50 years to be exact. Today I’m getting my next one. I’ve had more than a few over the years, but this is a ‘fun one.’ Today I’ll take one for the team and talk about Groupon again. Talk about penalty flags, they are setting records for their first year as a public company. Like the targeting scandals in the NFL, they could be coming close to getting a death penalty called on them. Time to stop and reflect on where they are now, and ponder can they save it before someone comes in and takes the ball from them.
Last week they were forced to admit that they had overstated their earnings in the latest quarter. The CFO fell on his sword and was officially let off the hook by the CEO. However, the investment industry doesn’t take well to these kinds of ‘mistakes’ and a drumbeat has come up with a chant looking for changes NOW, with a decree that this can’t happen again.
The market came on line at the same time and hammered the stocks on Monday, and yet again today. The price is now well below the initial offering price, but the overall market value of the company is still strong…too strong actually, and this is the real problem for Groupon.
Groupon was started with a great idea – daily deals that would shake money from the pockets of the public mired in a recession. They were sitting on their wallets and needed a real reason to open them back up. Groupon started the ball rolling, created buzz in the market, and produced some amazing results for many of their client businesses. Consumers fell in love the ‘daily deals’ and a new marketing segment was born.
It started so quickly, and the results were so strong for a number of advertisers, that many thought that this model would be the key driver for local marketing and would overtake all of the other media including daily newspapers. Investors roared in with loads of cash. Big money on Wall St. was looking for a place for high returns, and fodder for the mill on IPOs. The die was cast and Groupon went public in a blitzkrieg not seen since WWII. But then…the roof fell in, and here we are today. What happened?
What happened is that the creative spirit that drove the design and initial rollout of Groupon has no depth or maturity. The CEO Andrew Mason has been shown to have some great ideas, but no real management depth. A real manager should have been brought in – they needed an adult.
Secondly, the infrastructure to account for all the transactions and dollars is woefully inadequate. In these deals the money is collected up front by Groupon and then the remainder after the Groupon split, is paid back to the client company as they are redeemed. So here’s the picture- lot’s of cash rolling in, and slowly rolling back out over time. Sounds like a big bank that needs lots of financial controls – and there weren’t any, or at least, not enough. I’ve dealt with this many times in my career in business and consulting, and this always leads to problems. With all that cash on hand, you just have to feel wealthy and successful, but then the money has to rollout to clients and suppliers and the giddy ‘wealth effect’ sets in. This is where Groupon is today.
And now the ultimate penalty could be coming. The SEC, as toothless as they are, is now starting to investigate Groupon for having to restate their earnings. It doesn’t look good for Groupon, especially in light of the fact that the SEC needs a win to help them in their fight to keep their funding from being cut further by Congress.
If having the SEC on your case is not enough, an influential segment of the blogging community is also coming after Groupon. Rocky Agrawal in his reDesign blog opens with “Groupon was forced to restate fourth quarter earnings, sending its stock down 6% in after-hours trading. This surprised me as much as my $2 investment in the Mega Millions jackpot not paying off.” Ouch!
Rocky picks apart the business model of Groupon and that it is neither a coupon or marketing company, but rather a receivables factoring company. They are a sub=prime lender in effect, living off of one cash stream while they try to meet the spread on the other end. I think he is spot on in his points here. One thing for sure is that they are not the saviors of the marketing field, not newspaper killers. Newspapers have committed suicide over the last several years and needed no one to do the job for them.
So what next. Enjoy your daily deals. Groupon or someone else will continue to provide them. They work for many on both sides of the transaction, but not for all, as many complaints will show. I think the real issue is that Groupon can survive as a business, just not as a publicly traded one. A great idea, but a horrible timing in the rush to the public market. Yeah, they are a sub-prime business and Wall St. yet again was at the ready to make the deals cause they get paid no matter what.
I’d be willing to place a small wager that in this game, like the housing markets they have bets all across the line – win or lose, black or red, and they know how the numbers work. They will be the ultimate winner in this ‘daily deal’ at the expense of shareholders.