Investors in online deals company Groupon Inc (NASDAQ:GRPN) had a roller coaster ride last week as the company posted wider losses in the fourth quarter. The company posted a quarterly loss of $81 million in the latest three months, up from the $65 million reported in the same period of 2011.
The recorded loss came despite revenues increasing of 31.3 percent to $638.3 million. It’s not that the market had no inkling of the poor results but the fact that the financial performance fell short of street expectations resulted in 24 percent drop in stock price in a single day.
What happened after these disastrous but not entirely unexpected results is nothing short of a high pitched drama. The results put the company board under pressure to fire the quirky chief executive and co-founder Andrew Mason who has been with the company for more than four years.
The move was seen as a positive development for the company and marked an end to the era underlined by controversial accounting techniques and deep cuts its stock made. The company’s stock price tumbled more than 75 percent from its listing price of $26 in November 2011.
“The events of the last year and a half speak for themselves,” Mason wrote in his departing notes to employees. “As CEO, I am accountable.”
While Mason’s misplaced confidence is well documented, there is little doubt that his departure is not a solution to Groupon’s problems. The company’s real problem is its business model which is ludicrously simple to replicate with very low entry barriers.
While the Groupon’s solution seemed to favor both merchants and customers initially, the market began to understand the flaws only after the company got listed. Following Groupon’s record breaking success with group discounts, it was inevitable to be followed by its competitors.
What ensued was an intense pressure on margins which forced the company to get into direct deals – a marked departure from Groupon’s original strategy of just connecting buyer and seller and taking its cut for doing so. The move into direct deals brought the company in competition with Amazon and eBay.
Almost simultaneously, Amazon.com, Inc. (NASDAQ:AMZN) sensed the potential in daily deals and online coupons. Unlike Groupon Inc (NASDAQ:GRPN), Amazon’s view recognizes that daily deals is a viable business, although the margins seen earlier have permanently eroded now.
In retrospect, Amazon’s bet on the business through its Amazon Local service and the substantially controlled Living Social site appears to be better placed with multiple lines of business and a proven business model enabling the company to withstand unwanted surprises. Interestingly, Amazon has written down a part of its investment in Living Social but the update was no deal breaker when Amazon reported its results in January.
eBay also provided to be tough competition for Groupon when it announced its Lifestyle Deals section in October last year. The online merchant has taken to social media in a big way by incorporating Facebook-like features in a bid to boost revenues from its services. Traditionally, eBay has focused on products but understands the transition to services is a critical one.
Similar to Amazon.com, Inc. (NASDAQ:AMZN), eBay Inc (NASDAQ:EBAY) has formidable and profitable operations to internalize the initial losses generated by the group deals business. Facebook was also among the adopters of the daily deal businesses but has since abandoned its initial efforts.
As any growing industry, daily deals business is also an evolving one and it is too early to say Groupon Inc (NASDAQ:GRPN) has lost the bet although any negative publicity is only going to push its customers to Amazon.com, Inc. (NASDAQ:AMZN) and eBay Inc (NASDAQ:EBAY) both of which have means and intent of growing this business.