Groupon Going Bankrupt?

The answer?  Hardly!

Ever since Groupon released their IPO documentation, the industry has fallen in love with “pooping” on Groupon. Almost every major news site, portal or blogger has provided reasons as to why Groupon is bad, why Groupon is over valued, why Groupon’s business model is not effective and why Groupon will disappear. Writers, after all, need some negative “shock and awe” stories in order to increase readership. As such, Groupon bashing has truly gotten out of hand.

We have also been down on Groupon, but only because of their poor performance in the city of Montreal and their attempt at marketing in Quebec, but  never down on their business model.

Here is news for all those Groupon naysayers: Groupon is not going anywhere. In fact, they will continue to dominate this market and continue to grow this model in other markets.  It would be far more effective and more interesting to provide analysis on how Groupon can improve as opposed to trying to convince the market that Groupon will go bankrupt. (They won’t.)

There are a lot of voices online and a large proportion of them are still negative. Most are still trying to justify why the fastest growing company in history will blow up. Now, there are many fabulous reasons to give Groupon a stern lecture. Sure, there are issues, customer service, poor quality merchants, customers not being able to redeem their vouchers, too low margins for merchants, too much money taken out of the company by investors, etc. Some of these are expected, some of these are arrogance and some are simply not fair business practices. Should their investors have taken out that much money out of the company for themselves? Who’s to say. Industries like these are born out of capitalism. Investors have the right to manage their companies as they see fit. If Groupon investors believe that they could still grow the company quickly despite the amount of money they took out, then great. It is their call and the market and customers will ultimately prove them right or wrong.

Nevertheless, those issues are not a reason to determine that Groupon will just disappear. Their numbers prove otherwise. As well, for those that have managed operations for large companies understand that growing to 9000 employees (Groupon’s present head count) in a matter of 24 months is simply an operational nightmare. Taking everything into consideration, Groupon has done a rather remarkable job at building out their operations to support their growth. They are never complemented for this aspect of their growth, although they should be.

To me, all this Groupon talk seems rather similar to how the industry was adamant about Amazon’s demise in the first years of their existence. For those old enough to remember, Amazon was hated for their business model. At every turn and at every opportunity, the market, journalists, media and analysts ridiculed Amazon management (Jeff Bezos) for wasting investor’s money, for wasting consumers’  time and for a model that was not profitable. Jeff stubbornly and persistently continued his campaign to try and explain to the industry that in a fast growing market, especially one as new as ecommerce, that a larger portion of corporate investment must be allocated to first mover advantage status, the acquisition of customers and the building out of operations.  Growing  slowly or organically would not produce the gains that Amazon investors would be seeking. Was there a risk? Absolutely. Business is risk. However that risk can be managed by making sound business decisions.

Amazon continued to grow rapidly, acquiring customers, advertising, building out their operations…and losing TONS  of money in the process. The industry didn’t just question Amazon’s business model, they questioned why it was still in existence. Amazon management new better.

Amazon finally turned a profit about 6 years after it started operating and is now the world’s largest online retailer.

One of the major reasons why Amazon is as successful  today is directly tied to the amount of investment that was necessary in the first few years of their rapid growth. Without that investment, without their focus on growth instead of profits they would not be in the leadership position they are in  today.

A similar situation is occurring with Groupon. Although the numbers are far more favourable. Groupon is the fastest growing company in history. Fastest to reach 1 billion in sales and will probably be the fastest to reach 3 billion in sales by the end of 2011. If they wish to be profitable today, all Groupon has to do is reduce their marketing and customer acquisition costs. However, hyper growth is their goal and they have no intention of slowing down. Profits will come later. Right now they need to acquire customers, stabilize their operations and ensure merchants obtain a positive ROI in using their service.

Here is a comparison of Amazon and Groupon during their first years. (albeit not a very thorough comparison)

[table id=4 /]

Amazon launched as an online retailer of books. They have grown to become the world’s ecommerce juggernaut, selling an array of consumer goods and technology services. They have become a dominant company in line with Geoffrey Moore’s “bowling alley” scenario, (author of the  acclaimed books Crossing the Chasm and Inside the Tornado.) Moore explained that those companies that become dominant typically start off by dominating one type of market/niche (he uses the analogy of bowling pins) and then adding other complementary markets (bowling pins) over time in which they can dominate as well. Amazon has done just that and I fully anticipate that Groupon will follow in these footsteps. Here is a taste:

For Groupon,  the generic daily deal is just the tip of the iceberg. Their ultimate goal is to reshape and reinvent local commerce. Now THAT’s a lofty goal. Their first “bowling pin” is generic daily deals. What’s next?

[table id=5 /]

The point I have been trying to make all along is this:

Companies that reshape a market or that create a whole new market genre simply don’t go away if they are growing as fast as Groupon is. It is not in Groupon’s best interest to focus on profits right now. Their goal is to dominate and to scale to a size where they can call the shots around the world within their market. That strategy takes a lot of money and a whole lot of operational savvy. Give credit to Groupon for actually managing their hyper growth this well and keep giving them feedback on how to improve. But make no mistake, Groupon will continue to redefine the local commerce landscape. They are the real thing and they will continue to lead. They will be synonymous with local commerce much the same way that Yellow Pages is with local print search or Google is with online search.

What once started as a service to provide local deals along the lines of a city guide will deliberately and aggressively morph itself into the leading company world wide in the realm of everything local commerce. Amazon is watching, the Yellow Pages are watching, and certainly Google is watching. The industry is watching as Groupon drives local commerce forward. There are now hundreds of companies that are building complementary services, deal networks, ad networks, sales channels, affiliate channel specifically for the Daily Deal industry. Specifically to complement the services that Groupon, Living Social, Dealfind, Buywithme, Bloomspot and the other 600 sites offering deals. This does not happen unless there are plenty of opportunities within an industry. Daily Deals is only a part of the local commerce industry and Groupon is looking to grow as quickly as possible in order to ensure their leading position in this market.

Their growth and their “red ink” is deliberate and most of us would advise them to take on a similar strategy.

What is your view on Groupon’s growth? What would your advice be to Groupon in terms of future products?

4 Comments
  1. al@canadiandealsassociation.com'

    Here is a great post from Business Insider. Good graphs, good analysis, good read.
    http://www.businessinsider.com/blodget-groupon-analysis-2011-8?op=1

  2. Really interesting comparison; you really just made me think of Groupon in a completely different way.

  3. davidmoolah@gmail.com'

    I am someone in the group buying space myself. Yes, a new market may open up as it did with group buying. Any new model that drives revenue has a lot of hangers-on. However, in the long run the world is in a constant state of change, and it doesn’t matter how you started, but whether or not you can change as a company to evolve to the constantly changing marketplace, respond to the way people buy and shop, and provide value for customers and businesses alike. So, the bottom line, it is the innovators who will lead the group buying market, not the biggest, or the ones with backing from big companies.