Financial Statements for GROUPON INC (GRPN)
Year over year, Groupon, Inc. has seen their bottom line shrink from a loss of $1.3M to an even larger loss of $389.6M despite an increase in revenues from $14.5M to $312.9M. An increase in the percentage of sales devoted to SGA costs from 74.97% to 155.69% was a key component in the falling bottom line in the face of rising revenues.
The above is an excerpt from the Bloomberg Businessweek website summarising Groupon’s Financicals.
A recent report by Deloitte on ‘Switching Channels Global Powers of Retailing 2012’ pegged the composite net margin of the Top 250 Retailers at 3.8% in 2010. This is a testament to how competitive the Retail Industry is and how difficult it is to make money. There were stark outliers in the list though, who stood tall in the list including: Ikea, LVMH, H&M, PPR, Apple, Limited Brands, Liberty Media Corp, S.A.C.I Falabella, AutoZone, Next, Compagnie Financiere Richemont SA, El Puerto de Liverpool, Steinhoff International Holdings.
The outliers are mostly speciality retailers operating in niches such as high fashion, high technology own brands or have very tightly controlled supply chains. The market is difficult for resellers and generalists. Here lies the first problem for a model such as Groupon. The model is a generalist model trying to do many things at once and neither does it deal with its own brands which can enable it to tightly control supply chain and hence margins. The model depends about charging a commission or a percentage of the cost of services being offered by the merchants. The services/products are already discounted by the merchants and hence the margins delivered back to the model are always challenged.
The second and the biggest problem for the Groupon Model is alluded in the opening comments of Bloomberg Businessweek’s summary i.e. the SGA costs attributed to sales. The Groupon model is highly dependent upon building a network of mostly small to medium sized merchants across vast geographies that can at many times be very unreliable. This reach requires huge investment in a distributed sales force that need to be trained on the model and need to bring in substantial volumes to earn their commissions. Attrition is often times very high and the model inherently does not attract the right type of sales talent. The scale required to make the model worthwhile will always demand very high costs to build, motivate and expand the sales force in order for the business to scale.
The vastness of the scale of the model – offers that are local to the customers – essentially translates into a very complex online real-estate of websites. High investment in technology not just to present the offers to the customers but also to manage tracking of the uptake of offers, collection of commission from the merchants and management of cancelation and refunds. The model attracts significantly higher number of cancelations and refunds than the traditional retailer and the process, because it involves third party merchants, in inherently more complex.
The last but critical piece of the puzzle is to honour what is promised to the customer. The model makes it extremely difficult to verify the promise offered by the merchants to the end customers. Customers are often times caught out by the fine prints or are not satisfied the product/services they receive in the end. The complaints process again is very complex as many times there is very little small merchants can offer in terms of compensation or genuine care for their customers. In the process, the brand value and perception of the organisation running such a model suffers and can be damaging in the long term. This is compounded by competition from a lot of me too players who may wish to operate only locally and not deal with many of the issues of scaling.
The Groupon Model may look glamorous and present itself as the new business model of the internet age. However, inherent in the model is reselling of products and services that merchants are ready to offer at a discount because of the shortcomings in their business. Added to this the complexity of the scale required to make this model successful makes it an unviable model in its current form.