Why Groupon Is Poised For Collapse

This is one of the best and most damning analyses of Groupon I've seen yet, which is kinda surprising coming from TC but I guess it is a guest post.<p>The biggest parts of this are the account risk, the needing to grow revenue to pay existing liabilities (which is and should be a <i>huge</i> warning flag for any enterprise) and just how much room there is for someone to do this better.<p>My only fear is that a collapse of Groupon--which I actually see as a non unrealistic possibility--will taint other Internet/tech IPOs and, even worse, prompt the Federal government into more kneejerk regulation even stupider and more onerous than Sarbanes-Oxley.

It's almost absurd how closely Groupon is following the classic 'tech bubble' road to disaster.<p>1. Hype (check)<p>2. IPO talk (check)<p>3. Turn down acquisition at incredibly high P/E (check)<p>4. Superbowl Advert (check)<p>5. IPO just in time to avoid running out of money (on the way)<p>6. Market goes rational (inevitable, forces pushing it irrational can't do so forever), valuation plumets<p>7. Unable to raise money by selling stock, and a business model of 'sell stock to pay bills while making no profit', bankruptcy is announced<p>8. The talking heads repeat the mantra "nobody saw it coming" for the next 6 months.

I think this is the most interesting paragraph in the submitted article: "As critical as I am of Groupon, the slam dunk case is to sign up with Groupon if you’re going bankrupt. I strongly encourage every business that is about to go under to call Groupon. (Don’t tell them Rocky sent you.) It makes total financial sense--as a Hail Mary play. If you’re lucky, the upfront cash will be enough to help you stay afloat. If not, well, you were already going out of business. It may be your best option. In the short term, you’re actually helping Groupon because they’re being valued on revenue and no one is taking into account risk."<p>If word of this gets around, the incentives set up by the typical Groupon agreement with a merchant will be responded to by merchants for whom those incentives are the most perverse. Groupon may discover that it is inexorably moving into the business of last-ditch financing for failing businesses.

Here's the money quote:<p>&#62; If Groupon matches these payment terms, they’ll need cash faster and need to grow faster. (Google Offers accelerates the rate at which Groupon’s scheme has to draw in new suckers.) If Groupon doesn’t match, it gives Google a key differentiator to win deals. If those businesses go with Google’s more generous terms, that too will starve Groupon of the cash it needs to pay earlier merchants.<p>I found myself laughing villainously as I read that. Google offers to by Groupon. Groupon demurs. Google destroys Groupon by forcing the Ponzi scheme into overdrive. Oh, it feels so good! Google, I forgive you everything!<p>By the way, didn't we all flip the scam bit on Groupon months ago when this article showed up here on Hacker News:<p>Groupon in Retrospect (posiescafe.com) <a href="http://news.ycombinator.com/item?id=1698833" rel="nofollow">http://news.ycombinator.com/item?id=1698833</a>

One thing that a lot of analyses fail to account for are the number of Groupons that go unused. I would love to see some figures on how many Groupons are never redeemed (for whatever reason).<p>I had some friends visiting SF, and they had bought Groupons from various outfits for the trip. But they ended up not using a few of them, and gave them to me. Chances are I'll end up using them, but I wonder: how many such Groupons expire unused?

All these attacks rest on the assumption that Groupon aren't going to change their business model at all. It's seems a near certainty that they're going to move into the dynamic yield management business which is likely to be highly profitable.<p>For a lot of businesses their excess capacity is a lost cost anyway. They have to pay their staff regardless or not they do work. A customer might cost $X to service, but that completely ignores the fact that the company would have to pay $X even if that customer wasn't there.<p>Sure Groupon might not be matching that spare inventory to it's deals with great precision at the moment, but it's only going to be a matter of time.<p>Look for example at GrouponLive, their partnership with Livenation who are the largest entertainment ticketing company in the world. Does anyone seriously think Livenation are having wool pulled over their eyes ? - they know that yield management is important and Groupon are probably going to become the leaders in that space.

I don't know if it convinces me that Groupon is "poised for collapse", but it certainly exposes several risks in the business model (for Groupon, the merchant, and the consumer), as well as how competitors can take advantage of those.

Very interested to see how this plays out, because there's a faltering consensus around Groupon, and it's getting closer to their IPO.<p>See: <a href="http://www.guardian.co.uk/business/2011/jun/10/only-fool-invest-groupon-analyst" rel="nofollow">http://www.guardian.co.uk/business/2011/jun/10/only-fool-inv...</a><p>It reminds me a little of when there were a few dissenting voices claiming the US housing market was due a correction and yet prices kept going up.

Not sure if I entirely agree with this analysis. There's an element of inventory management which Groupon allows for, which has previously been unheard of for most small businesses. Maybe if you realize you are definitely getting x number of customers or x number of dollars), you can better manage your cash flow. Take the photo of the receipt provided in the article. A coke costs $2.00, and presumably it's a fountain drink, cause it mentions the refill is free. We've all been exposed to this, and let's face it, it's a blatant ripoff, but on some level its understandable - it's a way for the restaurant to make some additional cash, perhaps because the traffic is sporadic or perhaps to save up for a rainy day. But does coke really need to cost $2.00, if you have a better expectation of how much product you are definitely going to sell?<p>My guess is, probably not.

This article has some serious problems. There's a <i>huge</i> anti-Groupon bias (apparently shared with most of HN). This is fine, it's ok not to like Groupon, but some of the points this article makes are absolutely terrible.<p>For example, take this: "I had been struggling to understand why some businesses ran repeat Groupons or cycled among the various daily deal vendors, given that the economics clearly suck if you can’t drive repeat traffic. Some let the same customer buy 3 or more of the same deal. That’s a clear no-no for a loss-leader designed to acquire new customers.<p>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."<p>Let's look at what's happening here. There's actual, real-world evidence that the author may be wrong - small businesses are <i>returning</i> to Groupon. This doesn't make sense if Groupon is really such a terrible deal. So the author tries to explain this evidence.<p>What's the best way to do this? Go talk to the business owners who return to Groupon, and ask them why. That's what most people would do when trying to understand their behavior.<p>But instead, what does the author present? He talks to <i>one of Groupon's competitors</i>! The competitor, non-surprisingly, tries to dismiss this evidence. And he specifically tries to imply that the businesses doing this are not acting properly, comparing them to people who habitually overspend.<p>I'm not saying the author is wrong - but this is <i>not</i> the right way to make this point, and is simply a way to take a dig at Groupon, and dismiss the people who might prove that Groupon is worthwhile.<p>Or take this: "I’ve also heard from merchants who say Groupon has changed their deals at the last minute to make them more profitable for Groupon."<p>This is a cheap-shot, thrown in at the end of an (otherwise legitimate) paragraph. Either there are real cases or there aren't, but just saying "I've heard some people complaining" is just terrible reporting. If you think Groupon's done something wrong here, talk about it, don't just mention it offhand to tarnish their reputation.<p>Conclusion: Like I said, I don't know whether Groupon is good or bad for businesses. I don't know if many people truly know, actually. But articles like this, which go out of their way to bash Groupon, are not the right way forward.

With mounting evidence of Groupon's weak financials and long term business sustainability, we should all advocate against investing in Groupon. The better our market segment wisdom, the better for all of us. If we let crap float to the top, then top performing companies will always have their market stigma to overcome. See biotech 2000-2005. Besides Mason has already told us that Groupon is a joke when he told Charlie Rose that Groupon is to tech what Nsync was to pop. High-flying, fast - crashing products poised for brief nostalgia, and obscurity. <a href="http://techcrunch.com/2010/12/10/groupon-mason-charlie-rose/" rel="nofollow">http://techcrunch.com/2010/12/10/groupon-mason-charlie-rose/</a> O<p>ps. my favorite quote of this emerging IPO debacle has been thus far..<p>"Groupon's IPO prospectus should raise several red flags in a sensible investor's mind. Factor in Lefkofsky's checkered past, and this IPO is waving more red flags than a May Day parade."<p>Now that's a great visual.<p><a href="http://tech.fortune.cnn.com/2011/06/10/groupon-eric-lefkofsky/" rel="nofollow">http://tech.fortune.cnn.com/2011/06/10/groupon-eric-lefkofsk...</a>

Having dealt with the local advertising model myself (restaurant virtual tours) I can testify how god damn hard it is to get money out of small business owners so the success of Groupon is a surprise to me.<p>From a consumer perspective I unsubscribed a few months ago as I really didnt want to hear about a Botox or Massage deal each and every morning. It was good for xmas presents I will admit but in my local area the variety of the offers was somewhat limited (and Its by no means a small town), I shouldnt imagine I will check the site until around mid December again.

Insightful article, but notice that the business model being criticized is in many ways well known (and successful): namely, that of book publishers.<p>When an author deals with a book publisher, he/she gives up some of their future revenues in exchange for cash in advance and publicity.<p>Likewise, when a local business deals with Groupon, they are giving up part of their revenue in exchange for upfront cash and publicity.<p>The main difference might be in the actual numbers (cash upfront, revenue share %, etc).<p>The risks pointed out remain, and are very real though.

It seems his main point is this:<p>Google Offers pays merchants faster (80% of the money goes to the merchant right away, vs 33% with Groupon). The OP expects this will force Groupon to make the same deal with merchants, which will change their business model, which will put them out of business. That or Groupon won't change its business model, and Google Offers will run them out of business by virtue of this better deal.<p>IMHO, going from that small point to "Groupon is poised for collapse" is just a <i>bit</i> hyperbolic.

The part about how groupon will refund the price of the groupon if the business goes of out of business is interesting because Living Social specifically does not do that.

HN: just out of curiosity is there any examples of companies that have tanked based on speculation of failure regardless of track records?<p>Ie: Speculation leads to lower investor confidence leading to pulling out of investments and so on so forth

I got stung the other day by a Groupon clone here in Australia. My wife asked me to buy the daily deal, which I did, without checking it properly. The business in question doesn't exist.<p>Looks like the daily deal company did absolutely no checking that it was legit or the business did as this article suggests and knew they were going bankrupt anyway.<p>I started asking around and found a few similar stories from friends and colleagues. Hoping to see all of this hit the news soon.

I think that Groupon is likely to adjust their vig if they start to see their momentum decline. Instead of 50%, they take 40% or 30% …. at which point they can circle-back and offer their services to all of the business that may have declined their services due to the steep percentage of the offer they demanded. Sure, this means less revenue coming out of each deal, but it seems to give them a quick way adapt.

Given Rocky's claim that investing a large amount up front for a traditional advert placement is equivalent to receiving a short-term loan from Groupon for running a deal on the site, then Groupon is merely like all other direct marketing/direct response operations. So you can probably predict how successful Groupon could be by comparing it to something like Valpak.<p>Despite the fact that Groupon shifts the marketing costs from the merchant to the customer, it probably won't affect couponing behavior in the long run. To me this is like chess where the players have switched sides after a match. It's the same game, but a new player gets the first-move advantage this time around.<p>Groupon Now! seems slightly more interesting and possibly has more potential.<p>My wild, unsubstantiated prediction is that they'll IPO, fizzle out and be bought out by some media/new media conglomerate by 2014.

If the numbers in the article are correct, an IPO might be the beginning of the end. As a public company they will have to submit to outside audits. Based on their business model and cash situation they might not be of 'Going Concern' much longer.

I have to say that there was interesting thinking going into the Groupon model.It seems that the business may use it as a lost leader to show and showcase other products and services. For the business warm bodies mean opportunity.Each system has flaws this one has been very well pointed out in the article and the risks seem worth it for many companies.How to eliminate abuse. That is the question

The bottom line is I have yet to hear Groupon share any metrics with the public on how much their product is, you know, actually successful. Regardless of the reason, be it that they can't measure it, or, more sinisterly, don't want to share it, you have to assume their business sucks or elthey're incompetent or else they'd be trumpeting the upside for businesses everywhere.

Yep.<p>When Google offered $6bn for Groupon I was... surprised. What surprised me more at that time was that Groupon declined the - already exceedingly overpriced - offer.<p>Then again, LinkedIn was at one point worth $12bn and still is an insane $7bn (P/E of 1,139.40!!). Facebook is said to be worth $100bn.<p>I think we collectively lost our value judgment when it comes to Internet companies.

Anyone else getting tired of these? Why are these companies not being held responsible for their own negligence? If you do not do the math and cannot afford to lose the money then how dare you agree to the terms.<p>This is not on Groupon or any other Daily Deal service. It solely relies on the Small Business owner that does not do his due diligence.<p>This model is no different than bulk purchasing from a supplier. However, the supplier still makes money because they have figured out how much they can give to still turn a profit.<p>Small business owners need to either look at how much they stand to lose or take this as a advertising expense that they can afford.<p>The whole get money now and cry about it when people actually expect to collect what they were promised is ridiculous, where do they think the money comes from?<p>If you want to say that this model is only sustainable as long as small business owners are incompetent then yes, lets say that. However, to say that this business model is bad based on Groupons lies is just ridiculous. No one is holding a gun to your head and saying, give us coupons for all your stuff.

Is it even established that companies lose money on Groupon customers? I usually spend over the face value on a Groupon, so the restaurant gets (bill - (value of groupon/2)). If the profit on a dinner for two is more than half the value of the groupon, which seems plausible, they're not losing money.<p>Then there are the people who never redeem their groupons. I'm about to move to another and leave two groupons that I never got around to using unredeemed.

take another look at that recipt.<p>1. veggie scramble: at costco, you can get a 50 pack of eggs for less than ten bucks. round up and call it ten cents worth of stuff. Veggies aren't free, but they are pretty cheap in bulk.<p>2. bagel with cream cheese: at costco, I think it's two dozen bagels for five bucks. round up and call it a quarter. Cream cheese in the giant tubs is similarly cheap, call it another quarter.<p>3. o.j. I don't know the bulk price for O.J, but I know I can get a flat of cans of o.j. for fifty cents per.<p>4. Coke. figure a quarter. (I can get a can of coke in a flat for about that, I figure there are some savings using a fountan. call it a quarter for two glasses of diet coke syrup.)<p>so we're at a buck thirty five in materials at costco prices. Of course, you have to pay the rent, and you have to pay some kid to assemble it, you have to pay for insurance, etc... but as a business owner, I'm not going to go with groupon unless I'm in a situation where I've overinvested in fixed costs.<p>I mean, renting buildings isn't like spinning up a cloud server; Usually, you've gotta sign a multi-year lease, and usually you've gotta pay for expensive cooking equipment; equipment that costs you the same regardless of usage.<p>Employees are a little bit more flexible, but there is a training period. New people provide negative productivity for a time, and if you don't give your old people enough hours, or if you jerk them around on what hours they work too much, your people who are good enough to get work elsewhere will do so.<p>Further, I think most valuations of groupon are assuming that groupon will provide some 'this deal only good during the less busy times' solutions. If I'm paying all my fixed costs and the building and employees are idle, the marginal cost of another customer is not very much more than the cost of the food, and in this case, the cost of the food isn't much at all. Heck, I know times in my business when I overbought capacity when it would have made sense to take a 75% price cut to move product and salvage something from the situation, rather than just paying for capacity I wasn't using.<p>Now, personally, I still think the groupon is massively over valued. I'm just saying, it's not any more massively over valued than linkedin or facebook. All of these companies are being evaluated in unrealistically favorable light; I think if you shine that same light on groupon, it looks pretty goddamn good.<p>What I find scary about the groupon hate is that a lot of it seems to be because the founders cashed out early; this means that cashing out early will be more difficult for founders the next time around.

Almost starting to feel bad for Groupon... then I read their S-1.

What are better alternatives to Groupon? shopkick, perhaps?

On the plus side, Groupon has high name recognition, an international rolodex of contacts with small businesses clients (whether or not deals were made), an international rolodex of customer names with contact info and preferences, huge number of international offices and sales staff, a large profit margin from the business clients, interest-free loans from customers in exchange for a pdf coupon, the clients handles delivery/fulfillment to the customer months to a year later (assuming the customer remembers the coupon exists). And more. They've got a TON of room to grow if they can plug any revenue leaks. Sure, a lot of places can handle local deals. What if Groupon starts synchronizing deals? Every hair salon 10km apart in every city and country gives a touchup for $20? All dance schools, first salsa lesson free? It could drive trends. A mobile app that tracks all customer clicks? Tied to a recommendation service that tells the customer to wait for an upcoming deal within a week, or tells the Groupon office the kind of deals they should pursue that month? A service to tell retail entrepreneurs the sales demographics per area and business? Sell retailer data to financial and IT services to help them manage and modernize their businesses? I see a lot of possibilities for a big network.

Oh look, another 'Groupon isn't magic' post.<p>Yes, you have to actually work to maintain those new customers, just like always. In fact, you'll probably have to work a little harder than normal, since their first experience at your business is at a huge discount.<p>But treat them right and let them know what they're in for and it's no different than other other coupon scheme designed to lure customers in. Oh, except for being a huge buzzword right now and attracting more customers than would normally be possible.<p>Yes, you heard that right, I'm saying that Groupon can be a really good thing for your business if you jump on now. But ONLY if you have properly prepared for it, and negotiated with Groupon correctly.<p>Don't let them badger you into a bad deal for your business. You would be better with no deal than a bad deal.