It emerged yesterday from Hitwise that Groupon’s website traffic has declined by nearly 50% in recent months. So, what now for the voucher site, which was touted as a multibillion dollar takeover target just this summer?
We discussed a couple of months ago that Groupon missed a huge opportunity not taking Google’s multibillion dollar offer—all around the time that Facebook began getting involved in the localized deals space and looked set to trounce Groupon. (Hey, 750m users can’t be wrong, can they?)
Groupon Is Mass Direct Mail of the 80s
Only this week too, we are reminded of the heat and competition in the sector with the Advertising Standards Authority reporting that Groupon accounted for around half of all ASA Voucher rulings. OK, it was only 32 but that’s still something. The ASA comments show that localized deals are fast becoming the old mass-market direct mail of the modern age.
If you’re anything like me, you have daily emails from any number of voucher code sites: LivingSocial, Groupon, Frugaloo, etc. Just how many deals CAN one live/deal with? Inbox overload aside, there just isn’t enough money to go around most people’s pockets—especially at the moment. Which then prompts further discounting … and more emails. Where’s the relevance?
Facebook Isn’t Gone For Long
In one regard, Facebook’s withdrawal this week from localized deals does Groupon a few favors: It’s one less competitor after all, but I see this as more of a re-grouping than a total withdrawal. It always seemed a little clunky adding a whole new type of business model onto what was effectively just the old Facebook Places “platform.” When Facebook DOES come back, it will mean (mobile) business. On one hand, it’s easy to think that Facebook’s withdrawal suggests that if it isn’t doing it, the sector isn’t worth playing in. Hitwise’s reports of dramatic traffic losses over the summer for Groupon (over 50%) suggest this to be the case, too—so why the rise in Living Social’s traffic of 27%?
Scare Stories Stick
For me, it appears that there is now a resistance and dislike of the global behemoth. Around 3 months ago, there were very damaging rumours of truly nasty experiences by businesses at the hands of Groupon. The ASA rulings suggest that this unrest is now on the both sides of the fence. Admittedly, there was a high degree of naivety on behalf of these business owners in providing too high a value cash discount that ultimately damaged their business, but the impact of the rumours was enough to affect other small businesses from doing similar deals.
It is this scaring of small, local business that has undoubtedly led to Groupon’s decline in its Q2 merchant numbers and could bring the whole house of cards down. The reason for this is that, potentially, Groupon is a fantastically cashflow positive business. It immediately earns cash from the point a user purchases a deal and only pays its merchants after 60 days. The problem it has now though is that it OWES a significant amount more in OLD deals than it has cash in the bank.
Business Insider put this amount at $392 million of outgoing payments due versus $225 million of cash in the bank. It’s basically paying out old merchants with new money yet all its problems are resulting in a decline in the number of new merchants and therefore cash coming in to the top of the business.
So, all of this hitting its profits naturally limits its opportunity for IPO and to make mega bucks—if it technically owes more than it has, who would buy in to that? But, it may not be ALL doom and gloom. The big strength of Facebook Places as the vehicle to deliver localized deals was that it was with you all the time. You didn’t need to receive an email to bag a deal. You simply checked-in on your mobile and exchanged the deal or not.
Now that Facebook has withdrawn from this sector (for now), Groupon Now (its always-on deals scheme) has the opportunity to claim this space before anybody else.
Heaven knows, Groupon if nothing else has scale to make this effective quickly.
With a business model that is not profitable, and little competitive advantage outside of being the first mover in the space, I think Groupon is in big trouble. I agree that turning down a multi-billion dollar deal from Google may look very foolish in the long run.
I have been a groupon ‘hater’ since I read a multi part expose by Bob Phibbs the Retail Dr. The horror stories from the small retailers and restaurant owners combined with the nasty comments from the pro-groupon forces chiding the ’stupid’ businesses for not reading the small print, just made me sick. Groupon has dealt retail a huge blow, by trying to tell consumers that you are a ’sucker’ if you are not purchasing a service or an item at a HUGE discount. I cannot say I am sorry to see Groupon in their current situation. Maybe groupon should offer their stock as a ‘daily deal’…lets say a modest 90% off.
I just have to lol at that last sentence (in a good way)…good writing Cathy!
Perhaps the reason for its failure is its inability to stay ahead of the competition?
Forget about whether you do or don’t like the company – it’s model is sound, perhaps its execution is not…
I am not so sure this business model is a good one. The concept requires retailers to provide a 50% discount. Groupon sells the product and collects the money and then pays the retailer part of that. So in effect, if you are a product company you are selling below cost in most cases. So it is a loss leader. Problem is retailers are already discounting most of their products just to get sales, so this loss leader doesn’t work as it might have in better times. This deep discounting also helps to destroy the market as people start expecting these prices that cannot sustain the retailer. And if Groupon does not pay in reasonable time becomes worse.
It works okay for restaurants, but how many times can you make this offer without degrading your restaurant in the eyes of patrons.
I have used a different company that makes you give a discount of 50% limited to an amount the retailer determines. So it might be 50% up to $100. This is still a great discount but allows the retailer to make margins on sales above $100. They then charge you a reasonable fee for each redemption and a PPC for links to your website. For us (higher end apparel) it worked very well, where Groupon would not.
The field is extremely crowded at this point and local newspapers have also become a major player in this field…….promoting it vigorously in print and online. The model itself is hard to sustain and on any given day I have seen the exact same deal on different platforms….. While it was a brilliant idea, a remanifestation of the Entertainment Book ‘digitally remastered’ (& people will always love the deal), Groupon should have taken Google’s Big Bucks because what they have ended up with is the Pet Rock!
I have to give Groupon credit for not taking Google’s offer. Too many companies have a good idea, grow, and then sell to huge companies like Google. But while I commend Groupon for not selling, that doesn’t mean that they shouldn’t have sold. The strategy of using tomorrow’s money today in order to pay for yesterday sounds like a modified ponzi scheme. If you collect the money immediately, then pay the merchants. Groupon has dug itself into a hole.