Groupon: To Deal or Not to Deal?

I struggle to see a viable business model behind this much publicized company that is about to jump on the current tech IPO bandwagon.

I can see some short-term value for membership based business’s like Costco or Zip Car using a 30%-50% discount on the first year membership fee to attract new customers. Businesses like these will make up more than the discount value in subsequent sales, as someone buying the coupon is obviously interested in what they offer. I will also say that there may be some intermittent value for local businesses that are more indulgences than necessities, like a river cruise with dinner that people would not consider spending on without the 50%-70% discount.

BUT for pretty much every other type of local business like restaurants, clothing retailers, supermarkets, etc. I see absolutely no value in offering a 50%+ discount to attract new customers; and more so doing this repeatedly.

Additionally, I have read upwards of 70% of businesses (I know at least two first hand) that have used Groupon, swear they will never use it again. Groupon denies this and does not share any of its figures. Whether Groupon is lying or not (we will not know until after the IPO) there still remain many fundamental flaws with their model:

– There are no barriers to entry into the daily deal market; and the number of competitors is growing with Facebook and Google the latest entrants. Basically, all you need is a sales force

– There is also nothing unique or special about Groupon or its relationships that creates or incentivizes loyalty from its customers

– Groupon terms are also supposedly far from endearing: “Each time Groupon sells a voucher to users, it collects cash up-front. Merchants’ share of the proceeds, which averages about 60% world-wide, is remitted later—sometimes much later. In North America, merchants get paid in installments over 60 days. Internationally, it typically takes 70 days.” Seems Living Social pays within 15 days and Google says they will pay within 4 days. (WSJ: http://on.wsj.com/oO2XdQ).

Beyond these issues I also don’t see why any business would discount their product or service repeatedly because it very quickly devalues their brand and will erode forever any premium people were willing to pay for it.

Finally, I also have serious ethical issues with the company. Aside from how quickly they threw their agency under the bus after the Super Bowl ad debacle, it turns out there has been a lot of insider selling going on. The owners have taken out $870 million so far from the $1 billion they raised. Odd given that the company lost $150 million last quarter and needs lots of cash to compete and stay ahead of its rapidly growing list of competitors. (Read the article @Business Insider)

My take: Groupon is smoke, mirrors and hype. This is why they had no choice but to turn down Google’s $6 billion offer, and also the reason their insiders are cashing out now, ahead of the public scrutiny an IPO will bring.