Groupon or Group-off?

6 reasons to be cautious of Groupon’s biggest deal yet

Who doesn’t love a deal? Even if you’ve never clipped a coupon in your life, you may be intrigued by the daily deal offerings of online coupon site, Groupon. Seventy percent off an oxygen facial at your neighbourhood spa? Done! Admit it, you’re probably working your way through ten pounds of chicken wings right now because your husband found a two-for-one deal on Groupon.

Groupon has made clipping coupons modern and downright stylish, with discounts at retailers like the Gap (NYSE: GPS), to half-price scuba diving lessons, to free plates of appetizers at your local bistro.

The way Groupon works is that they approach businesses to secure exclusive discounts and promotional offerings, which Groupon then advertises on its site and blasts out to its subscribers. The offers are contingent on a certain number of people (in other words, a group!) buying up each coupon offer within a limited time. You can access deals in your hometown, or look for offers in other cities and destinations when you travel.

People love the Groupon. In less than two years, the site has grown from 152,203 subscribers, to 83.1 million. The increase in subscribers has grown eight-fold in the past quarter alone.

Reviews from retailers on the other hand, have been mixed. Many are excited by the wide promotion and potential for a flood of new customers, while others find it too expensive to provide a service or product at a 50-70 percent discount and then split what little revenue remains with Groupon.

The online dream

Revenues are anything but little at Groupon. In one quarter, revenue increased by 1475 percent. Compare that with Google’s revenue growth of 352 percent and 700 percent revenue growth at Amazon and eBay. It’s no wonder that Wall Street is having a love affair with anything online these days.

It’s every website’s dream to attract the attention of big-time investors and Groupon is no exception. The idea of ‘going public’, also known as an IPO (initial public offering), can mean multi-millions of new dollars flowing into the company when the general public starts buying shares.

As such, Groupon is hoping to raise $750 million in its upcoming IPO. But just because you buy Groupon’s coupons, would you also want to buy a piece of the company? Is a website dedicated to offering good deals a good deal in and of itself?

A closer look at the numbers

The first warning sign for potential investors is that despite all that revenue, Groupon is failing to turn a profit. Currently they are losing $117 million per quarter. Put another way, it’s costing Groupon $1.43 to make $1.00.

Several analysts, including The New York Times and online coupon aggregator site Yipit, have dug a little deeper on the numbers at Groupon. Here’s a summary of the findings:

1. Though overall revenue is up and overall subscriptions are up, the revenue per subscriber is decreasing - dropping by nearly 65 percent in less than two years. Translation: more audience reach doesn’t necessarily mean more bucks.
2. The ratio of customers to subscribers is shrinking. Two years ago, 28 percent of Groupon’s subscribers were customers – people who actually buy the Groupon deals. Today, only 19 percent of subscribers are paying customers. Translation: more ‘window-shopping’, but less buying.
3. The revenue each paying customer brings in is roughly half of what it used to be. Over the past two years, revenue per customer has dropped by nearly 47 percent. Translation: when they do buy, customers are spending less.
4. The number of Groupon deals bought by each customer has also decreased, by 34 percent over two years. Translation: customers are less engaged than they were initially.
5. Revenue per Groupon deal is decreasing. Down by 19 percent, the deals themselves are becoming less lucrative for the company. Translation: the company needs to sell more deals to make the same amount of money.
6. What’s increasing at Groupon? Marketing costs. In 2009, the company spent $4.5 million in advertising and emails to subscribers; in 2010, they spent more than $263 million. Translation: it’s been awfully expensive to add all those new subscribers.

WWWB do?

Now that we are fans of LouAnn Lofton’s new book, “Warren Buffett Invests Like a Girl”, we like to ask ourselves, what would Warren Buffett do in this situation? We don’t know if he plans to invest in Groupon or not, but we do know that he has traditionally favoured businesses with high costs of entry.

The theory goes that a business requiring a lot of overhead and start-up capital is more likely to retain its number one spot in the marketplace than one that costs very little to copy.

Groupon is the opposite. No product manufacturing, no warehouses of inventory, just a massive email list and a lot of salespeople. It’s a relatively simple and low-cost business to replicate, and the big guns - Google, Facebook and Amazon – are all over it.

Certainly there will be plenty of buyers and fund companies who will snap up Groupon shares at its IPO. But like any bargain, no matter how good a deal looks, if it’s not something you actually want, then it’s not a great bargain for you.

Now, how are those chicken wings?

 

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