“Groupon-C’mon:” A Coming Correction

by tjohansmeyer

“Groupon-C’mon:” A Coming Correction

I will be brief and get right to it: you cannot have a business model that is dependent on the products, services and pricing of other merchants, because not only is that too volatile – you have no control of the economic forces that create opportunity or hinder the business: your only controls are provided by forces outside of your company, which is far from ideal.

We keep hearing about : Groupon’s IPO – enough already. There will not be a “coupon revolution” –  there will be a correction. First – Groupon is really dependent on merchants conceding incredible amounts of revenue and cache to position themselves for customer acquisition, yet this will not be a foreseeable proposition if it doesn’t create a groundswell of long-term conversions. Why would any retailer stay within a relationship, where they are not only cutting half of their income – they are not receiving the long-term customers that make such a partnership worthwhile.

So we will have to see after year three – will merchants be as enthusiastic about these kinds of deals, because by year three – retailers will have a more comprehensive snapshot of conversion rates – and that will be the make-or-break of most coupon discounters – because merchants want a customer they can cultivate – not a one-night stand. Most merchants will lose money as a result of their relationship with Groupon – especially once the American economy picks up and they don’t have excess inventory to move.

If you read Wharton Business School marketing professor , lays out the critical areas that might elicit pause when examining Groupon’s long-term prospects.

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Reibstein stated, “Let me talk about some of the fundamental weaknesses. Obviously, one is, however brilliant of an idea it is, there is also now a huge increase in competition. When Groupon had few competitors, it was more viable than it is now with 499 competitors…But that is not the big weakness. The Groupon business model works better during a recession than it does during a vibrant economy. I will explain why, and this is where it gets intriguing. The reason some retailers might be willing to provide supply to Groupon is because they have excess inventory. That is particularly the case for services.

One of the services I notice frequently [offered on group buying sites] is that of beauty salons. They have so many seats and so many beauticians. If I don’t sell that 3 p.m. to 4 p.m. time slot on Thursday afternoon, I cannot carry that time slot in the inventory tomorrow. It perishes. It perishes in the same sense as an [unsold] airplane seat [once] a plane takes off down the runway. Because of the recession, there has been an abundance of people who are forgoing beauty salons and other sorts of luxury, discretionary services. Rather than let that airplane seat go [unfilled] and the beautician hour go with no revenue, [companies] would [rather] sell it for a little above whatever the incremental costs are. So there is a willingness to do deep discounting….As the economy picks up and there is less excess inventory, the availability of supply will go down. The willingness of the merchant to offer deep discounts will go down. The business proposition to the customer will be less attractive if [the item or service being offered] doesn’t have the same deep discount.”

It’s incredible that Groupon can pool customers together, yet what’s the benefit for the retailer if they engage in a few of these experiments without the conversions: they end-up suffering deep losses that’s what happens: Groupon’s happy, customers are happy — but retailers are pissed.

I also believe like professor Reistein that Groupon’s valuation is outrageous – undeserved and dangerous, because investors are salivating over this through an ephemeral framework, as opposed to sound fundamentals of product, positioning, management, financials and long-term prospects, all of which might be somewhat troublesome for the sophisticated investor. How does Groupon differentiate and create more value than the other 499 discount offerings once all this madness plateaus, and they are forced to operate and innovate in the grip of hyper-competition?

Groupon is exactly the kind of company that due to exuberance, hype and negligence/indifference moves us closer to a tech bubble, which would be a catastrophic force to the American and global economy, and have a devastating effect on innovation funding. I know what I think – tell me your side of the story.

Good Luck.