The Rise and Fall of Groupon


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Update: I have added two slides towards the end discussing the IPO

This is a presentation I made for my students. It covers different aspects of Groupon case, including marketing, finance, accounting, and corporate governance.

Published in: Business, Economy & Finance

The Rise and Fall of Groupon

  1. 1. Rise and Fall of Groupon Ashwin Malshe ESSEC Business School October 16, 2011
  2. 2. Sources of DataO All financial data are obtained from the latest S-1 filing (as of October 16th 2011) by Groupon to the SEC
  3. 3. Market for Deals!
  4. 4. Business ModelSmall Buyers and Sellers GrouponDisorganized Structured
  5. 5. ProcessA local daily deal Buyer pays for Groupon collects is displayed on the deal the payment Groupon Seller is paid Groupon splits The deal is validwithin 60 days in revenue with the if a minimum no. the USA seller of people buy Buyer may Buyer may use return to the the deal in seller withoutprespecified time Groupon
  6. 6. Groupon ProductsO Featured Daily DealsO Deals NearbyO National DealsO Groupon NowO Deal ChannelO Self-Service DealsFor description click on this link
  7. 7. What Groupon Brings to the Table
  8. 8. Guaranty Buyers SellersPurchased Minimum Deals Group Size
  9. 9. Value CreationO By facilitating trade O Bringing together small sellers and individual buyers O Giving small businesses visibility to large audiences locally O Exposing individual consumers to a wide selection of daily deals to choose from
  10. 10. Benefits to SellersO Wide exposureO Higher trial rates as compared to traditional advertisingO Opportunity to induce repeat businessO A minimum number of customers are guaranteed when a deal goes on live
  11. 11. Benefits to BuyersO A wide selection of dealsO Large discountsO Opportunity to try out services/products that are usually expensiveO Groupon guarantees the validity of the deal
  12. 12. How Has it Worked Out for Groupon?
  13. 13. Revenues (Mil. $)450400350300250200150100 50 0
  14. 14. Revenue Growth Q-o-Q250%200%150%100%50% 0%
  15. 15. Operating Income (Mil. $) 50 0 -50-100-150-200-250-300-350-400
  16. 16. North American Deals Services 11% Activities 23% Retail 17% Events 6% Health & Beauty Food & 17% Drinks 26%
  17. 17. International Deals Services Activities 12% 11% Retail 4% Events 16%Health & Beauty 34% Food & Drinks 23%
  18. 18. Marketing 101SWOT and BCG Matrix
  19. 19. Strengths and WeaknessesO Strengths O Brand equity among the consumers as well as merchants O A large established customer as well as merchant base O Ability to innovate to offer different dealsO Weaknesses O Highly unprofitable O Running out of cash O Corporate governance is an issue
  20. 20. Opportunities and ThreatsO Opportunities O Entering international markets via partnerships or M&As O Offering a wider selection of deals O Offering location-based deals O Increasing the merchant baseO Threats O Fierce competition in international markets O May not find investors to fund operations O Employee lawsuits
  21. 21. BCG Matrix Relative Market Share High LowMarket Growth Rate High Groupon ? Cash Low Dog Cow
  22. 22. Groupon- The StarO Groupon commands a large market share in daily deals marketO It is also in a market that is growing leaps and boundsO However, can we label Groupon as a Star?O The next few slides explain why we can’t
  23. 23. Groupon Valuation Bubble 2.0
  24. 24. Offer Too Good To Refuse?O The last year in November, Google offered to buy Groupon for $6 billionO Groupon refused this massive offer O they believed their potential was much more O here is more information about itO This was the first time Groupon’s valuation came into focus
  25. 25. IPO FrenzyO Just before Groupon filed for S-1 with the SEC, the rumors put a value of $25 billion to GrouponO On June 2, 2011 Groupon files for an IPO at a valuation of $30 billionO Experts keep on questioning Groupon’s high valuation
  26. 26. Attacks on ValuationO Rocky Agrawal wrote a series of articles on his own blog and other tech blogs such as TechCrunch analyzing GrouponO Academicians likewise pointed out the issues with accounting at GrouponO Salespeople lawsuit signals cash problems at GrouponO Groupon shows increasing cash problems
  27. 27. Criticisms andControversies
  28. 28. Business DevelopmentO For Groupon “marketing expenses” mean money spent to acquire subscribersO Selling, general, and administrative expenses (SG&A) mostly include the money spent on acquiring merchantsO Combined marketing and SG&A have been much larger than the revenue so far
  29. 29. Buying Revenue350300250200 Revenue150 Marketing SG&A100 50 0 2008 2009 2010
  30. 30. Small Business SufferO Daily deals actually lead to losses to small businesses O can’t handle the large influx of customers with large discounts O most customers don’t return O Groupon takes a large chunk (up to 50%) of the already discounted revenue O Groupon pays only over sixty days, thus creating liquidity crunch for merchants
  31. 31. Price Promotion vs. BrandingO Although price promotions may increase revenues in the short term, they dilute brand equityO Regular customers may start using Groupon thus reducing the revenue premium that the merchant obtains from such loyal customersRead more here
  32. 32. Quality of SubscribersO Groupon subscriber database has poor quality O only about 20% subscribers have ever purchased a Groupon O half of these purchasers never bought another Groupon O this translates into large acquisition costs per buying subscriber for Groupon compared to the small revenue these customers generate
  33. 33. Competitive AdvantageO Many critics claim that Groupon’s business is easily replicable O currently, however, only LivingSocial has emerged as a major competitor O Facebook and many others dropped out O this perhaps indicates that many don’t think that the business is profitable O in China, Groupon is struggling due to local competition O Google and Amazon have entered this space
  34. 34. Corporate GovernanceO Groupon used a non-GAAP accounting metric ACSOI to inflate its earningsO Groupon also reported gross revenue instead of net revenue thereby inflating the salesO The top management is not respectful of the SEC quiet period, see here and hereO SEC has forced them to amend the S-1 filing 3 times so far, delaying their IPO substantiallyO Early investors cashed out without leaving adequate cash for operations
  35. 35. Groupon Today Humbled
  36. 36. Pre IPO ValuationO It is still very difficult to value Groupon, but still the current valuation is lower than expectedO Wall Street Journal reports average valuation by analysts at around $10 billionO Steven Davidoff gives a nice summary of Groupon saga showing how the valuations dropped so much
  37. 37. IPOO Groupon first set the IPO price at $18 per share and then subsequently increased it to $20 per shareO The IPO had a nice 30% pop at the end of the opening day. The stock closed at $26O The price has been volatile ever since. At one point the shares traded at as low as $15
  38. 38. Stock Performance
  39. 39. The End