NEW YORK, August 10, 2011 /PR Newswire/-- A new financial research report released today on private company Groupon Inc., which has filed for a proposed IPO concludes that Groupon's IPO is in serious jeopardy and is likely to be delayed or withdrawn entirely due to a number of serious issues that are causing its business fundamentals to rapidly deteriorate, specifically that:
- Dramatically increased competition from competitors with natural competitive advantages to Groupon, particularly local publications that have pre-existing relationships with local advertisers
- Well-funded national competitors are even further pressuring Groupon's business, particularly from Google, Inc.'s newly launched Google Offers, and from privately-held Living Social, which just raised $400 million in venture capital in April of this year that it is deploying to launch a massive television advertising blitz
- Groupon faces serious legal troubles from the SEC and local state governments, which will likely cause it to acknowledge it sells gift-certificates rather than coupons, with major new consumer regulatory costs and burdens
- Groupon's users are each becoming less active over time
For the full research report from PrivCo.com, the leading provider of financial data on private companies, see: http://www.privco.com/private-company/groupon-inc
Increasing Competition and Pricing Pressure
PrivCo's research on Groupon, Inc. included information from contacts at Google and other competitors, who have confirmed they are undercutting Groupon's long-held 50% fee charged to merchants. Google is now reported offering as little as a 30% fee, forcing Groupon to lower its own fees in response. Groupon's recent amended and updated IPO filing (S-1) filed on August 9th demonstrates this fact: gross margins dropped from 41.9% in the first quarter by over 3 percentage points to 38.8% in just this three-month period (in 2010, Groupon's average fee was 45.2%, or just below its typical 50% cut of each merchant's sale). Based on channel checks, PrivCo expects Groupon will be forced to further cut its share of each "groupon" sold. If Groupon's fee drops to 30% or even lower, Groupon, Inc.'s entire business model, already unprofitable, may even become unsustainable.
No Natural Competitive Advantages Over Local Competitors
Local competition, particular from local newspaper websites, is badly damaging Groupon and will further do so. Local newspapers have the following natural competitive advantages over Groupon: (1) an existing local advertising sales force, including "boots on the ground", (2) existing relationships with local merchants, many of whom are small and difficult to connect with (bar or restaurants owners for example are notoriously difficult to reach and typically require an in-person sales visit to make a first sale), and (3) a larger local audience in each market than Groupon or similar national player.
Confirming Examples: New York Magazine recently launched daily deals, and can leverage its pre-existing 1.96 million unique visitors to its website in June (according to Compete.com). LATimes.com had 7.4 million unique visitors in June, while the Philadelphia Inquirer's website had 1.6 million unique visitors in June and San Francisco Chronicle had 3.1 million monthly visitors. PrivCo estimates that Groupon had no more than a mere 50,000 to 150,000 visitors in any of these major markets in the same period, similarly has relatively smaller penetration in any of its 100s of local markets, therefore cannot possibly compete with established local competitors who have larger built-in audiences married with local merchant relationships. Since Groupon cannot compete for merchant deal dollars either on local audience size offered, existing access to merchants, nor compete on price, PrivCo concludes that Groupon has no natural competitive advantages and therefore the company's business model may not be viable.
Groupon is currently a part of 15 class action lawsuits relating to the way their discounts are offered. "The crux of the argument is that Groupon's discounts are in fact gift certificates, which are heavily regulated by consumer protection laws," says Joseph Ranzenbach, VP of Operations at PrivCo. "Groupons currently expire within a few months, and many go unused, providing a source of additional income to merchants to compensate for the exorbitant 50% fee Groupon typically demands."
If groupons are deemed gift certificates, in most states it would be illegal to have them expire or expirations cannot be less than 5 years (depending on the state). Since groupons are already highly unprofitable already, this would further reduce merchants' willingness to offer deep discounts with Groupon, or force a reduction in Groupon's share of the sale, or both, badly damaging Groupon's business model. The likelihood of a large fine, if any, for Groupon's past sales of billions of dollars of expiring gift certificates to consumers must also be considered.
Groupon User Fatigue is Evident
"According to the amendment to Groupon's IPO filing, the number of cumulative subscribers grew to 115 million users in June from 83 million users in March," says Dmitriy Goman, VP of Research at PrivCo. "However, fewer than 20% of Groupon's subscribers have ever purchased a thing."
Further PrivCo's report shows that users are using Groupon less after initial registration: despite subscriber growth of over 39% in the quarter, groupons sold grew only 15%. Groupon's revenue per subscriber decreased to just $9 from $10 from the first to second quarter. Quarterly revenues per subscriber were $17 at one point in 2010, meaning each member's usage has plunged, falling nearly in half and showing every sign of falling further.
Groupon's IPO is Likely To Be Delayed or Withdrawn Entirely, and Groupon's Business Model May Never Be Viable. For a full copy of PrivCo's private company financial research report on Groupon, please see: http://www.privco.com/private-company/groupon-inc
PrivCo Media, LLC (www.privco.com) is the premier source for business and financial data on major privately held companies. PrivCo publishes exclusive financial data on over 209,401 private companies, as well as details on over 79,557 private company deals, including private company M&A deals and multiples, venture capital investments, private equity buyouts, pre-IPO activity, restructuring, and more.