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Adding to growing customer discontent, Groupon, which was initially seen by small mom-and-pop shops as a way to drum up new business, was losing favor with some of them. Merchants began to do the cruel math on the daily deals.
Restaurants offering $50 of food for just $25 only collect $12.50 — not even enough to cover the cost of the food. Some businesses also complain that the deals for new customers anger long-time patrons. Others say that the bargains attract high-maintenance types who don’t turn into loyal customers.
"Your restaurants are full packed with people who aren’t making you any money," says Paul Evans, a Kansas City marketing executive who advises clients against using Groupon.
Take Jessie Burke, for instance. Last year, the owner of Portland’s Posies Café offered a $13 coupon for $6. The café was deluged with customers and Burke ended up having to take $8,000 out of personal savings to cover payroll.
"It is the single worst decision I have ever made as a business owner," Burke said in a blog post that quickly went viral.
Andres Arango, founder of natural jewelry company muichic.com, had a similar experience. He sold 80 coupons — $35 of jewelry for $15 — in two days. But of that $15, he only got $7.50. And he still had to dole out $35 worth of jewelry.
As far as customers? "They never came back," Arango said
John Byers, a Boston University computer science professor who conducted a study on thousands of Groupon deals, wrote that he found that "Offering a Groupon puts a merchant’s reputation at risk. The audience being reached may be more critical than their typical audience or have a more tenuous fit with the merchant."
Groupon also has faced trouble behind its own doors.
After only two months, its public relations chief quit in August. The next day, CEO Mason wrote a 2,500-word email to the staff defending Groupon against critics. That email was leaked to the press and then lambasted by some analysts and members of the investment community for violating terms of the quiet period.
Two seasoned executives hired as COOs also left. The latest, former Google sales vice president Margo Georgiadis, resigned after five months to return to Google. Her departure coincided with Groupon’s announcement that it was restating its revenue by around half.
"It’s like watching a Ben Stiller movie and waiting for the next painful moment," says Mulpuru, the Forrester analyst.
The next chapter
After Groupon filed documents for its IPO in June, the SEC — and the investment community — began asking serious questions about the company.
The first concern stemmed from how Groupon accounted for its revenue.
Groupon roughly splits the money it collects from customers with merchants. But in the filing, Groupon reported all of its gross billings as revenue. Standard accounting principles dictate that Groupon should have used net revenue — the amount it keeps after paying the merchant.
For example, Groupon reported $1.52 billion in revenue for the first half of 2011. But after the SEC questioned it, Groupon in late September submitted new documents that showed that net revenue in the first half of this year was actually $688 million. Groupon was overstating its revenue by roughly half.
Groupon’s growth has no doubt been quantum. Since November, 2008, it has signed up 142.9 million email subscribers and has had more than 30 million customers. But only 20 percent of subscribers have purchased a Groupon. And only 10 percent have purchased more than one.
Groupon also faces concerns about how it has used its money.
On Oct. 7, in its fourth amendment, Groupon disclosed that it had spent half its net revenue — $345.1 million — on marketing costs alone during the first half of this year. Analysts think of those costs as how much Groupon is paying to acquire subscribers.
Additionally, there are questions about how the company has used investor money. Traditionally, investor money is used to grow a business before it goes public. But according to Groupon’s SEC filings, $810 million of the $946 million it raised went to early investors and insiders. That includes $398 million to Groupon’s largest investor, shareholder and executive chairman, Eric Lefkofsky.Next Page >
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