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Groupon: Webvan, Enron, or Something Else: Too Big to Fail

In just two years, Groupon’s fresh approach to a failed web strategy (group buying) has become a full fledged, global industry of thousands of copycat sites that include Web 1.0 titans Google and Amazon.  In the process, the Groupon name itself became a meme and a one word description for a new type of economy of collective bargaining and local commerce, also known as Grouponomics.

So pervasive now are daily deals that a recent Harris Interactive Survey found that 30% of all workers bought a daily discount offer from Groupon or another provider in the past year.  But beneath the hyper growth and the hype, clouds have gathered around Groupon and the industry.  Merchants have complained about overselling and predatory discounting.  Consumers complaints have solidified into numerous class actions, centered on gift card regulation.

Somewhere between the Tibet Super Bowl Ad and ACSOI (Groupon’s creative accounting metric), Groupon went from media darling to an anathema.  Their business model has been compared to a Ponzi scheme and predicted by some to be the next Webvan (rated by CNET as the top dot.com flop in Web 1.0 history).  In the past few days, Groupon changed an accounting metric again, and saw its revenue cut by half.  To make matters worse, their second COO resigned in just five months, heading back to Google.

Against this backdrop, Webvan makes an easy comparison.  But hype can go both ways, pro and con.  So let’s compare:

For those that don’t remember, Webvan sold groceries over the Internet and distributed them via state of the art, 300,000 square foot distribution centers below the cost of delivery.  It was unsustainable.  After blowing through $850 million dollars, in 2001, they shuttered their business and declared bankruptcy, leaving a cache of Herman Miller Aeron chairs and thousands of colored plastic shipping bins stranded at customer’s homes.

220px-Webvan_tubs

In the last quarter of 2000, Webvan managed $9.1 million in revenue while they reported paying a whopping $210 to acquire a new customer.  In comparison, Groupon generated $392 million last quarter, with customer acquisition costs of $32 per paying customer.  And while Webvan had only scaled to 10 cities across the U.S., Groupon is active in over 400 cities, with the majority of these in foreign markets.

So Webvan is a poor comparison.  But combine accounting tricks, financial misstatements and a working capital of a negative $310 million following insider cash out of a whopping $946 million prior to profitability – the image of another notorious company comes to mind, the poster child of meltdowns, Enron.

Imagine the ripple effect of a Groupon bankruptcy – $310 million dollars swiped from the hands of small businesses around the world, perhaps creating a chain reaction of bankruptcies.  After all, Groupon has been an ATM for so many struggling merchants unable to afford traditional advertising or borrow money to grow.  And last count, Groupon advertised 56,781 merchants in the quarter ending March 31, 2011.  Painfully, because they pay out most of the featured merchants in 60 days, they would go under owing most of them money.

Like Enron, Groupon’s jet engine of value has been its meteoric rise in revenue.  Like Enron, Groupon used accounting tactics to inflate revenue.  But Enron’s books were truly cooked; selling their story to a glass half full Wall Street that their company generated 5.7 million per employee.  Meantime, Groupon’s retained revenue is real, producing a pedestrian $155,000 per employee.  This looks a lot more like Twitter than Google, Amazon, Ebay or even Yahoo.  While Groupon’s staff is relatively low paid salespersons (many of whom are suing Groupon over unpaid overtime), they clearly have work to do to cut costs and improve performance.

rev_emp_graph

Can there be Grouponomics without Groupon?  This is a company that even the haters will miss if it is gone.

So instead of cheering against Groupon and hoping they fail, we should cheer for them and hope they get their act together, raise more cash, and get better prepared for what is going to be a bumpy ride.  Personally, I worry about the small businesses and the macroeconomic signal it sends to an already weak global economy.  For so many small businesses, Groupon is already to big fail.

 

James Pruett

James Pruett has been dreaming of ways to save people money since childhood. At the schoolyard playground, he put together bulk buys for marbles at Texas Art Supply. James began his business career in earnest as a financial consultant at Shearson Lehman Hutton, and worked in Real Estate and Mortgage Lending for more than ten years. James started working on the Web in 2000 at SeeItWork and Telescan (now InvestTools), a pair of Web 1.0 online start-up companies. At SeeItWork, James secured content licensing and distribution agreements with major shopping engines, e-commerce companies, and online portals. In 2006, James founded FractionalMarkets.com, an online firm that used a group buying approach to reduce sales and marketing costs of fractional interest vacation properties. James began to see the possibilities offered by group buying to change the way people do business, and presented two group-buy patent applications as novel and useful approaches to aggregating and managing group purchases in whole and fractional real estate. James has an economics degree from the University of Texas in Austin and has frequently written about group buying, influenced by ongoing studies in sociology, cultural anthropology, and semiotics. At Get Grouby, James is in charge of guiding company branding, application development, social media reach, and strategy.
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