Bargain-buy portal Groupon: Dictation of the Cheap

Photo by Groupon

Groupon is a provider of local discount campaigns; its name is wordplay between “group-buying” and “coupon”. In November 2011 Groupon went public, three years after its foundation.  Among the listed online service companies, only Google has a higher market value. The company has existed for twelve years and boasts, 24.000 employees and huge profits. Never before has a North-American company grown as fast as Groupon! Several industry experts think that the bubble will burst soon, however. The American analyst Rakesh Agrawal warns that Groupon will not be able to survive without rapidly gaining of new clients; and that is only possible with extensive marketing expenses of almost a billion US-Dollars per year. According to the documents provided on the stock exchange supervision, Groupon almost had to declare insolvency in the last few months. In September Groupon had 240 million in cash, but double this amount in debt. Agrawal’s accusations against the management appear to be well substantiated. Groupon’s IPO almost failed due to dubious balancing methods, billing errors and disregard of confidential information. The US-stock exchange supervision already dismissed their applications twice. The last application was eventually approved, so Groupon went public.

On December 2nd Groupon’s stock price slid down below their emission price and continues to tumble. To their investors Groupon pretended to repeat Amazon’s success story: unloved and in deficit in the beginning, but market leader in the end. However, the numbers could hardly be more different. While Amazon’s market value on IPO was 400 million US-Dollars, Groupon’s market value accounted for a comparably miserable 12 billion US-Dollars. Amazon’s business model was bulletproof right from the beginning, while Groupon’s self-portrayal is full of omissions and palliations. Groupon’ s ‘finance jugglers’ have done a good job in disposing only  five percent of the company, bringing USD$700m in cash. For investors, this high starting stock price means there may be little room for growth.

Apart from these stories of the big business, Groupon still tries to preserve its image of a start-up. CEO Andrew Mason is only twenty nine years old and embodies the head of the company. He likes to mention how exhausting his job is and how hard he has and continue to work for the company’s success. While others manage the company ‘backstage’, he embodies the essence of the “American Dream”. However, behind this American facade there is German-style working efficiency; due to the fact that the Samwer brothers navigate the company in the European market. The former ‘jamba!’ founders, together, hold more shares of Groupon than Mason himself. When Groupon bought the German equivalent ‘CityDeal’ in 2010, Marc and Oliver Samwer were paid in shares of Groupon.

Groupon’s chairman Eric Lefkofsky follows a similar strategy. In an article of Fortune magazine he is described as a “morally-free” capitalist. Mason absolved an internship at one of Lefkofsky’s companies when his idea of Groupon came up. Lefkofsky invested. His numerous investments follow the model of going for high profits while taking high risks, early emission of preferred stock, and legal disputes with investors, creditors and clients. In the case of Groupon, it seems to be the same story. Mason, Lefkofski and partners became rich, while its business partners feel they were ill-advised.

There are plenty of field-reports online about incalculable reputation dangers and high losses. Groupon’s sales staff, usually receive provisions of 60 percent – an absolute maximum. Not only do Groupon’s partner companies run high on displeasure but also their client attraction has stagnated. According to Agrawal’s analysis, there are close to no clients who use Groupon’s services more than once. Without a gigantic increase of new customers, Groupon’s biggest problem might become reality soon – eventually everybody tried it once.

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