Groupon, grandfather of daily deal websites and portmanteau for "group coupon" is under scrutiny after its second quarter revenue fell short of expectations, exacerbated by the frail European economy which curtailed online coupon sales.
In the biggest decline since November’s IPO, its shares fell 23% to $5.80 on Monday, leaving the company with a market value of $4.88 billion, significantly less than the $6 billion buyout offer from Google before it chose to go public.
“We had some challenges in Europe,” commented Groupon's chief financial officer Jason Child. “Because over half of our business is outside the U.S., the strengthening of the U.S. dollar versus the variety of currencies that we transacted declined since we gave guidance last quarter.”
European shoppers purchased fewer deals of $100 or more in the last quarter requiring the company to search for new market opportunities, CEO Andrew Mason added.
“The business is maturing faster than investors may be hoping for, and growth rates are slowing,” said Edward Woo, an analyst at Ascendiant Capital Markets LLC told Businessweek. “It’s getting tough to grow when you’re already the biggest kid on the block.”
As the first to market with locally based discount deals, Groupon hit the proverbial wall first as rivals LivingSocial and Yelp followed their lead and business model. Mason aspired to their couponing to become the operating system for local commerce. "If we can come up with an ecosystem that local merchants use to run their business and it's connected to consumers, then I think that’s a pretty sizable business.”
Apart from the disappointing revenue forecast, investors are disturbed by Groupon Goods, the way the company records revenue from merchandise sales, counting the total amount paid and not just their share of buyer payments.
Analysts conclude that Groupon's goods business, selling discounted consumer products, and other newer initiatives will likely prove less profitable than its core daily deals. "We'd prefer the goods business to be an incremental growth driver rather than the primary driver, and we believe Groupon has less competitive advantage overall in this segment," wrote J.P. Securities analyst Doug Ammuth.
The New York Times cites CFO Child's defense: “If the company booked only its share of sales, it would give too much information to competitors about its business costs. If just Groupon’s share was counted, he said, revenue growth in the second quarter would have been 30 percent, not 45 percent.”
Adding insult to the injury of increased competition from Amazon and Google, the Wall Street Journal reported that Groupon’s sales force is disaffected, describing a contretemps between a Groupon attorney and Mike Silagadze, CEO of Top Hat Monocle, Inc., about his improper recruiting of Groupon employees. Silagadze replied he was merely taking advantage of widespread employee dissatisfaction.
Groupon’s meteoric rise from launch in 2008 to $500 million in revenue in three years, followed by the current stock slippage and disappointed analysts, is partly reflective of any new business paving the way with disintermediation.
“The collapse of the stock, along with similar performances by both Facebook and the online games company Zynga, has led to questions about whether these new fast-growing consumer Web businesses were overpromoted,” writes the NY Times.
That said, Groupon now has 1,000-plus daily deals in more than 48 countries. Back at headquarters in Palo Alto, California, Groupon is expanding to add hundreds of workers, building a suite of technology products for local merchants that includes Groupon Scheduler, online appointment-booking and Groupon Rewards, a loyalty program.
Two comments on Businessweek encapsulate consumer sentiment: “You can [sell] some of the people Green Stamps some of the time; all of the people Green Stamps some of the time, but you can't sell all of the people Green Stamps* all of the time. *Green Stamp concept comes back every other generation,” wrote "Jack N Fran Farrell."
But, “Groupon is old news. There are too few deals and they are mostly irrelevant. If it wants to recover is needs, more deals with Groupons that are refundable or don't expire. They also need better quality merchants. It seems like many of the merchants they advertise get terrible reviews on yp.com and yelp.com,” observed "Finger Tips."
The jury is still out – but the world is watching as daily dealing traverses the next slippery slope.