What If the Groupon Business Model Was Right – And the Problem is Just Crummy Execution?

This well-reported and smart article on Reuters explained the growing failure of Groupon (GRPN) to live up to expectations, and explored how it might alter its business model to revive growth and survive.

Certainly, something is very, very wrong at Groupon.

GRPN Chart

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Groupon wasn't ready to be a publicly-traded company. But investor desires for quick returns (count founders among those individuals) led to a hasty IPO, which has left Groupon with a reputation as a disastrous stock above all else, overshadowing its actual business.

But to this observer, those proclaiming the daily deal business as dead, and encouraging Groupon to instead invest in more general online retailing, seem as short-sighted as Groupon management. Yes, Andrew Mason, the 30-something founder still serving as CEO, has made a hash of things, pushing growth to the exclusion of profitability and generally seeming to be trying to manage the stock price instead of the company.

It seems clear Mason lacks the management chops to run what is an operations-intensive business, employing thousands. Groupon’s board might start to save the company by pushing Mason aside and hiring, or promoting, a seasoned operations executive with experience in telemarketing and online marketing.

But the board should also realize that the daily deal business is Groupon’s one area of competitive advantage. Going toe-to-toe with Amazon (AMZN) doesn’t seem promising, given Amazon’s incredible market position, efficiency and deep pockets. Trying to compete in point-of-sale technology also seems nutty, given how crowded that space already is.

The daily deal business, however, attacks an under-developed market. It links the incredibly-fragmented world of small merchants to consumers, delivering an advertising and promotion channel that didn’t formerly exist.

Yes, Groupon seems to have done a poor job of developing this business – quality control and greed in seeking its share of revenue in deals (which has turned off some merchants) come to mind as obvious flaws in execution. But the 200 million consumers who have given Groupon their email address, and the thousands of merchants who’ve run or considered running a daily deal, are both huge assets, and seem under-exploited.

The Reuters article, for instance, quotes a Raymond James sampling of 115 merchants who've recently run daily deals, with 39% saying that weren't likely to do another. That seems to suggest 61% might do another. Not bad, given all the horrible publicity surrounding Groupon.

Groupon’s costs need cutting. Its sales staff needs to be more productive. It needs to be smarter in crafting deals to appeal to both merchants and consumers (and get a little profit itself). In other words, the company needs to be managed. There isn’t a transformative change that’s going to save Groupon, it seems; rather, like most businesses it will succeed or fail based on its ability to steadily make incremental improvements.

As of now, the Groupon board lacks executives with operating experience. It’s made up of investors and finance types. Not encouraging. But it's not hopeless.

Jeff Bailey is the editor of YCharts, which includes the just-released YCharts Pro Platinum for professional investors.



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