Whither Groupon?

By Felix Salmon
September 1, 2011

Our fabulous social media guru, Anthony DeRosa, doesn’t use Groupon, and neither do I, and neither do any of the people in our social circles, that we know of. Now we’re guys, while Groupon skews female. And most likely we do know people who use Groupon; we just don’t know who they are. But the fact is that at heart it’s pretty uncool. That’s fine — many hugely successful companies are uncool and based on saving people money, up to and including Walmart. But here’s the problem: Groupon can’t afford to be uncool just yet, because it needs to do one last big capital-raising round at a high valuation in order to get the cash it’s going to burn through in the coming year or two.

Henry Blodget has some smart analysis today, concluding that “if Groupon raises a boatload of money in an IPO, the company will be able to keep spending aggressively on marketing and not have to worry about running out of money or dealing with slower growth for a while.” So it’s important that Groupon is able to tell its high-growth, high-intrinsic-profitability story at least through its IPO.

But Groupon’s web traffic looks like it might be falling, and Connie Loizos has been talking to analysts, including PrivCo’s Sam Hamadeh, who increasingly, don’t buy it:

Groupon’s model simply doesn’t make sense, say the number crunchers. While the company’s early success was premised on customers spending an average of $15 per month — and being affordable to acquire — these days customers cost Groupon in the double-digit dollars to acquire, says Hamadeh, and they’re spending closer to $3 a month, with “every indication” that even that figure is declining, says Hamadeh.

The monthly spend per customer is a key number to look at. There doesn’t seem to be any doubt that it’s going down; the big question is whether it’s going to level off with Groupon becoming a big and sustainably profitable business, or whether it’s just going to approach zero.

Or, to put it another way, can Groupon make the transition from being a fun fad to being a basic part of the way people spend money on a monthly basis? I think it can. But in order to do that, it’s going to have to concentrate increasingly on targeting and on the quality of the merchants it chooses to feature.

14 comments

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I think your first paragraph is way off base. I believe Groupon is going to crash and burn, but that is not because it isn’t “cool”. As a mid-20s college educated person in DC, I can honestly say everyone in my age range uses Groupon, Living Social, Gilt City, etc (same goes in NYC). There is little shame in it, and no one thinks using a Groupon is “uncool”. Maybe your crowd, which is older and skews more artsy, may not be into it, but when it comes to young people Groupon is popular.

That being said, its offerings have gone downhill pretty quickly and the competition is fierce. It is already losing the quality battle, offering lots of picture frames and crappy asian food. It will be tough to reorient themselves at this point, with so many competitors breathing down their neck.

Posted by Suncoke | Report as abusive

Checked it out recently and joined but I couldn’t ever find anything that I needed.

Posted by simply_put | Report as abusive

I have to agree with Suncoke here. Felix doesn’t get it, and never has about Groupon. So I find it hilarious that he devotes so much attention to it. It’s like a gay man trying to figure out why straight guys are attracted to Megan Fox.

Go back six months, Felix, to the discussions on this blog about Groupon. I said then that the model is inherently unstable. That everyone eventually gets stuck with a Groupon or two, and that sours them on paying upfront for something that may never happen.

That means you burn through your customer base over time. That and the complete randomness of the coupon offers are such a turn off now–liposuction one day, cooking school the next. Whatever. It’s as if the Girl Scout’s did so well in your neighborhood that they decided to knock on your door every night: want some porn? how about a pepperoni pizza?

I said it then and I’ll say it again: they shoulda taken Google’s offer. Colossal Hubris.

Posted by LadyGodiva | Report as abusive

I’m not sure I would say it is uncool, though most people I know hadn’t even heard of it until I sent them links asking if they wanted to do something.

When I first joined I used to buy something every few days/once a week and generally for a group of us. In the last 3/4 months though the offers have become horrendous.

The locations are quite often badly wrong; London deals have quite often been situated in Essex/Surrey/Kent, and the deals in them areas are actually in London. Then for Cardiff the offers are for places 2/3 hours away ranging from west Wales all the way up to the valleys.

Then as you mentioned it has become far more feminised. When I first joined there were plenty of restaurant deals, comedy nights, photography courses, sailing etc… Nowdays the majority seem to be stylists, fake tans and hair removal.

So rarely was there anything worth actually buying that it isn’t worth visiting most days anymore, and after the way they spammed my email there is no way I am relying on that instead.

Posted by ABT | Report as abusive

Uh, in the under-35 San Francisco geek crowd, everybody uses Groupon; I don’t know that it’s seen as “cool”, but it’s certainly not “uncool” like Wal-Mart.

But I think it’s also conventional wisdom at this point that Groupon is going to crash because its business model is not defensible, and that the businesses that are placing coupons are probably mostly losing money and not getting enough return to make up for it.

Posted by Auros | Report as abusive

The food-related Groupons including cafes and bars are very popular…and remember that national Barnes and Noble Groupon, or the Domino’s one?

The problem it seems, that with time, the offers get progressively dull — near-daily facial, pedicure and massage offers.

Posted by GRRR | Report as abusive

Wither, not whither.

For all its customer acquisition and marketing costs, Groupon doesn’t own its subscribers in any real sense, hence the buzzsaw at the SEC over the phony-baloney profit-before-expenses accounting. They have an email address and no loyalty. Kind of like a john thinking the hooker is really into him (or do I mean the other way around?).

Posted by PR1 | Report as abusive

“Maybe your crowd, which is older and skews more artsy, may not be into it, but when it comes to young people Groupon is popular.”

That’s right! Take that, Felix, you geezer. When Felix was first out on his own, he had to use newfangled “ATM machines” to get cash and pay for stuff at the non-big-box stores. You had to fend off dinosaurs with a burning stick to get into these stores. But electricity had already come to the British Isles by then, so at least they had refrigeration.

Posted by SelenesMom | Report as abusive

“Maybe your crowd, which is older and skews more artsy, may not be into it, but when it comes to young people Groupon is popular.”

That’s right! Take that, Felix, you geezer. When Felix was first out on his own, he had to use newfangled “ATM machines” to get cash and pay for stuff at the non-big-box stores. You had to fend off dinosaurs with a burning stick to get into these stores. But electricity had already come to the British Isles by then, so at least they had refrigeration.

Posted by SelenesMom | Report as abusive

I think we are all missing the BIG QUESTION. Is Groupon good for the businesses?
A hot dog shop that sells $10 worth of product for $5 only to give Groupon $2 of that is not going to see incredible value. For small businesses this is not a sustainable long term model. Customers will buy deals that are clearly “Loss Leaders” if they present a good value. A mobile coupon site like Mobsav is a made to support the business and drive promotions and coupons they build. Give me a free drink with my dog and fries and Ill be back twice a week.

Posted by justacouponguy | Report as abusive

“The problem it seems, that with time, the offers get progressively dull — near-daily facial, pedicure and massage offers.”

Would these not be the businesses that can AFFORD to sell their services at a 75% discount? For anybody else, it has to be treated (and judged) as a loss-leader.

The BIG QUESTION is whether Groupon does enough to justify the fees they charge. Sure, they splash a deal out there to a million people in a 30-mile radius of your business. But are there not cheaper forms of advertising? Buy the front page of the community newspaper and offer customers 50% off on Saturday. You’ll get traffic out of that, and the ad likely won’t cost you ANOTHER 20% of your day’s sales.

If Groupon wants to charge higher-than-industry fees for ad placement, then they need to justify that with better targeting of those ads. From what I’ve seen, they make no effort to target.

Posted by TFF | Report as abusive

Can you please link to the full PrivCo analysis on Groupon to put it into context (as you did with BusinessInsider)? Thanks Felix (fyi it’s below too)
http://www.privco.com/press/groupon-runn ing-low-on-cash-and-ipo-likely-to-be-wit hdrawn-nearing-insolvency-august-20-2011

Important to read the full analysis and see how the conclusions are drawn, in my humble opinion.

Posted by WhartonMBAAlum | Report as abusive

Thanks for the link! Added

Posted by FelixSalmon | Report as abusive

Groupon is going to crash and burn because it has neither a sustainable business model nor any real assets. It owns no pyhsical or intellectual property, and it’s business model is easily replicable.

All it “owns” is an idea (i.e. online coupons), and a not particularly revolutionary one at that.

Ten years from now people will be listing Groupon’s decision to turn down Google’s buyout offer as one of the most boneheaded financial decisions ever.

Posted by mfw13 | Report as abusive