Groupon Shares Plummet 17%
Yesterday, Groupon Shares Plummeted 17% after the coupon company delivered an earnings restatement. According to the company, they did not set aside enough money for customer returns. Since it’s gone public, the company has also been forced twice, by the SEC to address accounting concerns and it’s stock is off 52 week high of $31.44.
I don’t make a practice in life of say, “I told you so” but this time I believe it’s appropriate. While I have not been publicly telling the world my thoughts on Groupon, I certainly have witnesses to how I feel about this company.
While the business is generating massive revenue, I hate the business model. I absolutely hate this business model. First of all, they got their start by offering great deals to the consumer at the expense of the business. When you create a business model where it’s a win-win-lose for the three participants and the “product” is the loser, you are eventually going to have problems.
Loser Business Model
Why is the business or “product” the loser? Back when they started, the business owners they worked with had to offer a impressive deal (50-70% off) so they would get customers like you and me to buy the Groupon. Sounds great right? For us and Groupon, the deals are magical. For the business owner, the deals are pathetic. Here’s why: First, the business owner gets coupon customers. This type of customer is the wrong customer for business owners. If the business creates a coupon based business, no one will ever pay full price for anything. Think of your favorite restaurants or think of the best restaurants in town. When’s the last time these restaurants gave out coupons? Secondly, Groupon not only had the business give to 50-70% off, Groupon took half of the Groupon dollars generated. So if Groupon offered a 50% off $30 worth of merchandise at a store, the Groupon was priced at $15. Groupon took $7.50 so the business owner generated $7.50 for every $30 worth of merchandise. Please tell me businesses you know who can survive on taking in $7.50 for every $30 out the door? Third, Groupon probably doesn’t get many repeat customers. How can they? No business can survive consistently losing that kind of money. Don’t believe me? Comb the internet. There are lots of stories about business owners who sold thousands of dollars worth of Groupons in 24 hours only to realize how much money they were about to lose. Fourth, if you bought a Groupon, and didn’t use it, Groupon kept the money generated further adding to their “profits.” Lastly or fifth (how many reasons do we need?!), Groupon did all this a midst the worlds 2nd worst economic downturn of the last 100 years. Taking advantage of desperate business owners is not likely to happen very much longer as we come out of this bad economy. The result is, Groupon will have to give average deals which will keep you and me from buying as many and businesses, enjoying a better economic environment will not use Groupon as much. In other words, unless you need a massage or lasik surgery, Groupon is in trouble.
Frankly, I don’t know what the splits are between the business owners and Groupon these days. I’ve completely sworn off the company. I don’t care what the deal is, I’m not using Groupon. My guess is they have all sorts of games they play. Some customers probably get better deals than others. The more desparate the business owner for traffic, the more Groupon probably takes. I’d love to know how many Groupon customers repeat and also how many Groupon customers over the years have gone out of business. It’s probably allot.
I’m sure there are a lot of good people at Groupon. But it’s a bad business model when Groupon, as a company makes money by taking advantage of the customer. This is an “I told you so” moment for me because I’ve been, for a long time, talking about how they take advantage of their customer. I also think it’s a bad stock to own. Stay away and invest in a company where everyone wins. There are lots of companies like that.