Groupon’s spectacular rise from concept to $6 billion company in two years is hard to believe. Even harder to believe: the company shot down a $6 billion buyout deal from Google Inc. (NASDAQ:GOOG), preferring instead to try to find their own way in a crowded marketplace.
Groupon offers customers a daily coupon. Register for an account, give Groupon your ZIP Code, and they’ll send you an offer for a discount at a local or national retailer every day. If you like the offer of the day (which is typically 50 percent or more off standard rates at local restaurants, spas, etc.), you pony up the cash and print out a coupon with a fresh bar code on it.
Web companies have long been trying to tap the local advertiser market, and Groupon’s approach seems to have clicked. In the wake of Google’s buyout offer, Groupon’s in a mad rush to IPO in an attempt to establish market dominance before the company’s copycats start gaining ground.
An IPO date hasn’t been set, but here are three big warning signs you might want to consider before investing in Groupon’s stock:
1) Competition. Groupon’s 30-year-old CEO Andrew Mason estimates some 500 copycat sites have sprung up since Groupon first started offering discounts in 2008. The barrier to entry is so low, a lone programmer could probably replicate the site’s functionality in a day. After that, it’s all up to clever marketing, knocking on businesses’ doors and convincing retailers that, yes, it is in their best interest to sell their products at 75 percent or more off the going rate (including Groupon’s cut).
Already, a second company, LivingSocial, has started generating major press after first scoring a $175 million investment from Amazon.com, Inc. (NASDAQ:AMZN), then engineering what’s been dubbed the “most successful online coupon campaign in history.”
Shortly after securing the investment from Amazon, LivingSocial offered its email subscribers 50 percent off a $20 gift card at Amazon.com. The company sold 1.3 million of the vouchers netting Amazon and LivingSocial $13 million in cash up front, according to Mainstreet.com.
2) Is Groupon just an internet fad? One big flaw in Groupon’s model is the fact that it’s hard to offering compelling discounts via email 365 days a year. If the company sends out a few stinker coupons, I expect that’ll lead Groupon’s 50 million or so subscribers to stop opening the company’s emails. After a few weeks of clicking “delete” every time you see a Groupon email, you’ll probably decide to unsubscribe from the service altogether – and that will make you a lot less inclined to sign up for similar services in the future.
3) Groupon may have spurned the wrong company. Just because Google got shot down by Groupon, that doesn’t mean they’re going to hang up their hats and slink away from the growing local advertising market. By rejecting Google’s overtures, Groupon may have created a very powerful competitor for itself. Google’s scale makes it a logical choice for offering daily deals from national retailers. As the smart phone market continues to grow, too, Google will be able to leverage GPS to target ads at users who are near local businesses.
While doing it’s due diligence before making an offer for Groupon, Google got a nice hard look at the company’s numbers, operations and marketing tactics. Now, they can use that information as recon while dumping billions of dollars into their own efforts to tap local advertisers (a little network they’ve dubbed Google Offers). If I had to bet on one of the two companies to succeed in long-term, I’d lay my money down on Google.
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