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Groupon continues to be front and center in the foodservice industry. A day doesn't go by where I don't hear the name Groupon from an operator, see an RSS feed with some B-School analyst speculating on its business model, or get another offer to buy "X" at "Y" price to get "Z". I continue to be amazed at the business model and the capital that pours into the business. An impending IPO and more speculation about Groupon's future than who will win the 2012 election are everywhere these days. But there are some little red flags appearing in its business model. Let's take a look.
Financial model: Chase more deals
Groupon continues to lose money – a lot of money. Its current burn rate is a staggering at about $100 million a month. It lost $413 million on revenues of $713 million. So its burned through about $1.2 billion in 2010. It went from 36 employees to over 8,000 in a little over a year. As of June 30, Groupon had $680 million in current liabilities and bills the company has to pay. These are mostly payments to merchants for the Groupon purchases that Groupon must share with them. Meanwhile, Groupon only had $376 million of current assets with which to pay these liabilities. Yet, Groupon maintains an unwavering faith that growth will be its salvation. As many companies learned in the last tech bubble, such a strategy works just fine until you run out of credit cards to keep filling the tank up with gas.
Conversion rates for repeat customers aren't showing up
Groupon consistently brags to analysts and Wall Street that its growth will continue to be "explosive." In 2009, the company had around 150,000 subscribers, and over a two-year period rocketed up to more than 83 million subscribers. This is indeed impressive. Yet, if you look closer at the numbers, the company's revenue per subscriber is falling -- sharply. A little over two years ago the revenue per subscriber was at $21.69. As of March 31 of this year, it dropped like a rock to $7.76; a 64 percent decline.
Another key metric to evaluate – which has been pretty tough to find – is the conversion rate from initial deal offer to repeat customer. Of the operators I continue to speak with in foodservice and other service businesses, repeat customers produce a cloudy and low number. Estimates by analysts put this key metric around 1 to 5 percent. So basically of all the Groupon groupies you have walk in your store, you only stand a very small chance of getting them to come back again.
Finally, and this one is good, Groupon came up with a clever accounting metric that it touted around to the investment bankers and analysts called Adjusted Consolidated Segment Operating Income (ACSOI). It worked until the SEC recently knocked it flat on its face. Basically, this is a way for Groupon to attempt to show a profit in the face of mounting losses. The metric attempted to measure Groupon's profit before subtracting its subscriber-acquisition costs and stock based compensation. Translation: We aren't making money so we are going to craft this nifty metric in an attempt to shine some positive light on our crappy internal numbers. In the first quarter of 2011, Groupon posted a net loss of $113.9 million. Yet, the company reported ASCOI of positive $80.1 million. After the heat from the SEC, Groupon has jettisoned the dream team accounting metric, and the company's losses continue to mount.
Good businesses are profitable businesses
As many of the readers of this blog know and have discussed with me on numerous times, good businesses are profitable businesses. What Groupon continues to lose sight of is the need to focus on getting the business to a profitable state. Sure, startups across all verticals and spaces will lose money in the early days as their business plans reach profitability. But here is a company that continues to spend and burn cash like a night at the casino with the hopes of striking it big.
Economics aside, ultimately Groupon is not delivering on the one thing operators hope for -- new customers and repeat business. It seems we may be entering another era of euphoric valuations that could be ripe for another tech bubble as the deal offers space has to articulate how it will make money. It must also prove itself as a viable business model, not only for Groupon, but for the operators it serves. While I do think there is a place for the deal offers space, this one sure feels like another Pets.com at this point.
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