Groupon - find another company like this and you will be rich

Groupon's CEO Andrew Mason has finally resigned after one of many terrible quarterly reports (here).

After four and a half intense and wonderful years as CEO of Groupon, I've decided that I'd like to spend more time with my family. Just kidding - I was fired.  

The stock market did not like Mason, so the share price might get a boost in the coming weeks. Longer term, the company has already lost almost everything, and it is possible that a new CEO will create a successful new strategy for the company. This post will look at the old strategy of Groupon.

Two groups of student in my Strategy class picked Groupon as a future big loser back in March 2012. After the students' analysis the company is down 77%. My analysis below presents a synthesis of the students' arguments of one year ago.


Industry definition. It is difficult to understand in what industry Groupon is competing by reading published material and reports. I have read ten equity analyst reports and nobody clearly defines the industry. The analysts mention terms like Internet, Technology, Social Commerce, Daily Deal Market, none of which really define an industry. Let us put some order into the confusion. Groupon is selling vouchers that can be redeemed against products and services offered by independent companies. This makes Groupon a retailer. In the GICS system, this belongs to Internet Retailing (code 25502020).

I will also argue that Groupon is selling sales promotion services to retailers. The retailers are suppliers to Groupon because they are paid by Groupon. However, Groupon is both paying in cash and kind by providing sales promotion services to the retailers. So Groupon implicitly sells sales promotion services, the cost of which is deducted before Groupon buys the merchandise from the suppliers. This makes Groupon a seller of professional services. In the GICS system Research & Consulting Services (code 20202020).

Groupon is present in the Internet Retailing industry as well as the Research & Consulting industry. Figure is focusing on apparel retailing and is incomplete. Groupon is also sourcing from other retailers and restaurants. All industries in the figure as defined by GICS.

A full analysis of Groupon would involve studying the two industries in detail. The theoretical distinction between industry and industry segment (here) is important for such an analysis.

Strategy description. Groupon is selling vouchers that can be bought at a discount, typically 50%, to the end-customer.  Groupon is building brand awareness (here) and the offers are distributed by email. Groupon is outsourcing the fulfilment to independent retailers and is paying them 25% of the value of the voucher.  Groupon is also selling sales promotion services that will generate benefits (e.g. new customers, customer knowledge from Groupon's database) to the retailers. Since Groupon only writes one contract with the retailer it is not possible to allocate revenue and costs to the two different transactions. However, we know that Groupon is selling vouchers and passing on 25% of the value of the voucher to the retailer.

Strategy assessment. The strategy really stands out as being flawed in the offering of sales promotion services. There are existing companies selling coupon fulfilment services in the US. Typically magazines contain printed coupons that might be worth $1 if a particular consumer product is bought. A fulfilment company will charge around 5% of the transaction value. Groupon expects the retailer to be willing to pay 75% of the transaction value for its sales promotions services, the details of which are not clearly stated on the website.

The strategy is also flawed on the retailing side. Groupon is offering low prices to the consumer so it must implement a low-cost strategy. Since Groupon is buying from other retailers and not from the manufacturers another step is added to the industry supply chain. It is difficult to understand how this can be generate a low cost.

Groupon is attempting a low-cost strategy in the Internet Retailing and a differentiation strategy in the Research & Consulting Services. This creates another dimension of problems in terms of internal organisation. Some employees have to be very good at driving down cost and some providing an extraordinary quality of service to the retailers. In Groupon's current organisation, the salesforce is supposed to do both.

Professional assessments of the company. What did the equity analyst reports say at the time? Here is Wells Fargo Securities (11/12/2011, share price $23.30). The bank considered 27-29 as the target price

Groupon is a category leader in the online daily deal and social commerce market. The company has a unique culture, innovative business model, and seasoned management team that has demonstrated the ability to manage growth. In our view, Groupon is a growth play with a rapidly expanding and highly defensible market leadership position. 

And here is Morgan Stanley's thinking around the the sustainability of the strategy (14/12/2011, $23.30). The bank considered the fair value to be 27.

Our view: Highly Sustainable. Groupon has established a significant advantage given its scale, processes, and data, all of which enable better targeting to offer more relevant deals. 

However in the next sentence they hedge their bets. I still do not know if I should consider this honest or just lazy.

Where we could be wrong: It could be too early to tell for certain whether Groupon is a successful idea (i.e. local “daily deals”), a successful company, or just an internet induced fad.

And here is Deutsche Bank one year later (20/9/2012, $5.50). The bank thought the share would go to 6.00

Groupon’s business model works, it brings consumers and merchants together in a marketplace that generates value for both sides.

Today, the he share price of Groupon is 4.53. Given the depth and quality of these reports it is fully understandable that most banks are cutting down on equity research departments.

My students were not the only ones with an analysis more insightful than the majority of the equity analysts. Here is another take on Groupon from 2011.

What will happen? The company has $1.80 in cash per share so it still has money to burn. Groupon is down 86% from its all-time-high so their current strategy has already failed. It is possible that a new CEO will be able to create a new strategy that actually is sustainable.

Thanks to Brandon LEE, Sheetal Sofiah Sidhu, Michelle TAY, Rachel CHI Wei, HUANG Tengchuan, CHIN Hui Shan, Liane TAN, Jenn LIM, GOH Ming Rue, Sarah TAN, NG Hui Ting of Singapore Management University for the two original reports.