When Groupon filed for an IPO in early June, excitement was brewing about a chance to buy into the leader of online deal-buying websites, a trend that was relatively unknown about two years ago. But since its official announcement, the company’s rosy picture has become murkier and murkier.
The almost-three-year-old start-up, infamous for rejecting a US$6-billion bid by Google, recently adjusted its numbers after the SEC blew the horn on its use of a non-standard accounting metric, known as the “adjusted consolidated segment operating income,” that hid its whopping subscriber-acquisition and marketing costs. A recent filing on Aug. 10 that drops the metric showed the company posted a US$102.7-million loss in Q2 and a US$117-million net loss for Q1 this year, all after losing US$414 million in 2010.
In a scathing Harvard Business Review blog post, Rob Wheeler writes that Groupon’s vast expansion is actually hurting the company. While Nicholas Jackson of The Atlantic says Groupon is in a Catch-22. “Groupon must spend to grow, but must continue growing to cover its operational expenditures.”
Companies that file for an IPO are required to have a quiet period, but in an attempt to silence critics, CEO Andrew Mason craftily wrote an internal memo that was picked up by media. He argued that the high marketing costs are a one-time expense to gain subscribers.
But those aren’t Groupon’s only headaches. New York’s Experian Hitwise, a company that tracks web traffic, says visitors to the website is down 50% since it peaked in June 2011, while main competitor Living Social saw a 27% growth in visits. This data doesn’t include visits from cellphones or apps.
And the competition just keeps on coming. According to Yipit, a New York-based company that redistributes collected daily deals, during the first half of the year there were 362 “deal” websites, but of those, 132 have already shut down. Facebook and Yelp recently announced they are bowing out of daily deal game, but Amazon is looking to fill that void by expanding its offerings. Analysts say Facebook and Yelp withdrew because the market was oversaturated and not showing enough revenue.
But Groupon’s issues extends beyond the borders of North America, as GaoPeng, the company’s joint venture with Chinese firm Tencent, laid off about 400 people in 10 cities. Apparently, its failure comes as no surprise given the competitive shark tank it was swimming in.
It’s not all bad for Groupon though. The company hit sales of US$878 million in the second quarter of 2011, and by 2013 it aims to spend no money on gathering new users. But until that turnaround happens and the company makes a profit and lowers its marketing costs, Groupon has quite a way to go to appease potential investors.