Another bad week for Groupon. The latest problem for the adolescent daily deals company is revenue restatements arising from greater-than-expected customer refund provisions. As a result of this restatement, Groupon lowered its fourth-quarter revenue by $14.3 million and its net income by $22.6 million. The company has now reported a net loss of $64.9 million on revenue of $492 million. Investors gave the company an immediate 13% stock price haircut, then later a little more.
Groupon’s issues are starting to look chronic, more than acute. It’s beginning to feel like a web 1.0 company that went public in a blaze of excitement with a spectacular new idea, only to later disappoint. No-one likes a spoiler.
Last year, the company got into trouble for including in its revenue numbers the merchant
share of its deals – an amateurish mistake. After federal regulators questioned this, the company almost halved its revenue. Since then, Groupon has become a public company, and the fact that it now has had to revise its numbers again raises questions about the company’s ability to manage its financial reporting and give investors an accurate picture of how it is faring. All of this raises the fundamental issue of internal management. “We believe Groupon is now a ‘show-me’ story, where a company’s ambitions are higher than the level of its internal planning and controls,” Jordan Rohan, an analyst with Stifel Nicolaus, said in a note to investors after the latest restatement. Internal auditors are now questioning the strength of the company’s financial controls and lawyers are trawling for class-action lawsuits.
Moreover, there are real doubts about Groupon’s business model. Both merchants and investors are having second thoughts about the nascent daily-deal industry. Merchants are concerned about the capricious nature of consumer behavior in utilizing deals (e.g. an entire restaurant full of diners using a Groupon deal) and the low rate of repeat business from new customers gained through such offers. Investors fret over the rising cost of merchant acquisition and shrinking margins. The amount of billings Groupon booked as
revenue narrowed to 37 percent in the third quarter from 42 percent in the prior period and 44 percent in the first quarter. Groupon is responding by going beyond daily deals business (e.g. Botox interventions), but that is pressurizing its margins further and increasing the likelihood of refund requests.
Did Groupon take off too soon, with too little in the tank? Will the mistakes continue, or are they over? And is the idea which got Groupon up in the air unique and inimitable enough to keep it there? It all depends on who you ask.