A Washington, D.C., restaurant named Back Alley Waffles claims it is going out of business because it had to wait too long before Groupon sent it the cash it raised from one of the daily deal site’s email offers.
UPDATE: Groupon denies the restaurant’s claims. See its full statement below.
UPDATE 2: Waffle man strikes back!
EARLIER: The restaurant posted a message on its site saying it was “closed indefinitely due to the bloodthirsty business practices of groupon.”
The message was accompanied by a diatribe about how long it takes to get money remitted from Groupon.
The message goes some way to illuminating a controversy surrounding Groupon—whether its cashflow practices are a sign of good management, or whether they’re a questionable way to fund a business that otherwise would make little or no money.
The Groupon experience
Does Groupon then electronically deposit the money that the customer paid them for the coupon into the business’ bank account overnight like credit card companies do? No. After taking a big chunk of the money as its share, Groupon holds on to the business’ share, using it while the business waits. And waits. And waits. And waits.
After about a month, Groupon issues the first of three payments to the business. By check. Then it has to “process” the check, which can take up to 10 days. Then it snail mails the check. A month later, the process is repeated for your next instalment . Then, a month later, the process is repeated again for your final instalment .
And for some of the money, it will be three months after honouring the customer’s Groupon coupon in the shop before the business is paid for that customer.
Groupon’s side of the story
Groupon told us that it was not to blame, and that owner Craig Nelsen had full control of the Groupon offer:
Mr. Nelsen initially approached Groupon and our merchant advisors structured a deal to best encourage overspend and help his business grow. We also required Back Alley to cap the number of Groupons sold to ensure the feature was in the best interest of both consumers and the merchant. We scheduled his feature on his terms, on a date he selected, under a contract he reviewed and signed. According to our records, only 132 Groupons, or 18% sold, have been redeemed since Back Alley ran two months ago, and Mr. Nelsen has received 2/3 of his share of the revenue to date. We always hate to hear that a local business has decided to close, but the maths does not point to Groupon as the cause.
In addition: see our breakdown of the numbers behind the deal here.
The company has previously gone to lengths to ensure that small businesses don’t bite off more than they can chew when making a Groupon offer (like this cupcake shop did in November). Groupon wants return business from merchants and would rather they only make offers they can afford to make.
Groupon’s cashflow problem
That aside, BAW’s description of delayed payments from Groupon is basically a verbal description of the numbers on its cashflow statement. In Q1 2012, Groupon had $60 million in unpaid accounts payable on its books. It had an operating profit of only $40 million. In other words, it’s using delayed payments—working capital, in accounting parlance—to fund its operations until they become profitable enough to fund themselves.
Some people—including my boss—think this is good management. Any business with purchasing power collects its revenues ASAP and delays paying its bills as long as possible.
Others—and I’m still in this camp until Groupon can turn a formal profit on its income statement—believe this is a fundamental weakness of the business, and that CEO Andrew Mason needs to solve Groupon’s addiction to late payments before it runs out of new waffle houses to do business with.
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