Fast Company

Groupon Is The Next Google (Unless It's The Next Webvan)

There was a lot of snickering Thursday after Groupon announced an IPO valuing it at $30 billion. But the company might actually be worth a lot more than people think.

Groupon IPO tweet

It didn’t take long after Groupon filed for an IPO Thursday that valued the company at $20 billion for the snark to start flying around the web.

“$GRPN 's S1 can be boiled down to: ‘we don't really have a biz model, we'll try some stuff & will lose money for yrs’ ..can ya' spare $750M?” said one tweeter. “Can't wait for the $LNKD/$GRPN merger: one email offering a half-price dinner at a place I don't like w/ someone I don't want to see,” said another.

We get it. On the surface, Groupon looks like a dodgy proposition. Sure, it’s had phenomenal growth (from 152,000 subscribers and 212 merchants in June 2009, to 83 million subscribers and almost 57,000 merchants worldwide in March of this year). But important questions persist about its underlying fundamentals.

All of which leads to the question: Is Groupon the next Webvan, madly overvalued and ultimately unsustainable? Or is it the next Google, underestimated by some (at the time of its IPO), but nevertheless poised to completely transform an industry?

The Webvan Argument

Webvan was the delivery company back in the go-go years of the early Internet that allowed you to order groceries online and have them delivered in a precise half-hour window. Customers loved the idea, but the model was ultimately unsustainable. Webvan poured huge amounts of money into infrastructure, but eventually went bankrupt.

Those skeptical of Groupon’s future prospects sense the same shakiness in the coupon seller’s model. Despite its amazing growth, it’s still not profitable. It brought in $713 million in revenue last year, but still lost $413 million, according to the company’s S-1 filing.

Add to that the skepticism that Groupon’s model can survive. Much of the company’s growth last year was due to its massive expansion into new markets. But it’s not clear how many merchants trying Groupon for the first time become repeat customers.

The S-1 filing says there’s so much demand on the merchant side that in some markets, the waiting list to get vetted is nine months long. But it doesn’t talk about how many of those merchants come back. And meanwhile, horror stories persist about merchants who give the service a shot, have terrible experiences, and vow never to go near the service again.

All of which begs the question that’s been rattling around for months: Does Groupon have legs? Will it be able to survive once the novelty wears off? Will it be able to craft a sustainable business?

If you look at Groupon based on what it is today, the answer probably is No. The customer acquisition costs involved in a model based on deep discounts is too high for many local merchants, and the targetting too imprecise. In the long run then, this theory says, Groupon won’t become a viable marketing channel for local merchants, and its core business will dry up.

Which is possible.

But there’s another narrative, which could lead to an entirely different conclusion. And it goes something like this:

The Google Argument

The worldwide market for local advertising is huge--in the hundreds of billions of dollars. Anyone who can figure out how to grab a meaningful slice of that pie stands to make a pretty penny.

You’re not going to get very far, of course, if the only advertising product you can offer are deeply discounted coupons spread about helter skelter. But what if your advertising products could help merchants solve the conundrum they struggle with every day: how to move specific inventory, to specific customers, at specific times? Now, that might actually be worth something.

Here’s a very simple example. Imagine you own a bakery. Maybe you have lots of foot traffic in the morning, as people pick up their coffee and muffins. And maybe also on the weekends, when there’s big demand for your tarts and baguettes.

But how about on weekday afternoons, from about 2 p.m. to 5 p.m.? It’s probably pretty dead. The hourly revenue plummets, but the fixed cost remains the same. What you'd really like, then, is a way to move inventory during those specific hours.

As it turns out, Groupon may be able to help.

Groupon Now couponLost in all the frenzy over the IPO announcement Thursday was a small sliver of news about a new Groupon service: Groupon Now. Merchants can now dispatch offers that are available right now, for a limited time (like the one at right).

So let's say Groupon fleshes out this service to its maximum utility. And let’s say you're back in your bakery, it’s 2 p.m., and you discover your bakery has too many chocolate chip cookies left over. You know from past experience, you’re not going to be able to move them all. But what if you could now go online and whip out a deal: "Good until 4 p.m. today: Buy a regular-priced drink and get two chocolate chip cookies for the price of one."

Meanwhile, Groupon users in this new world have set up alerts to let them know when there’s a good deal going on right now, in their general vincinity. So now you have 20 people who grab that Groupon and march over to your bakery for an afternoon pick-me-up. Your bakery moves the cookies, sells a bunch of extra drinks that it wouldn’t have sold otherwise, and maybe moves a few tarts and baguettes as well. A downtime that would have seen excess inventory go to waste now sees bustling business.

So what if Groupon created a whole suite of products that served this purpose? You’d have a system that could help clothing stores move blouses that weren’t selling, theaters sell last-minute seats to shows that hadn’t yet sold out, arts-and-crafts stores to target stay-at-home moms during slow weekday morning hours.

Carry all of this to its logical conclusion, and here's what you have: An advertising system that enables merchants to move the inventory they want to move, to the customers they want to move it to, at the time they want to move it. What does that look like? A new, powerful variation on AdWords.

Groupon’s IPO contains clues--albeit opaque ones--that this might be where it’s headed. "We use our technology and scale to target relevant deals based on individual subscriber preferences," the S-1 reads. "As we increase the volume of transactions through our marketplace, we increase the amount of data that we have about deal performance and customer interests.

"This data allows us to continue to improve our ability to help merchants design the most effective deals," the filing continues, "and deliver deals to customers that better match their interests."

The S-1 also talks about the huge effort Groupon is making in acquiring subscribers. It spent $263 million last year on marketing. That's a big chunk of change, but it also dovetails with a strategy geared toward helping merchants find the exact types of customers they’re looking for. The larger pool of customers to draw from, the more likely any particular merchant is going to be able to find the subset they're looking for.

And in his letter to investors, cofounder and CEO Andrew Mason hints at new offerings to come: "We are pursuing models of reinvention that would not be possible without the critical mass of customers and merchants we have achieved."

Still feeling skeptical? Then consider this: A couple of months ago, Groupon nabbed for its new COO Google’s former vice president of sales operations, a woman named Margo Georgiadis, who, as it turns out, was responsible for driving not only sales operations across various regions and channels but who was also responsible for the technology teams that commercialized AdWords, AdSense, and display advertisements to advertisers and publishers.

What We Think

On the surface, Groupon can definitely look like a massive folly. (It’s hired almost 1,000 writers, after all, to pen Groupon ads. Surely that can’t be sustainable.)

At the same time, the company doesn’t seem to be standing still. It’s talking to its customers (the merchants), learning what they need, and trying to design products that help them. If it does indeed create ways that deliver meaningful results for merchants--and can do that in a financially sustainable way--then it does indeed stand a chance of--if not actually assuming Google’s mantle--at least being as good a bet as the search giant was when it IPO’d back in 2004.

One Last Thing

Attitude is not everything, but it's also not nothing. And Mason demonstrated a Google-like attitude in a letter he wrote to investors as part of S-1. "We are unusual and we like it that way," the Mork of social startups writes.

"[W]e vowed to make Groupon a service that people love using… nothing [will] be as crucial to our long-term success as happy customers and merchants,” Mason continues.

"When we see opportunities to invest in long-term growth, expect that we will pursue them regardless of certain short-term consequences," he says. "Expect us to make ambitious bets on our future that distract us from our current business. Some bets we'll get right, and others we'll get wrong, but we think it's the only way to continuously build disruptive products."

It’s not quite "Don’t be evil" and "we do not plan to give earnings guidance in the traditional sense," as Google founders Larry Page and Sergei Brin wrote in their letter to investors back in 2004. But it’s not too far off either.

[Homepage image: Groupon on Flickr]

E.B. Boyd is FastCompany.com's Silicon Valley reporter. Twitter. Email.

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9 Comments

  • jorge eduardo ardila

    I think Groupon has three structural deficiencies:
    i) Low entry barriers,  indeed facebook and amazon (livingsocial) are flying around their business, but haven´t found the profit driver.  Also 482 groupon like business just in USA,  add to that,  about 10 startups in each western country?
    ii) the cost for merchants is very high: 50% of the discount?  Placing in the context of the example about moving exceeding stock,  how much does it cost to the bakery owner?  More than relying on groupon to evacuate overstock he will avoid overstocks,  which are expensive,  but more expensive is the groupon solution.
    iii) what is the incentive to merchants to keep it´s high cost discounts with groupon?  Maybe they will switch to other marketplaces by less than a tiny reduction in the cost of promotions. 

    Indeed,  the hope for groupon owners could be the efficiency of promotions and low cost for merchants.

  • hemidude

    I think you've nailed it. Between Facebook, other national and a bevy of local competitors, the model itself is local. That said, the "in the market" media (newspaper and radio) are already besting Groupon / LivingSocial in our city.

    This model also counts on large numbers of their audience spending money on these "extras" regularly - in this economy, I think that is a stretch at best.

    To compare this offering or value prop to Amazon is silly as they have no USP, they are simply too easy to duplicate, as we are seeing every day.

  • Chris Reich

    First, I really like the balanced presentation of your post. Thank you.

    Groupon seems to be a lightning rod for loyalty in that people seem to love and support it or disdain and dismiss it. There doesn't seem to be much middle ground support.

    I'll take that middle ground. If I'm on the road and wondering where to go---it might be great to have a special for a restaurant. Nice, I'll try that place. So I can see value in the proposition. But I don't see $20 billion or more. I think we way over value these services.

    I saw Facebook pegged at $76 billion recently. That's absurd for a site where people post pictures of their lunches. A site for narcissists, like Facebook, won't produce a lot of revenue because the ads are largely ignored by the people who care more about "sharing" the mundane details of their lives with "friends" they will never meet than "Will Palin run in 2012?"  

    Even with billions, I don't see a coupon house as a powerhouse.

    Chris Reich
    www.TeachU.com
     

  • Doug

    WebVan operations were profitable in the Bay Area. The VC's drove the IPO and forced WebVan to buy non-profitable competitors in other markets such as Home Grocer and others. These same VC's were putting together another $800M to drive WebVan, the tech sector crashed, the VC's did not come up with the money, and WebVan went under. Safeway purchased a lot of WebVans technology and is the core foundation to Safeway's home delivery service today.

  • Chuck B.

    Check your facts.  Webvan did IPO.  For close to a billion if I remember correctly.  I know because I bought stock - good mistake to learn from.  Why solve a problem that does not exist or try to target the most costly and complex piece of the value chain to own.  They ran through that billion quickly and then went bankrupt.  Linked In was at least profitable.

  • Dorba Chen

    Honestly, I hadn't tried Groupon until I received a free $250 coupon for the website. After I did try it, though, I found myself constantly using the website until my coupon was finished! It's really an amazing place.

    If you want to get your own Groupon coupon, here's the site I got mine from:

    bit.ly/FreeGroupon1

  • Dorba Chen

    Honestly, I hadn't tried Groupon until I received a free $250 coupon for the website. After I did try it, though, I found myself constantly using the website until my coupon was finished! It's really an amazing place.

    If you want to get your own Groupon coupon, here's the site I got mine from:

    http://bit.ly/FreeGroupon1