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The problem with being a trailblazer is that you become exposed to those who would shoot you in the back. After jaw-dropping growth that propelled the company to an IPO in 2011, daily deals trailblazer Groupon (GRPN) is being assailed on all sides by critics who seem to be counting the days until the staggering giant falls and rises no more.
The key points against Groupon are well known:
- A dual-class structure that concentrates control in the hands of insiders who have already taken considerable money off the table.
- Slowing growth in the core daily deals business.
- Trouble in Europe.
- Concern over the leadership of CEO Andrew Mason.
- Persistent accounting issues.
- Dismal stock performance.
Fixing the Value Proposition
The trouble with Groupon’s core business is simple: for too many customers, the value proposition is not compelling.
Many customers have learned firsthand that not all revenue increases are worth the effort. Ironically, that lesson in basic liquidity management would benefit Groupon itself.
Think about the environment that marked Groupon’s founding and growth, and how much at odds that environment is with the reality of many small businesses.
As long as the company showed growth, rapid, explosive growth, cash flow was not a problem. In part this was due to a negative cash conversion cycle. Put simply, Groupon has a model that allows it to hold onto other people’s money. Combine that with the fact that the company was able to raise enormous amounts of VC financing.
One has to wonder to what extent Groupon understands the day-to-day realities of its customers, and the ways its core offering has failed them.
The extent of customer dissatisfaction is clear in Groupon’s latest 10-Q. Despite active customers increasing by nearly 37%, the company saw gross billings per average active customer decline by 21%.
Arbiter of Growth
The reason I believe that all is not lost for Groupon is that the company has what I believe may be one of the best pitches of our generation: they are selling growth. Sign up with Groupon, get the pricing right, and voila, sales go up. The problem is that the first iteration of that offering has been deeply flawed.
Customers were and are encouraged to offer discounts so steep that they incremental sales do not cover fixed, let alone variable, costs. There has been no thought about how to facilitate long-term acquisition of new customers for Groupon clients. Groupon started to look to many of its customers like a scam, rather than an incomplete expression of a powerful idea.
But what if Groupon took a step back and looked at what it is offering? What if Groupon management, surveying the economic landscape, decided that, if they can get the value proposition and the pricing right, selling (profitable) growth is a winner? I think customers would welcome this.
If Groupon could embed itself into longer term customer relationships, with a hybrid fixed and contingent fee structure, they could become the de facto partners for facilitating small business growth. A recent survey by the National Federation of Independent Business revealed that the number one concern among small businesses is sales. Groupon is well-positioned to be the partner to address that concern.
And what about the massive value of Groupon’s customer data? What if the company were to reach out to accountants, attorneys, insurance brokers, lenders and others with the following pitch: we know of 100 companies in your (insert area here) that are experiencing rapid growth and hence are likely to have need of your product/service.
Highest bidder gets featured placement on our regular communication to that group. Those are high quality leads; people would pay.
Last Man Standing
It may be fun starting a company in a time of easy financing, but for cementing a lead over the competition nothing works better than a down market. The bloom is off the rose in the daily deals sector, and Groupon has the potential to pursue an aggressive acquisition strategy to complement a revamped core offering.
Management can, and should, look to ramp up the deal machine and acquire any competitor who has addressed area of weakness for Groupon. This is no time for a “developed here” bias. Good ideas are good ideas, and the management of a struggling company cannot afford to shun good ideas that happen to have originated elsewhere.
A New Groupon
What might a new Groupon along these lines look like? I think it would look very compelling for investors, and daunting for prospective competitors.
- Sales: An altered fee structure would imply some period of transition, and growth would likely stall or go negative for a period, but over time the focus on customer value would drive growth as customers gravitated toward a credible solution to a persistent problem.
- Marketing Expense: The focus on customer value proposition would foster longer-term customer relationships, driving down marketing costs.
- Selling, General and Administrative Expense: The staffing mix would have to change, as Groupon worked to change its focus from maximizing deals to maximizing customer relationships over a longer time horizon. This would not necessarily result in higher costs, as the change could be implemented in tandem with much needed technology infrastructure.
Too many people have written the obituary of Groupon. The company surely faces challenges, but it is not without strengths. There is opportunity here.
About the author:
David Johnson is a partner with ACM Partners, a boutique financial advisory firm providing due diligence, performance improvement, restructuring and turnaround services. He can be reached at 312-505-7238 or at [email protected].
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