Gustavo Ballvé on December 31st, 2010
Corporate Strategy, Diversified financials, Food for thought, Home, Industries, Investment Themes, Media, Portfolio Management, Retailing, Tech

In this post we collect interesting links on Groupon, the inventor and world’s largest player in the collective buying market. We have always found the business model very interesting, and since Groupon is in the news with a US$ 950mm offering – having rejected weeks ago a US$ 6 billion offer by Google – our interest was renewed. Also noteworthy is the Brazilian Groupon “clone”, Peixe Urbano, which has dominated the local market and made Groupon’s life difficult in Brazil.

Starting with the US$ 950mm offering, stories by the Financial Times and Bloomberg (the latter for free). Then we go back a month or so and find stories of how Groupon supposedly turned down a US$ 6 billion offer by Google, including a rather strange NYT interview with Andrew Mason (one of Groupon’s founders). After the offering Groupon will have some US$ 1.1 Bi to play with, and in this blog post P. Morgan Brown (of ScoreBig) states a very likely target investment for Groupon: its own local sales force.

But this is all meaningless unless you understand Groupon’s business model and a few articles/ sites have tried to address this:

– Obviously Groupon’s official site for businesses has to be mentioned (and its tips, tutorials and success cases taken with the necessary pounds of salt).

– WSJ’s Groupon’s $6 billion gambler story and the now-classic Forbes piece Meet the Fastest Growing Company Ever – Usually we shun BusinessWeek, WSJ and Forbes as a bit too carried away in their profiles, but the WSJ does try very hard to present a fair and balanced view… The Forbes story includes a nice, 2:24 introductory video while the WSJ’s, more recent, already describes the rejected Google bid and lists Groupon’s market share as “80%-ish”.

Groupon, a TechCrunch teardown – VERY interesting analysis of what Groupon is or, at least, what it was in April 2010. A rare case of fact-based research amidst the hype, and yet flawed. To save you the time of sorting through the comments to find the good ones, there are three very important issues:

— 1: The author seems to assume that Groupon deals are good for all businesses;

— 2: Also failed to mention the “float” that Groupon gets to keep and invest: they get paid upfront and only pass the retailers’ share after the customer cashes the coupon in – assuming he EVER does it.

— 3: Too much optimism regarding Groupon’s future profitability: “low customer acquisition costs” relative to other models, sure, but not “low” as in “irrelevant” – Groupon advertises a lot – and not necessarily constant either (if anything, now they’ll have to reach advertisers and customers further down the “technology adoption” curve). And it neglects (as we’ll discuss later on) increasing competition via direct competitors such as Amazon-backed #2 player LivingSocial and the likes of Facebook, Google, aggregator sites like SaveMe in Brazil, niche players and so on.

Bargain junkies are beating retailers at their own game – Wired (whom else?) uncovers the “retail hacking” underground subculture… and hype aside, makes a valid point that Groupon is “safer” for retailers and easier to use for customers (at least compared to the paranoia-inducing bargain-hunting examples they list).

The inevitable Charlie Rose interview (videos embedded at the bottom of this post). Transcript also available.

Of course there are doubts regarding the business model. Some say the promotions actually make a high percentage of small businesses lose money, and the fact that some percentage (Groupon’s and the media’s numbers differ a lot) of advertisers on Groupon never do a second campaign is seen as proof of this point. Often it’s a narrow view: people are looking at that one particular campaign and hoping that some cross-selling at full price will occur. One example of the wrong way of thinking would be a beauty parlor hoping that people who get a haircut at 50% discount will also necessarily have their nails done at full price in the same visit. That’s apparently not the typical Groupon customer’s behavior. Even so, that doesn’t take into consideration any measure of conversion of Groupon discount-seekers into recurring, full-price customers – so the NPV of such campaigns would have to somehow include that, along with brand exposure via social-media sharing of the promotions and so on. It’s better seen as an investment, part of a marketing budget. As with all new tools and mediums, not all businesses will inherently benefit from Groupon – and those that have the potential to do so still have to create smart campaigns (for instance, those businesses dealing with excess capacity). It was very well dealt with in this NYT You’re The Boss blog post, and again well illustrated in this academic study on Groupon’s effectiveness (free PDF download after registration). For a more practical guide on how to run a Groupon campaign, this post is a great start.

The writing above considers Groupon in its current “shape and form”… but as we’ve argued in Buysiders before, perhaps Groupon can be better used in a world in which hyper-local advertisement meets geo-tagging, social reviewing and maybe even augmented reality apps. This TechCrunch post better illustrates the same point: “The future of local commerce is Facebook + Foursquare + Yelp + Groupon“. In it, the author states: “In my mind, the ultimate product combines all of these features in a mobile app.” (he’s talking about what each of the 4 brings to the table and also adding one-click payments – sounds great indeed). In fact, John Batelle also had a great post recently that goes along this line. Finally, Groupon itself isn’t standing still.

Having said all this, we haven’t done enough research to call Groupon’s future neither bright nor dark. Fortunately, and this is perhaps the most important point of this post, we don’t have to! We’re nervous about business models in which it the model itself isn’t established, the numbers are virtually unknown and the only certainty is increasing competition (not just the many direct competitors, but also Facebook Deals, Google, etc.) that will be looking for increasingly harder-to-reach advertisers – which is almost certain to drive down Groupon’s cut while costs increase. Sure, the idea behind the $950mm offering could be for Groupon to ensure its place as the last man standing – or a better negotiating position the next time someone comes looking for a deal. At this point, for us it’s much more a case of sitting in the sidelines and studying this at a distance, seeing how it evolves and trying to extract useful insights about retailing, media, Tech/ online services and payment systems. There are easier ways to make money right now, in listed, liquid shares of more established business that we know much better, with good and aligned management teams and controlling shareholders, with good prospects and ultimately a better risk/reward proposition.

What about Brazil, since we mentioned Peixe Urbano in the introduction? One of the advantages of emerging countries, or so the legend goes, is the ability to leapfrog technologies and adopt models that are already working abroad. It’s the “crystal ball that works” approach, something we strive for when we look at companies abroad as investors (as we’ve done for over 10 years) and use it to help us develop insights about local businesses. But it can also mean that local entrepreneurs develop a leg up on the foreign competition by being first movers and developing scale. We don’t know nearly enough to say that it has been the case of Peixe Urbano – the Brazilian Groupon “clone” currently dominating the local market – but it’s definitely worth following.

In fact, when Groupon got to Brazil in June 2010, Peixe Urbano was so far ahead (despite being about 3 months old!) that Groupon tried to use a brand called Clube Urbano. It didn’t make much of an impact and it has since reversed its strategy to re-brand itself… Groupon. The recent wave of Groupon TV ads in Brazil may be a sign that international expansion won’t be easy (they chose the acquisition route in Germany)… Even before Groupon came to Brazil, there was another local player – ClickOn – receiving significant funding (over US$ 8mm). New collective buying sites are still popping up (over 250 and counting) and the picture is far from clear. At least now, since the Portuguese word for “coupon” is “cupom” and the pronunciation is very similar, the Groupon name rings just right… But we’ve seen so much material on the Brazilian market that we hope to create a separate post.

As promised, the 3 videos comprising the Charlie Rose interview with Andrew Mason (you can watch the whole video at Charlie’s website).

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