Groupon: Two More Nails in the Coffin
In yesterday’s bearish take on the future of Groupon (Nasdaq: GRPN), I neglected to address the company’s much-discussed introduction of “adjusted consolidated segment operating income”, or CSOI, as a key metric in an accurate understanding of their financial health. Put briefly, CSOI relieves operating income of the twin burdens of marketing and acquisition. Their prospectus touts the, ahem, innovative figure as an indicator of the profits to be had in the near future, when Groupon’s loyal costumer base will be firmly in place, pesky competitors and cumbersome ad campaigns will be a distant memory, and the sun, generally speaking, will shine brightly upon the faces of steadfast investors.
Sound too good to be true? Well, not to be the bearer* of bad news, but…
Methinks the 424B4 doth invent too much.
While it’s certainly pleasant to consider the day when Groupon will stop having to shell out to the tune of nearly $500m to get new costumers onboard—and keep them there—it’s also, and ultimately, an exercise with very little grounding in reality. The fact of the matter is that Groupon is engaged in a rapidly emerging market with almost zero barriers to entry, and wherever they look to expand, they are going to find competitors either:
A) Waiting for them, or
B) Waiting for them to settle in, develop a costumer base, and set the stage for a new kid on the block.
In other words, the buyouts aren’t going to stop anytime soon. In fact, as long as Groupon sticks to a script of giving a pretty penny to whatever local outfit stands in their way, there’s going to keep being serious incentive for upstarts to throw their hat in the ring. Furthermore, and perhaps most damningly, a closer consideration of point B yields this startling, but undeniable, truth:
Whatever competitors Groupon doesn’t buy out, Groupon advertises for.
With their sector so brand-spanking new that most people over thirty are still struggling to wrap their heads around it, it’s safe to say that Groupon’s marketing is doing just as much to introduce and explain their business model as it is to build their brand.* Thus, whereas they propose to be building a rock-solid clientele, I’d more realistically liken what they’re doing to warming up a crowd, signaling (dollar by precious dollar) to consumers and merchants alike that the model works. That they are doing this on their own dime is costly; that they are doing to the benefit of their competition, both present and future, is disastrous.
If you don’t believe me, go ahead and think about the Groupon copycats. Now think about how you heard of them. In my case, someone told me that I should try out LivingSocial because it was, and I quote, “just like Groupon.” And guess what?
They were right.
*Pun definitely intended.
*Consider the search bar: would Google (Nasdaq: GOOG) have enjoyed such word-of-mouth success if Yahoo (Nasdaq: YHOO) hadn’t first bought the idea some traction?