Editors note: This is the personal opinion of Jonathan Anderstrom.
The mega coupon clipping giant Groupon has made headlines several times lately. First with a big IPO and most recently with a less then stellar earnings report. Groupon rode the coat tails of social media glory and timed their IPO at just the right time. But, sad to say, Groupon is doomed. I said this to myself right after the IPO and immediately started to research how to short sell a stock. Sad to say, getting set up to short sell a stock is really complicated and I gave up quickly. But not before I came up with 4 reasons on why Groupon is doomed to fail.
1.) No barrier of entry for competitors.
Daily Deals, Living Social, Google Offers. Ring any bells? Owned by the Pioneer Press, Amazon, and Google respectively. Cost to develop these systems? About $5. Competition to Groupon from each of these is serious in our local Minneapolis / St. Paul markets. Being a web design shop, we can crank out a Groupon-like system very quickly and inexpensively. In fact, we already have. The system we created is actually better functionality than Groupons. But the market is so saturated already, it doesn’t really stand a chance in the market. And, it didn’t really cost that much to create. I’d be happy to share the site with anyone who is interested. You can see what I’m saying for yourself.
2.) Groupon loses money.
The company generated a net loss of $275 million in 2011. Competitor LivingSocial lost $558 million last year. If Creed lost $275 million dollars doing web design last year, I don’t think any investors would be too keen on investing in us. If the dot com boom taught us anything, it was that tech companies that don’t make money… don’t make investors money either.
3.) Groupon presses retailers too hard.
Talking to some clients that are retailers that have been approached by Groupon, there is a graveyard of Groupon horror stories among the retail community. Groupon tries to get a retailer to cut prices in half. Then, they try to get the retailer to split all revenue from the deal 50 / 50. So, the proposal to the retailer is to sell the goods or services for 25% of the normal price. I don’t know many retailers that have over 75% margin on every dollar they sell. So Groupon is asking the retailer to take a steep loss on all sales. I’m sure they promise the retailer repeat business but how much is that really worth in order to take that steep of a loss on the front end.
4.) The business life cycle is already mature.
Each business has a life cycle and needs to reinvent itself. Groupon seems to have already got most of America signed up for the deals it has to offer. But I think America has some coupon fatigue setting in. A 30-something male can only take so many offers for a weekend spa special that one has to drive an hour to redeem. It seems that Groupon could tailor the offers much better with some simple web development algorithms. Even a beginner web designer could probably put something together for this that is better than what Groupon has to make offers relevant. The online offer industry is already past the peak of saturation, in my opinion.
So, this all leads me back to my initial conundrum. How do I short sell Groupon and double the $100 that I have to invest?