7 ms·

Groupon is a huge, fun target but there are compelling fundamentals under all the noise and pre-IPO PR blunders: 1) "66% of Groupon deals are profitable for th

by aresant 15y ago

Groupon is a huge, fun target but there are compelling fundamentals under all the noise and pre-IPO PR blunders: 1) "66% of Groupon deals are profitable for the seller, and 40% of businesses would not use Groupon again, according to a Rice University study." http://www.quora.com/Groupon-IPO-S-1-Filing-June-2011/What-is-Groupons-redemption-rate http://www.quora.com/Groupon-IPO-S-1-Filing-June-2011/What-i... 2) Groupon has a hidden vat of PURE margin - breakage / un-redeemed deals that could be a shocking amount of money once financials are disclosed. 3) They have enormous growth potential in key markets which is why they are spending money like drunken sailors on customer acquisition. They can grow by 10x in the restaurant space alone. http://answers.ask.com/Food_and_Drinks/Restaurants/how_many_restaurants_are_in_america http://answers.ask.com/Food_and_Drinks/Restaurants/how_many_... 4) Restaurants, spas, and other retail vendors have fixed (and perishable costs). This means that at particular times they can offer incredible deals as the alternative is burned or thrown out resources. Groupon's team has indicated their #1 mission moving forward is to figure out this perishability equation. Their VP says “If we can eliminate 10 percent of perishability, we can change the dynamics for small business owners,” he says. Small businesses would become more like airlines, matching supply against demand to maximize revenues." http://moneyland.time.com/2011/03/18/impulse-shopping-2-0-groupons-new-deals-tempt-anyone-whos-hungry-or-bored-right-now/#ixzz1OFeK6lY0 http://moneyland.time.com/2011/03/18/impulse-shopping-2-0-gr...

anigbrowl 15y ago
#4 is a viable point, but the problem for Groupon in trying to capitalize on reducing this wastage is that the demand for such services is highly elastic. To a large extent the problem here is a time-of-day issue that Groupon can't particulary assist with. Sure, a restaurant is burning valuable energy outside of lunch and dinner hours, but if such a business owner wants to give a discount during certain hours why use Groupon? That's what 'happy hour' is for, and merchants have a pretty good idea how far they can go with price discrimination without alienating their busy-time customers. Also: http://xkcd.com/951/ http://xkcd.com/951/
- abbasmehdi 15y ago
  I beg to differ, a time-stipulation could be incorporated in said coupons which could be automatically refunded if unused.
  - anigbrowl 15y ago
    Sure, that's possible. But now you're asking customers to make a buying decision under pressure, for something they'll only be able to use within a narrow time window. Although this is still economically rational in many cases, it seems to me that the whole point of Groupon is that it promotes impulsive and slightly irrational shopping - a deal that's 'too good to pass up,' even though you may not really want or need the product or service that's on sale. If you attach too many conditions to said deal, then the utility of the purchase itself is subject to the same analysis. It's a cool idea from an engineering standpoint, but I'm not sure about whether it has the fun factor.
    - abbasmehdi 15y ago
      People make buying decisions under pressure when deep discounts are involved (auctions). And I don't think it is as hard to do as you seem think it is. Especially once a customer is familiar with the process.
      - deleted 15y ago
        [deleted]
- aresant 15y ago
  Speaking to Bloomberg Businessweek, Groupon showed off what it hopes will take its business to the next level: A new service for smartphones and computers called Groupon Now, the centerpiece of which consists of two buttons: One that says “I’m Hungry,” the other of which says “I’m Bored.” So: Impulse buying for Groupon customers, and a means for merchants to sell off their spare capacity, and, hopefully for Groupon, a big, untapped market in which to serve as the middleman. http://www.geekosystem.com/groupon-im-hungry-im-bored/ http://www.geekosystem.com/groupon-im-hungry-im-bored/
potatolicious 15y ago
Is #2 true though? Say we sell a groupon for cookies - $20 worth for $10. The customer pays $10 to Groupon, Groupon keeps $5.00 of it and gives the merchant $5.00. Now, if the customer just does nothing, Groupon still has $5.00 in any case, the only winner here is the merchant, who got $5.00 and didn't have to provide any product. So how is #2 pure margin for Groupon? As for #3 - the problem I see here is that there are a lot of Groupon competitors in all the worthwhile niches - including the restaurant space you pointed out. Group-buying, in its current state, is a non-differentiated good. Which is to say, the barrier to entry is low, and customers have no loyalty since they're all peddling pretty much the same thing.
- deadmansshoes 15y ago
  I think if a groupon is unused then the merchant is not paid, so Groupon keeps the $10. This is how kgbdeals works. However Groupon redeem expired vouchers (if asked) whereas kgbdeals refuse to redeem vouchers even if valid.
  - jeremymcanally 15y ago
    I don't think so (I don't know for sure). My logic says no, though. Groupon always allows you to redeem an expired voucher for the purchased value (e.g., $10 for $20, you can always get your $10 in credit from the merchant). I think the merchant must be able to keep the purchased portion of it or they'd be out a lot of cash over time if their Groupon was a particularly popular one.
hncommenter13 15y ago
I don't believe these are entirely accurate. 1) The Rice survey regarding profitability of deals is based on anecdotal data only (it didn't crunch the numbers on the deals offered). The circumstances under which Groupon deals are profitable for merchants are very narrow and often difficult for merchants to measure, as they require tracking customers and referrals carefully over a period of months. How many businesses do you know of that could cut their prices by 75% (50% off list + 25% to groupon) and survive? Put another way, how many businesses have net margins > 75%? Answer: none. The profits to merchants are a mirage, as it's really future sales sucked into the present at a discount, not incremental increases. 2.) Not quite true. The current financial statements reflect the presence of breakage (for international), which is why the CityDeal acquisition actually saved Groupon's ass. The merchant agreement in the US says that unredeemed balances are split with the merchant after 60-90 days. Also, a customer's LTV goes down if breakage becomes too high--when customers don't use the coupons they buy, they tend to stop buying them. 3.) The latest numbers in the S1 show that the "backlog" of merchant deals in the US awaiting scheduling dropped in the most recent quarter. Given that Groupon has 900 employees in the US alone calling merchants all day every day, that's not a good sign. Sure, there are plenty of local businesses that haven't run Groupons yet. But that doesn't mean they haven't worked with a competitor or that they are good potential targets. Remember, Groupon has deliberately (per the S1) not repeated offers from the same merchant, and the pool of attractive restaurants/merchants is getting thinner. A 50% off coupon to a crappy restaurant isn't worth much if no one wants to eat there. 4) This is actually less true than you would think. Per the Deloitte annual restaurant surveys, food + labor (known as "prime costs" in the restaurant business) equal about 60% of revenues across all of the types/sizes of restaurants surveyed. These costs are largely variable, as it's easy to cut a server's hours on a weekly basis or put food in the refrigerator for a day and order less for the next delivery two days hence. Unlike hotels and airlines, where once the airplane takes off or once the hotel is built, there is no ability to easily adjust supply and significant costs are incurred to provide service to empty seats. Regardless, restaurant net margins (per the same annual study) are in the 7-10% range. Which means that a 75% discount to fill the empty seats would still be unprofitable. 5) Even if all of the above were true, that doesn't make it a good investment at the likely offer price. Assuming the offer price is $10B, the only question is, "if I had $10B in my pocket and someone offered me the chance to buy the whole company on the spot, would I take it?" Buying a single share at $10B/[shares outstanding] is the same question. Personally, I was eager to short it at $30B. (Sadly, the speculative bloom is off the rose, so while I still think it's a short, it's not a screaming short.)
netcan 15y ago
Good points and I agree that Groupon seems to get jumped on for unjustified reasons. I don't believe that they would have ever gotten so many customers if it was such a bad deal for businesses. 40% "failed experiment" rate in advertising is not bad. For them it's a one off cost. For the ones that do get value it's an ongoing advertising channel. Eventually most customers will be repeat customers. What I don't see is how Groupon would hold on to a market like this. Where are the barriers? There's no reason n+1 Groupon sites couldn't exist. I also see no real need for Groupon to be big. If there is to be a leader in each market(city), why should Groupon be outcompeting local Tokyo, Paris or Tel Aviv Groupon clones? Groupon has its brand and experience and other little advantages, but nothing that outclasses whatever advantages the small competitors could plausibly bring to the table. If someone told me this idea before Groupon, I'd think it was good, especially if they had demonstrated that businesses will bite, which Groupon has. It's a great idea for a business with value for businesses and customers. I really don't get the Groupon hate. I just don't see this as a winner take all market where a head start guarantees much. I don't think Warren Buffet would buy Groupon.

by aresant 15y ago

anigbrowl 15y ago

#4 is a viable point, but the problem for Groupon in trying to capitalize on reducing this wastage is that the demand for such services is highly elastic. To a large extent the problem here is a time-of-day issue that Groupon can't particulary assist with. Sure, a restaurant is burning valuable energy outside of lunch and dinner hours, but if such a business owner wants to give a discount during certain hours why use Groupon? That's what 'happy hour' is for, and merchants have a pretty good idea how far they can go with price discrimination without alienating their busy-time customers. Also: http://xkcd.com/951/ http://xkcd.com/951/

abbasmehdi 15y ago
I beg to differ, a time-stipulation could be incorporated in said coupons which could be automatically refunded if unused.
- anigbrowl 15y ago
  Sure, that's possible. But now you're asking customers to make a buying decision under pressure, for something they'll only be able to use within a narrow time window. Although this is still economically rational in many cases, it seems to me that the whole point of Groupon is that it promotes impulsive and slightly irrational shopping - a deal that's 'too good to pass up,' even though you may not really want or need the product or service that's on sale. If you attach too many conditions to said deal, then the utility of the purchase itself is subject to the same analysis. It's a cool idea from an engineering standpoint, but I'm not sure about whether it has the fun factor.
  - abbasmehdi 15y ago
    People make buying decisions under pressure when deep discounts are involved (auctions). And I don't think it is as hard to do as you seem think it is. Especially once a customer is familiar with the process.
    - deleted 15y ago
      [deleted]
aresant 15y ago
Speaking to Bloomberg Businessweek, Groupon showed off what it hopes will take its business to the next level: A new service for smartphones and computers called Groupon Now, the centerpiece of which consists of two buttons: One that says “I’m Hungry,” the other of which says “I’m Bored.” So: Impulse buying for Groupon customers, and a means for merchants to sell off their spare capacity, and, hopefully for Groupon, a big, untapped market in which to serve as the middleman. http://www.geekosystem.com/groupon-im-hungry-im-bored/ http://www.geekosystem.com/groupon-im-hungry-im-bored/

potatolicious 15y ago

Is #2 true though? Say we sell a groupon for cookies - $20 worth for $10. The customer pays $10 to Groupon, Groupon keeps $5.00 of it and gives the merchant $5.00. Now, if the customer just does nothing, Groupon still has $5.00 in any case, the only winner here is the merchant, who got $5.00 and didn't have to provide any product. So how is #2 pure margin for Groupon? As for #3 - the problem I see here is that there are a lot of Groupon competitors in all the worthwhile niches - including the restaurant space you pointed out. Group-buying, in its current state, is a non-differentiated good. Which is to say, the barrier to entry is low, and customers have no loyalty since they're all peddling pretty much the same thing.

deadmansshoes 15y ago
I think if a groupon is unused then the merchant is not paid, so Groupon keeps the $10. This is how kgbdeals works. However Groupon redeem expired vouchers (if asked) whereas kgbdeals refuse to redeem vouchers even if valid.
- jeremymcanally 15y ago
  I don't think so (I don't know for sure). My logic says no, though. Groupon always allows you to redeem an expired voucher for the purchased value (e.g., $10 for $20, you can always get your $10 in credit from the merchant). I think the merchant must be able to keep the purchased portion of it or they'd be out a lot of cash over time if their Groupon was a particularly popular one.

hncommenter13 15y ago

I don't believe these are entirely accurate. 1) The Rice survey regarding profitability of deals is based on anecdotal data only (it didn't crunch the numbers on the deals offered). The circumstances under which Groupon deals are profitable for merchants are very narrow and often difficult for merchants to measure, as they require tracking customers and referrals carefully over a period of months. How many businesses do you know of that could cut their prices by 75% (50% off list + 25% to groupon) and survive? Put another way, how many businesses have net margins > 75%? Answer: none. The profits to merchants are a mirage, as it's really future sales sucked into the present at a discount, not incremental increases. 2.) Not quite true. The current financial statements reflect the presence of breakage (for international), which is why the CityDeal acquisition actually saved Groupon's ass. The merchant agreement in the US says that unredeemed balances are split with the merchant after 60-90 days. Also, a customer's LTV goes down if breakage becomes too high--when customers don't use the coupons they buy, they tend to stop buying them. 3.) The latest numbers in the S1 show that the "backlog" of merchant deals in the US awaiting scheduling dropped in the most recent quarter. Given that Groupon has 900 employees in the US alone calling merchants all day every day, that's not a good sign. Sure, there are plenty of local businesses that haven't run Groupons yet. But that doesn't mean they haven't worked with a competitor or that they are good potential targets. Remember, Groupon has deliberately (per the S1) not repeated offers from the same merchant, and the pool of attractive restaurants/merchants is getting thinner. A 50% off coupon to a crappy restaurant isn't worth much if no one wants to eat there. 4) This is actually less true than you would think. Per the Deloitte annual restaurant surveys, food + labor (known as "prime costs" in the restaurant business) equal about 60% of revenues across all of the types/sizes of restaurants surveyed. These costs are largely variable, as it's easy to cut a server's hours on a weekly basis or put food in the refrigerator for a day and order less for the next delivery two days hence. Unlike hotels and airlines, where once the airplane takes off or once the hotel is built, there is no ability to easily adjust supply and significant costs are incurred to provide service to empty seats. Regardless, restaurant net margins (per the same annual study) are in the 7-10% range. Which means that a 75% discount to fill the empty seats would still be unprofitable. 5) Even if all of the above were true, that doesn't make it a good investment at the likely offer price. Assuming the offer price is $10B, the only question is, "if I had $10B in my pocket and someone offered me the chance to buy the whole company on the spot, would I take it?" Buying a single share at $10B/[shares outstanding] is the same question. Personally, I was eager to short it at $30B. (Sadly, the speculative bloom is off the rose, so while I still think it's a short, it's not a screaming short.)

netcan 15y ago

Good points and I agree that Groupon seems to get jumped on for unjustified reasons. I don't believe that they would have ever gotten so many customers if it was such a bad deal for businesses. 40% "failed experiment" rate in advertising is not bad. For them it's a one off cost. For the ones that do get value it's an ongoing advertising channel. Eventually most customers will be repeat customers. What I don't see is how Groupon would hold on to a market like this. Where are the barriers? There's no reason n+1 Groupon sites couldn't exist. I also see no real need for Groupon to be big. If there is to be a leader in each market(city), why should Groupon be outcompeting local Tokyo, Paris or Tel Aviv Groupon clones? Groupon has its brand and experience and other little advantages, but nothing that outclasses whatever advantages the small competitors could plausibly bring to the table. If someone told me this idea before Groupon, I'd think it was good, especially if they had demonstrated that businesses will bite, which Groupon has. It's a great idea for a business with value for businesses and customers. I really don't get the Groupon hate. I just don't see this as a winner take all market where a head start guarantees much. I don't think Warren Buffet would buy Groupon.