By Ben Strubel of Strubel Investment Management
With all the buzz surrounding Groupon’s IPO I decided to take a quick look at its S-1 Filing. Two things stuck out to me. First it seems Groupon’s management could care less about shareholders and profit. Second, it’s a good thing Groupon’s management doesn’t care about making money because it looks like they might have a tough time doing that.
The introductory letter from Andrew Mason in the S-1 filing tells you all you need to know about management.
“Our customers and merchants are all we care about.
After selling out on our original mission of saving the world to start hawking coupons, in order to live with ourselves, we vowed to make Groupon a service that people love using. (emphasis mine) We set out to upturn the stigmas created by traditional discounting services, trusting that nothing would be as crucial to our long-term success as happy customers and merchants. We put our phone number on our printed Groupons and built a huge customer service operation, manned in part with members of Chicago's improv community. We developed a sophisticated, multi-stage process to pick deals from high quality merchants with vigorously fact-checked editorial content. We built a dedicated merchant services team that works with our merchant partners to ensure satisfaction. And we have a completely open return policy, giving customers a refund if they ever feel like Groupon let them down. We do these things to make our customers and merchants happy, knowing that market success would be a side effect.
Ask any of the mobile handset makers who got blindsided by Android and the iPhone how that strategy worked out. They can learn a thing or two from MyPoints and their quest for excellence with Amazon coupon codes.
We believe that when once-great companies fall, they don't lose to competitors, they lose to themselves—and that happens when they stop focusing on making people happy. As such, we do not intend to be reactive to competitors. We will watch them, but we won't distract ourselves with decisions that aren't designed primarily to make our customers and merchants happy. (emphasis mine) “
Apparently Groupon’s management doesn’t even want to be in the business they are in in the first place. They would all rather being doing something else. This should alarm any investor. Also their business plan seems to be to ignore everyone else and just do what we feel like. Ask any of the mobile handset makers who got blindsided by Android and the iPhone how that strategy worked out.
Also from Groupon’s S-1 is this statement about how they measure the business.
“We don't measure ourselves in conventional ways.
There are three main financial metrics that we track closely. First, we track gross profit, which we believe is the best proxy for the value we're creating. Second, we measure free cash flow—there is no better metric for long-term financial stability. Finally, we use a third metric to measure our financial performance—Adjusted Consolidated Segment Operating Income, or Adjusted CSOI. This metric is our consolidated segment operating income before our new subscriber acquisition costs and certain non-cash charges; we think of it as our operating profitability before marketing costs incurred for long-term growth. “
Basically Groupon would like you to value them based on the income they earn before a bunch of (expensive) costs they incur to earn said income. Of course it’s not really a surprise when you look at the financial statements.
Marketing and acquisition costs per subscriber and per “Groupon” are climbing. Even if you back out the cost of acquisitions and just use the marketing cost line item the cost per subscriber has doubled. Given all the competitors popping up lately this shouldn’t be a surprise.
Also alarming is the fact that revenue per subscriber and revenue per “Groupon” is going down. It is even more pronounced in Groupon’s two oldest markets.
First up is Chicago.
Revenue per subscriber has dropped from $43.37 to $14.29 and the average revenue per “Groupon” is down more than $10 dollars.
Next is Boston.
Boston has seen an even more pronounced drop in revenue per subscriber, from $41.01 to $11.94. Revenue per “Groupon” also has been dropping the last four quarters.
Management that doesn’t care about shareholders and made up Non-GAAP financial measures to mask declining business fundamentals, I guess its (1999 Tech Bubble) déjà vu all over again.