Photo: Groupon via Flickr
Things don’t seem to be going well for Groupon. The company is facing a looming cash crunch brought on by rampant insider selling, huge marketing spending and sheer growth.After being hailed as the fastest-growing company ever, Groupon’s cash troubles make the company look horrible, so much so that Business Insider’s Nicholas Carlson asks if there are any Groupon bulls left at all.
So let’s make the bull’s case for Groupon.
The one-tweet version of it goes like this: Groupon has finally found a way to get local businesses to spend on advertising, which is a ginormous market.
Groupon is a form of advertising. As an industry source told SAI: “When a restaurant does a deal and 100 groupons are sold and no one comes back, that’s not a Groupon problem that’s a restaurant problem.”
Groupon basically invented the online-to-offline equivalent of the banner advertising. And display advertising can be a brutal business because it’s like stacking pennies. But with scale, it’s still a huge business.
And that’s the point. Groupon’s margins are starting to shrink. Because of competitions, merchants aren’t letting Groupon take a 50% cut of groupons, and it’s increasingly going to take less money in.
But that’s not a death knell. It’s increasingly looking like Groupon isn’t the next eBay, with network effects and very low costs. It’s instead looking like the next Amazon–a business with low barriers to entry, low margins, but barriers to scale and premiums for organizational efficiency and brand power.
Photo: Asa Mathat | All Things Digital
Let’s tackle some common criticisms of Groupon:
- “Groupon is a ponzi scheme, it’s just selling $10 bills for $5!” We don’t think that’s true. Couponing and discounting is and has always been a big, legitimate business. Groupon is just a new (and great) spin on it.
- “Groupon should stop spending so much on marketing!” No it should not! It’s in a global race for scale with literally hundreds of competitors, many of them well funded. People clearly love what it’s selling. If Groupon is to be profitable, then certainly scale is part of the equation.
- “Groupons are bad for merchants, and they’ll wise up to that, and it will collapse like a house of cards.” This is increasingly looking untrue. First of all, as we said, it’s a form of advertising that gets people in the door. It’s very good at accomplishing that. If that’s not what merchants want or can handle, they should buy other kinds of advertising. Second of all, in a very new space, both merchants and daily deal companies are starting to wise up, and are realising that selling five thousand coupons for a business that can only accomodate 10, and other dumb offers, help no one at all. Third of all, there is good evidence that daily deals are good for businesses.
And this is without getting into future businesses that also have huge potential like Groupon Now.
One caveat: there is a difference between Groupon and “Groupon”, i.e. between a hypothetical huge daily deal company and Groupon as it exists. If the best parallel for Groupon is Amazon, another company that had tremendous growth, and tremendous unprofitability, and that many people wrote off for dead but ended up being enormously successful, then it needs what Amazon has: a management team that’s laser-focused on the long term and on relentless, continuous improvement. Groupon’s management deserve tons of credit for building a gigantic business in a literally record amount of time, in the face of fierce competition. But the management also raises red flags with its rampant insider selling, which is just egregious, robs the company of cash precisely when it needs it most, something which was entirely predictable.
Only the future will tell whether Groupon’s management can succeed at turning it into “Groupon”–the Amazon of online-to-offline local commerce that it can be. Or maybe a few years from now “Groupon” will be called “LivingSocial.”