More Trouble for Groupon IPO--WSJ

In my job I've worked with Gilt Groupe on event promotions, but I also like to shop there. In fact, between Buywithme, Gilt, Gilt Taste, Ruelala, and countless other online sales groups, I get at least 10 emails a day notifying me of the next sale, the next opportunity to buy.

One place I never buy from is Groupon. It seems that when people talk about an online sales "bubble" Groupon always comes up. I thought it was more about the offerings, but there is a lot more going on--as this article on the IPO and significant managament problems highlights. It seems like quite a leap for the company valuation to include full "booking" costs for experiences...completely ignoring the fact that a significant portion of the proceeds go to partners. That this differential accounting led to a 400 million dollar overstatement of revenues seems crazy, and incredibly misleading. Now it seems that the management side is experiencing problems as well, with the COO leaving after only months in the job---headed back to Google of all places.

Groupon In The News - Accounting Weirdness

Frankly, it is somewhat scary to me that I am finding an article like this one, not only important, but very interesting... It also happens to tie up themes in this Digital Marketing class with my other Financial Planning and Analysis class, so my whole academic world is circling right on this very post!!!!

Here is the article: (the link may have expired but just search "Groupon's Accounting" within WSJ site ) http://online.wsj.com/article/SB10001424053111903635604576472531846174782.html?KEYWORDS=groupon

The breakdown of the article is that in the preparation for Groupon's IPO, its financials are compiled and disseminated - like every company. BUT unlike most companies that are IPO'ing soon, they have super high valuations with very little profit to show (if any at all).

Therefore Groupon uses "creative accounting" to create a metric called "Consolidated Segment Operating Income", which in other industry leaders' eyes amounts to Profit before Expenses.

We learned in our Marketing class discussions that Groupon has yet to turn a profit, still very high in costs due to the model needing high personnel costs, but they have to "window dress" somehow...

AmEx Wins!

In professor Pham's Marketing class, we were lucky enough to have the CMO of American Express meet with us, and during that discourse he asked us for Digital Marketing ideas. Specifically, he asked us to for potential engagement strategies for customers. Now, we skip ahead 3 months to Introduction to venturing with Murray low, where we are evaluating several technology companies. When we arrive at the group presenting GroupOn, the inevitable question about competitive insulation arises. Specifically, why doesn't AmEx make daily deals, leveraging the natural advantage they already have with our credit data and existing shops. The answer was "because they are a large company, and large companies suck at innovating." Today, we eat those words, because AmEx has released a new deals platform alongside Facebook.

Initial launch partners include big brands like H&M, Sports Authority, Dunkin' Donuts, Sheraton, Westin, Travelocity and Celebrity Cruises. This is a massive rollout, and I think it's brilliant for AmEx to engage customers on the web, a previous weakness of theirs, and for Facebook to gather even more data about its users. The deal requires that you link your Facebook account to your AmEx, which will naturally be the big questionable privacy point, but if you volunteer this data, the rest is easy sailing. The major problem with many of the daily deal sites is the outreach and training required to use the coupons, but because AmEx has an existing relationship with these shops, they can apply the discount without any additional actions from the shops.

This is the natural outcome of the daily deals fad, it is primarily a marketing tool with questionable financials, but now AmEx can fully own that it is a relationship building tool, rather than a bottom line item. I fully anticipate AmEx becoming the dominant force in online daily deals very soon, and the other credit cards should be following suit before the end of the year.

The Magic of the Disappearing Ad Spend

There was a great article from the NY Times yesterday about how internet start ups are eliminating their marketing budgets from the equation when valuing their company. They call the process ACSOI which stands for Adjusted Consolidated Segmented Operating Income. Start ups from Pandora to Groupon use this to show what their company would have earned without the money they spent acquiring users. To me this seems a little crazy as your marketing spend should definitely be a part of your overall expenses as a company. If you're going to start taking large pieces out, why stop there? Here's a link to the article, so you can decide for yourself.

http://dealbook.nytimes.com/2011/06/17/abracadabra-for-internet-start-ups-magic-trumps-math/?ref=technology

Groupon Vs Living Social – Their Approach to Advertising

At the end of Q1 2011 Groupon had 83 million total subscribers compared to 26 million for Living Social. At first glance it seems that Groupon and Living Social have the same business strategy but the way each company approaches its audience is vastly different. Both companies spend heavily on advertising but rely on different channels to get their message across.

“LivingSocial concentrates the vast majority (73%) of its display ads on the top five U.S. Web properties, especially Yahoo and MSN. Within those sites, the ads run chiefly in email and news sections. The rest of LivingSocial's ads are scattered around the Web. Groupon takes the opposite track, running only 31% of its ads to the top publishers' site and spreading the bulk (69%) across mid-tier and long-tail sites.”

The reason might lie behind the demographic and geographic make-up of their audience. Geographically, Groupon's user base lies towards the Midwest and Pacific regions, while LivingSocial is stronger in the East. Which makes sense as Groupon is headquartered in Chicago while LivingSocial in Washington, D.C.

Demographically, Groupon users are younger than its rival’s (25% Groupon users are in the age bracket of 18-24 compared to Living Social’s 10%). Also while Living Social users are more gender balanced, Groupon users are primarily female.

Another reason for the difference in choice of advertising channel might lie in the retail categories that the companies focus on. More than half 50% of Groupon's offers are for restaurants, while more than 40% of the LivingSocial's deals are for books and magazines.

It is worth noting that both companies heavily rely on display marketing instead of search marketing (SEM or SEO) due to the nature of their business model which relies heavily on interruption marketing.

At the same time the differing strategies of both companies raise the question as to who is smarter and why? And what is the brand impact of these strategies. Does LivingSocial benefit from being more selective about its ad placement or is it just a matter of targeting its older audience who read more books and magazines more effectively? Is Groupon chasing its younger audience when advertising in niche websites or is the game simply about achieving the lowest customer acquisition cost?

Another thought to ponder in this discussion might be whether these companies intially used these advertising channels because of their target audience or whether their choice of advertising channels has created their unique audience. I guess it is the case of the chicken or the egg…

Source: Online Media Post