In 2008, Andrew Mason pioneered a new trend in local commerce that begot one of the fastest growing companies in internet history. A mere five years later, Mason is out of a job and his company, Groupon, is left to find a new way to stay alive.
Groupon announced in a press release that Mason, the company’s founder and CEO, had been fired and that Executive Chairman Eric Lefkofsky and Vice Chairman Ted Leonsis will occupy the “Office of the Chief Executive” until a new permanent CEO is appointed.
While the firing did not come as a surprise to many who had followed the company’s financial progress over the past few years, with even Mason himself acknowledging it was inevitable, it does leave a question mark as to Groupon’s next move.
With the oversaturation of daily deals sites leading to decreased profits, Groupon is looking to shift its focus from small local business third party vendors and fledgling international markets to find long-term, sustainable profit for the first time in its history.
Not So Great Expectations
On February 27, the day before Groupon announced it had fired Mason, the company released its fourth quarter and yearly earnings reports from 2012.
Although it reported a 30% year-over-year revenue increase from the previous year, meeting Wall Street targets according to Chicago Business, its cash from operations figures fell from $169.1 million at the end of the 2011 fiscal year to $65.7 million.
It also predicted its first quarter revenue for 2013 to hit the $585 million mark, far below analysts’ prediction of $650 million. These two figures, along with an unstable performance record, led to its shares plummeting 26% in after-market trading immediately following the earnings report release.
Not meeting expectations has been an unfortunate trend in Groupon’s history.
The San Francisco Chronicle reported in January that Groupon’s stock price had dipped by more than 70% since its November 2011 IPO. Initially valued at $20 a share, the company’s stock price hit a low of $4.42 a share after last week’s earnings report. Though stocks surged briefly last Friday, they remained around the $5 mark this week.
A 2011 profit that turned out to be $22.6 million less than what Groupon initially reported also did little to engender trust in the company’s accounting practices among investors, according to TechCrunch.
Once thought to be worth around $6 billion (which is what Goggle offered to buy it for in 2010), the company is currently valued at $3.3 billion.
As the daily deals market became saturated at lightning speed over the past few years, consumers have stopped spending on coupons the way they did when the fad was fresh. With multiple companies barraging inboxes with similar offers, the mystique of scoring a great deal faded, and companies were either forced to bow out or get creative.
LivingSocial, one of Groupon’s main competitors, announced last November that it would be laying off 400 employees in an effort to turn sustainable profit. AllThingsD.com reports that the company suffered a $565 million operating loss on $124 million in revenue in the third quarter of 2012, with operating expenses of $193 million.
For Groupon, yet another blow came with the expansion into an international market proving to be less than profitable; the company reported slowed European sales in the second quarter of last year. What Mason and his company hoped would be a boon to business has so far failed to produce the numbers of Groupon’s initial success in the U.S.
At one time the prettiest girl on the room, inspiring copycat sites and brave expansions, Groupon has aged less than gracefully, and is now tasked with finding a new, more mature niche, sans Mason.
Mason’s firing represents a need within the company to shift focus almost entirely, potentially scaling down the scope of operations while refining what it wants to achieve.
As Business Insider points out, Groupon has been in three businesses simultaneously for the past couple years, focusing on its foundation of daily deals and local commerce while also building an e-commerce presence.
Its Groupon Goods venture provides the company with its only business presence that does not involve a third party. Groupon offers discounts on its own selection of products that it sells directly to consumers.
The service offers discounts and convenience in the style of Amazon, but relies on a more carefully curated selection of goods to pique customers’ interest.
While profit margins are much lower for the goods than its merchant-facilitated deals, yielding 15% versus 35% respectively, Groupon Goods could prove to be a more sustainable business model, as the company is not dependent on the cooperation of third parties.
This third party cooperation is precisely why the company’s fortunes have been volatile. “If Groupon plans to survive, it will have to recognize that 1) taking 50% of the revenue an already generous deal generates is too high a price-point when there are so many Groupon clones; and 2) it must do a better job of working with merchants to convert redemptions into repeat business,” says Dwight Dunkley, a marketing consultant at Collaboration 360.
“As long as merchants feel burned by even the most successful deal on Groupon because they don’t get the promsied new repeat customers, then Groupon is doomed to eventual failure as the word gets out. The small business owner community tends to be small,” states Dunkley.
Business Insider suggests that the fact that the majority of Groupon’s remaining management team has worked at Amazon could signal a shift toward goods rather than local deals.
International business may also need to get trimmed significantly to reduce the number of markets the company operates in to only the most profitable. Cutting between 10 and 20% of the worst performing of Groupon’s 500 markets could result in a substantial increase in profits, according to Reuters. International division deals reportedly require twice as many people involved as domestic deals.
Other cuts Reuters cites may come from within Mason’s framework of fundamentals, starting with his signature, quirky editorial staff. Such a move would indicate a more serious path for a company known for its off-kilter style and sense of humor.
Not to be ignored, however, is Groupon’s wealth of information on local commerce. According to David Moore, CEO of City Rewards Network, a local coupon aggregator, “Groupon is in a unique position because of the vast consumer following they have. What they need to focus on is engaging in transactions with merchants that allow for long term relationships that benefit all parties.”
While many observers cite Groupon’s email list as a prized company attirbute, Moore points out that there’s more to Groupon analytics than just reach. “Groupon is probably sitting on massive amounts of consumer spending and transaction data,” states Moore. “They should focus on getting through the next few quarters by making solid paridigm changes. Groupon just hit the reset button and as long as they execute on new complimentary strategies, I believe the company still has a chance.”
The direction the board wants to move the company in will certainly dictate their choice for the company’s next CEO, and they are currently looking exclusively at candidates outside of the company.
Bloomberg reports that directors plan on hiring an executive recruiting firm to find a new permanent CEO with three to six months, and that interim executives Leonsis and Lefkofsky have been ruled out as candidates.
Current Amazon Senior Vice President of Seller Services Sebastian Gunningham is one potential candidate, noted by Business Insider, who could help with a move to make Groupon Goods a higher priority.
It may be a wait to see who eventually takes the reins, but Mason’s successor will immediately face the inherent challenges of not only setting the company on a more profitable course, but also of working closely with a co-founder, Lefkofsky, who may still be entrenched in old practices.
As Bloomberg points out, any candidate who takes over will have to stand firm to make the necessary changes and reverse Groupon’s currently tanking image. So far, the company has not announced any plans to change the current business model.