Update: I have added two slides towards the end discussing the IPO This is a presentation I made for my students. It covers different aspects of Groupon case, including marketing, finance, accounting, and corporate governance.

1. Rise and Fall of
Groupon
Ashwin Malshe
ESSEC Business School
October 16, 2011

2. Sources of Data
O All financial data are obtained from the
latest S-1 filing (as of October 16th 2011)
by Groupon to the SEC

3. Market for Deals!

4. Business Model
Small Buyers
and Sellers Groupon
Disorganized Structured

5. Process
A local daily deal
Buyer pays for Groupon collects
is displayed on
the deal the payment
Groupon
Seller is paid Groupon splits The deal is valid
within 60 days in revenue with the if a minimum no.
the USA seller of people buy
Buyer may
Buyer may use
return to the
the deal in
seller without
prespecified time
Groupon

6. Groupon Products
O Featured Daily Deals
O Deals Nearby
O National Deals
O Groupon Now
O Deal Channel
O Self-Service Deals
For description click on this link

7. What Groupon Brings to
the Table

8. Guaranty
Buyers Sellers
Purchased Minimum
Deals Group Size

10. Value Creation
O By facilitating trade
O Bringing together small sellers and
individual buyers
O Giving small businesses visibility to large
audiences locally
O Exposing individual consumers to a wide
selection of daily deals to choose from

11. Benefits to Sellers
O Wide exposure
O Higher trial rates as compared to
traditional advertising
O Opportunity to induce repeat business
O A minimum number of customers are
guaranteed when a deal goes on live

12. Benefits to Buyers
O A wide selection of deals
O Large discounts
O Opportunity to try out services/products
that are usually expensive
O Groupon guarantees the validity of the
deal

13. How Has it Worked Out for
Groupon?

14. Revenues (Mil. $)
450
400
350
300
250
200
150
100
50
0

15. Revenue Growth Q-o-Q
250%
200%
150%
100%
50%
0%

16. Operating Income (Mil. $)
50
0
-50
-100
-150
-200
-250
-300
-350
-400

17. North American Deals
Services
11% Activities
23%
Retail
17%
Events
6%
Health &
Beauty Food &
17% Drinks
26%

18. International Deals
Services Activities
12% 11%
Retail
4%
Events
16%
Health &
Beauty
34%
Food &
Drinks
23%

19. Marketing 101
SWOT and BCG Matrix

20. Strengths and Weaknesses
O Strengths
O Brand equity among the consumers as
well as merchants
O A large established customer as well as
merchant base
O Ability to innovate to offer different deals
O Weaknesses
O Highly unprofitable
O Running out of cash
O Corporate governance is an issue

21. Opportunities and Threats
O Opportunities
O Entering international markets via
partnerships or M&As
O Offering a wider selection of deals
O Offering location-based deals
O Increasing the merchant base
O Threats
O Fierce competition in international markets
O May not find investors to fund operations
O Employee lawsuits

22. BCG Matrix
Relative Market Share
High Low
Market Growth Rate
High
Groupon ?
Cash
Low
Dog
Cow

23. Groupon- The Star
O Groupon commands a large market share
in daily deals market
O It is also in a market that is growing leaps
and bounds
O However, can we label Groupon as a
Star?
O The next few slides explain why we can’t

24. Groupon Valuation
Bubble 2.0

25. Offer Too Good To Refuse?
O The last year in November, Google
offered to buy Groupon for $6 billion
O Groupon refused this massive offer
O they believed their potential was much
more
O here is more information about it
O This was the first time Groupon’s
valuation came into focus

26. IPO Frenzy
O Just before Groupon filed for S-1 with the
SEC, the rumors put a value of $25 billion
to Groupon
O On June 2, 2011 Groupon files for an IPO
at a valuation of $30 billion
O Experts keep on questioning Groupon’s
high valuation

27. Attacks on Valuation
O Rocky Agrawal wrote a series of articles
on his own blog and other tech blogs such
as TechCrunch analyzing Groupon
O Academicians likewise pointed out the
issues with accounting at Groupon
O Salespeople lawsuit signals cash
problems at Groupon
O Groupon shows increasing cash
problems

28. Criticisms and
Controversies

29. Business Development
O For Groupon “marketing expenses” mean
money spent to acquire subscribers
O Selling, general, and administrative
expenses (SG&A) mostly include the
money spent on acquiring merchants
O Combined marketing and SG&A have
been much larger than the revenue so far

30. Buying Revenue
350
300
250
200
Revenue
150 Marketing
SG&A
100
50
0
2008 2009 2010

31. Small Business Suffer
O Daily deals actually lead to losses to
small businesses
O can’t handle the large influx of customers
with large discounts
O most customers don’t return
O Groupon takes a large chunk (up to 50%)
of the already discounted revenue
O Groupon pays only over sixty days, thus
creating liquidity crunch for merchants

32. Price Promotion vs. Branding
O Although price promotions may increase
revenues in the short term, they dilute
brand equity
O Regular customers may start using
Groupon thus reducing the revenue
premium that the merchant obtains from
such loyal customers
Read more here

33. Quality of Subscribers
O Groupon subscriber database has poor
quality
O only about 20% subscribers have ever
purchased a Groupon
O half of these purchasers never bought
another Groupon
O this translates into large acquisition costs
per buying subscriber for Groupon
compared to the small revenue these
customers generate

34. Competitive Advantage
O Many critics claim that Groupon’s
business is easily replicable
O currently, however, only LivingSocial has
emerged as a major competitor
O Facebook and many others dropped out
O this perhaps indicates that many don’t
think that the business is profitable
O in China, Groupon is struggling due to
local competition
O Google and Amazon have entered this
space

35. Corporate Governance
O Groupon used a non-GAAP accounting
metric ACSOI to inflate its earnings
O Groupon also reported gross revenue
instead of net revenue thereby inflating the
sales
O The top management is not respectful of
the SEC quiet period, see here and here
O SEC has forced them to amend the S-1
filing 3 times so far, delaying their IPO
substantially
O Early investors cashed out without leaving
adequate cash for operations

36. Groupon Today
Humbled

37. Pre IPO Valuation
O It is still very difficult to value
Groupon, but still the current valuation is
lower than expected
O Wall Street Journal reports average
valuation by analysts at around $10 billion
O Steven Davidoff gives a nice summary of
Groupon saga showing how the
valuations dropped so much

38. IPO
O Groupon first set the IPO price at $18 per
share and then subsequently increased it
to $20 per share
O The IPO had a nice 30% pop at the end
of the opening day. The stock closed at
$26
O The price has been volatile ever since. At
one point the shares traded at as low as
$15

39. Stock Performance

40. The End