Rakesh Agrawal, meet Felix Salmon.
Rakesh is a small business strategist, entrepreneur and avid blogger. Salmon writes about financial matters for Reuters.
Rakesh sees a rocky road ahead for Groupon; Salmon thinks Groupon is doing swimmingly, thanks.
They are both right, which makes them both wrong.
In my first Groupon post “Two Tales of the Groupon Tool”, I explained that, in the hands of the right vendor, Groupon could increase long-term profits; in the wrong hands it could spin out of control and spell disaster.
Rakesh has posted at least twelve blogs in the last month dissing social network coupon sites at http://techcrunch.com/author/rockya/ Agrawal’s headlines read like The New York Post: “Why Groupon is Poised for Collapse”, “Why I Want Google Offers and the Entire Daily Deals Business to Die” and “Groupon Was “The Single Worst Decision I Have Ever Made as a Business Owner.”
It’s too bad that Rakesh clouds his best argument (bad accounting) with tales of woe from merchants who didn’t know what they were doing when they bought in to Groupon.
Agrawal writes about a woman whose Groupon was her “single worst business decision, ever”. She believed a predatory sales rep who promised her the moon. She should KNOW her average sale price and realize that the Groupon was a losing proposition. It’s sad, simple math.
Some of what was sold to that coffee shop owner was not in line with Groupon policy. Businesses are allowed to ‘cap’ Groupons within reason. Timing is another issue: this coffee house was deluged because of a nearby event. Bad timing.
Felix Salmon http://blogs.reuters.com/felix-salmon/, on the other hand, thinks Groupon is sprinkled with Strategic Business Fairy Dust. What other promotion guarantees a threshold level of customers who are willing to pay for your product or service in advance? Salmon cites a study by Utpal Dholakia of Rice University, where 65% of merchants offering a Groupon said that the offer was profitable for them IN AND OF ITSELF.
Determining the appropriate offer(s), business cycle timing, pricing, minimums and maximum number of coupons–Salmon acknowledges “Its very easy to screw up these things.” This might explain why another study cited in Megan McArdle’s blog http://www.theatlantic.com/business/archive/2011/05/why-does-groupon-work/238706/ claims that “32% of Groupon merchants lost money.” Does that mean they lost money inside the promotion (it’s called ‘advertising, and yep, sometimes, you lose money), or in the long haul (which is the point).
It’s kind of like the debate about the National Debt. One group says it’s a spending problem, another yells it’s a funding issue. Both sides have their points, and that makes demagogues wrong to dig their feet in.
Government, like Groupon, is a tool, and instead of serving us, government has devolved into a system where the tool has escaped our hands at full throttle. Andrew Mason, Groupon’s CEO, has a power tool in his hands and it’s starting to overheat. Congress has a loose chainsaw that could cut us off at the knees.
Government and Groupon, both of them are tools.
Andrew Mason, Groupon CEO, courtesy of business-insider.com
The fate of both is as exciting as it is tenuous. Only one matters a little more, and I’m going to make you guess which one.
Groupon’s accounting issue? Mushy numbers. It’s issue is the strongest reason to pass on Groupon as an investment.
In their filing for an Initial Public Offering, Groupon uses their own “Adjusted Consolidated Statement of Operating Income (CSOI). Here’s how this accounting scheme works: If Groupon takes $25 from a $50 Groupon under CSOI, GROUPON IS COUNTING $50 AS ‘TOP LINE’ REVENUE. The money paid to the merchant ($25) is the “cost of revenue”. It’s kind of photoshopping your head shot for an online dating site, not bothering to mention you are covered with skeleton tattoos from the chest down.
This is only half of their accounting problem. Rakesh Agrawal puts it best:
In its merchant agreement, Groupon dumps the tax compliance burden on the merchant. But this method of booking revenue is inviting the tax man to come take a look. Because Groupon is booking the entire transaction as revenue and treating the payouts to local merchants as cost of goods sold, tax authorities may look at it and say that Groupon is the retailer and should be responsible for remitting taxes on the entire transaction.
It is easier, both politically and operationally, to target Groupon for tax compliance than hundreds of local businesses. Any state in which Groupon has a physical presence could go after them. (emphasis is mine).
In my last Groupon post, I promised to list three reasons to avoid Groupon as an investment. Their ‘happy face’ accounting might be enough. That’s reason number one.
Problem two is ironic: it’s the same problem their merchant clients face: the crush of success. Poorly trained employees who don’t target the proper businesses and strategies for mutual success could topple Groupon as other ‘daily deal’ clones fill the fickle void.
Third, as a Groupon client, I can attest to the DIMINISHING VALUE OF THEIR DEALS. When considering a place for my last New York City haircut, I looked at Groupon (and their new sub-site Groupon NOW), and found a better deal just walking into a few salons around Chelsea.
Fancy number-crunching, the sheer volume of new employees, the importance of good strategy, increased competition with a low threshold of entry, diminishing value, a draconian contract…uh, no thanks.
And, if the US Government finally decides to end the tax break for Internet businesses and/or examine Groupon’s accounting, CEO Andrew Mason might want to offer a Groupon for Groupon, giving ALL the revenue for that coupon to Uncle Sam.
Groupon’s upcoming IPO is a shaky deal. Sometimes the tool gets to humming so loud we forget to turn it off, and the engine just blows. If I were you, I’d steer clear of Groupon (and Washington, DC) until the fiscal cannon is fired.
