Groupon Inc (NASDAQ:GRPN), the market leader in the daily deal voucher sales, may not be such a good investment idea, says a report from the Huffington Post by Norman I. Silber. The author believes that vouchers sold by the company are a risky affair as to redeem the voucher one has to deal with “Groupon’s network of small, often struggling merchant partners.”
“In short, the company’s balance sheet has the elements of a ticking time bomb which could explode at any moment — leaving consumers and investors with little or nothing to show for their spending and investing,” says the author
Despite refund from Groupon, customers are at loss
Since the existence of Groupon Inc (NASDAQ:GRPN), the amount of total unused vouchers has increased to $725 million. Groupon promises to pay back the customer if the merchant fails, but the financial stability of the company is itself questionable. So, the refund promise does not hold a strong satisfaction for users.
Owing to a federal lawsuit regarding the validity of its vouchers, Groupon promised its customers that vouchers issued will remain valid forever. Such promises from the company encouraged users to delay their redemptions, and many of those users end up with the vouchers for goods and services that no longer exist. In such a case, the customer will get back the original outlay as promised by Groupon Inc (NASDAQ:GRPN), but “this does not provide the economic or intangible benefit that the consumer was expecting.” Despite the refund, customers are losers considering the inconvenience and loss of the time value of money.
Expensive, risky, and ineffective for merchants
According to a report from the Small Business Administration, 10% of small businesses fail each year, and between 2007 and 2010 more than 2,500,000 small businesses closed down. The author also notes that the failure rate for the Groupon’s partners is higher than the normal rate as the company primarily attracts those merchants who are already struggling.
Though Groupon Inc (NASDAQ:GRPN) considers itself as “the most effective local advertising [tool] available,” it could be expensive, risky, and ineffective. Expensive because it forces merchants to offer discounts of 50% or more, and then share 50% of the proceeds with Groupon. Risky because if too many vouchers are issued, then the cost for merchant may get out of control. For merchants, Groupon may also prove ineffective as customers provided by the company are mainly one time shoppers or coupon hunters, who won’t be counted as loyal repeat customers.
Reserves might not be enough
For 2012, Groupon Inc (NASDAQ:GRPN) beat the revenue estimate by selling a huge number of vouchers, but again failed to post a profit. Consistent losses along with other balance sheet woes, “leave it in no position to back up the hundreds of millions of dollars of refunds it continues to promise consumers,” believes the author.
Early investors in the IPO of the company have already sued the company for understating risk on its financial disclosures. To win back the confidence, Groupon has increased the amount of its refund reserves, but the reserve may prove inadequate considering the growth in revenue for the company.