Groupon Inc (GPRN) Has Much Bigger Problem Than CEO Can Think

Groupon Inc (GPRN) Has Much Bigger Problem Than CEO Can Think
By GrouponRUS (Own work) [<a href="">CC BY-SA 4.0</a>], <a href="">via Wikimedia Commons</a>

Groupon Inc (NASDAQ:GRPN) surprised investors Wednesday by posting a fourth quarter loss of $81 million or 12 cents per share when analysts were expecting 3 cents in earnings on a revenue of $639.8 million. Now the company executives are busy finding excuses to soothe investors.

Groupon Inc (GPRN) Has Much Bigger Problem Than CEO Can Think

On one side, Groupon Inc (NASDAQ:GRPN) chief financial officer told Reuters that the daily deals company has started sharing more revenues with merchants. When Groupon first started, it took 40 percent of the deal-revenue and handed 60 percent to its partners. But now the daily deals company keeps only 35 percent and gives 65 percent to its partners in order to attract merchants.

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Well, that makes some sense; unfortunately other comments haven’t made as much sense. On the other side, CEO Andrew Mason didn’t seem to know what he was talking about. This guy said, Groupon is “better positioned than any other company in the world to plug local commerce into the Web.”

Yeah, and that’s clearly reflected in the company’s earnings, right? Mason’s goofy talk didn’t even touch the basic issues troubling the company.

Our vision is to be the operating system for local commerce. 

As the growth in the core daily deals business is slowing, Groupon Inc (NASDAQ:GPRN)’s offering will compete with the heavyweights like, Inc. (NASDAQ:AMZN) and eBay Inc (NASDAQ:EBAY), in a business where margins are razor thin. Puting the margins aside, couldn’t Mason just say the how he will compete with those juggernauts? Let me tell you one thing – that’s not going to be easy.

The basic problem with Groupon Inc (NASDAQ:GRPN) is that its core business model has been flawed from the get-go. Its daily deal business depends on getting interesting discounts, offering them to a large list of subscribers and cutting a steep commission on each deal. But many businesses like hair salons, restaurants, spas and the likes have complained that they lose money when they offer Groupons, or they report some other bad experiences.

Again, the Chicago-based company uses a part of the cash received from its customers to pay the previous vendors. That causes many to believe that its business model is a pyramid scheme. Of course, Groupon Inc (NASDAQ:GRPN) is now a big brand, but is it valuable? I think no, because its business model – requiring substantial discounts from small businesses and cutting a hefty commission – is not sustainable in the long-run.

What’s worse is that Groupon Inc (NASDAQ:GRPN) missed its own forecasts for the fourth quarter citing issues related to the company’s international expansion (another excuse). Its outlook for the first quarter is also another disappointment. The fourth quarter earnings, first quarter guidance, and Groupon Inc’s failure to turn around its international operations will put further pressure on Andrew Mason.

A few months ago Mason said that he would fire himself if he felt the need to do so. I don’t know when Mason will feel the need to take that action, but investors probably think that now is the time.

Groupon Inc (NASDAQ:GRPN) shares tumbled 22.15 percent to $4.66 per shares. The stock is down more than 75 percent since the company went public in November 2011.

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