Coupon kings
Psst — have we got a deal for you. The rise of Groupon and its imitations is a classic internet story. But where does it end?
A few short months ago, they were the kind of emails you could have mistaken for ill-directed spam: discounts on fondue dinners. Cut-rate Bollywood dance lessons. A chicken soup care package. Yet for deals website Groupon, offering discounts on items consumers never realized they wanted or needed has fueled the most dramatic growth story in the history of the Internet. And, like all good stories, there are twists and turns. Hundreds of copycat competitors have sprung up. An expensive advertising campaign turned into a public relations nightmare. And a critical executive has departed, just as the company is rumored to be mulling an initial public offering valuing it at an eye-popping $US25 billion. Even by the exponentially inflated standards of the Internet, Groupon’s rags-to-riches tale is remarkable.
It begins in America’s Midwest, with 30-year-old Andrew Mason. After graduating with a music degree, Mason moved into Web design and pursued a masters in public policy before founding The Point, an Internet site that, in his words, “existed to solve the world’s unsolvable problems” by harnessing the power of social networks to lobby companies and governments. It went nowhere. Yet Mason realized that collective action lent itself to a less altruistic end: the largely untapped world of local commerce, where store owners often struggle to find new customers. In November 2008, the platform created for The Point was repurposed to offer consumers in Chicago a daily “group coupon”, or Groupon, with discounts for local businesses. Barely two years later, the company employs some 6,000 people, delivers daily emails to more than 60 million subscribers in 43 countries (including Australia—more on that later), and boasts revenue approaching $US1 billion annually. Oh, and by the time you finish that sentence, you can be sure those numbers are obsolete.
“It’s certainly a fun one,” Groupon’s president and employee number 200, Rob Solomon, told AFR BOSS in March of his experience at the company. An independently wealthy veteran of Yahoo!, Sidestep and venture-capital firm Technology Crossover Ventures, Solomon joined Groupon with management heft to complement the creative Mason, a practical joker who, among other things, created office space for a fictitious character, instituted a holiday called “Grouponicus”, and publicly backed a television campaign that poked fun at serious causes before a PR firestorm prompted the advertisements to be withdrawn. Presumably, Solomon’s Groupon ride wasn’t quite fun enough: just two weeks after our interview, he revealed he was leaving after barely a year. “I’m great at a lot of things; I’m not the guy who wants to run a 10,000 person company,” Solomon told Bloomberg Businessweek. “I’m much better at the startup and growth stage.”
His departure comes at a critical time for the company, whose explosive growth seems to be making the lure to cash in irresistible. Groupon was valued at about $US1.3 billion a year ago. Late last year, it rejected a $US6 billion takeover offer from Google. It’s now said to be considering an IPO valuing it at $US25 billion, and the pressure to get a deal done increases daily: while Groupon is currently the coupon behemoth, its easily replicable business model has unleashed hundreds of competitors, most seriously the Amazon.com-backed LivingSocial. In addition, companies including Facebook, Foursquare and, yes, Google are eyeing the same space. “The reality is that, over time, there’s going to be a few big players,” Solomon told AFR BOSS. “We’ve seen it in just about every category of the Internet, and I think we’ll see a similar phenomenon in this category.”
Here’s the Groupon concept. Its salespeople work with local businesses to devise a deal to drive customer demand: say, offering a coupon for $10 that buys $20 worth of food. The coupon is emailed to Groupon subscribers in the relevant geographic area, and only becomes active when a predetermined number of consumers buy it. Groupon keeps a slice of the revenue as commission, while the retailer pockets the rest. In theory, it’s a way for local businesses to tap new customers, with the advantage that the financial outcome is largely predetermined. “I think of Groupon as the e-commerce engine for local businesses,” Solomon says. “The tried and true methods from the old days of Yellow Pages and newspaper advertising and traditional advertising just don’t work at all for these small businesses. And Groupon came along with this new concept.”
The reality can be less of a win-win. Groupon pockets its commission immediately, while retailers must wait 30 days for the first payment and 60 days for the second. For small businesses with limited turnover, that delay between the cost of providing a good or service and receiving payment can be difficult to bridge financially. In addition, while Solomon says the company’s standard commission is one-third of the coupon value, the Internet is rife with complaints about salespeople seeking to impose higher rates—even up to 100 percent. Finally, there’s a fundamental question about the nature of the coupons. If consumers can’t dictate the kinds of discounts they want and are limited to whatever Groupon happens to email on a given day, all of their activity is opportunistic. Does that foster loyalty to the retailer? Or to Groupon?
There are other challenges. In many markets, the company failed to secure the Groupon name, perhaps not anticipating its rapid expansion or the publicity that would accompany it. That’s why Groupon operates in Australia as “Stardeals”—a company called Scoopon has registered both Groupon Pty Ltd and Groupon.com.au. “We sure wish we had our brand name to play with, but someone has decided to squat and take that,” Solomon says, declining to comment further because of ongoing legal action. Nonetheless, Stardeals is pressing ahead in what Solomon calls a “fantastic market”. “The things we look for are high population densities in large cities, a wired and very connected audience, and the demographics: high household income, well educated,” he says. “Melbourne, Sydney, Brisbane, soon-to-be Perth—Australia has these amazing big cities that map to all of the trends that make Groupon successful.”
But can Groupon stay on top? LivingSocial, the rival backed by Amazon.com, just raised $US400 million and is trialing a mobile application called LivingSocial Instant that delivers time-sensitive discounts to consumers. Not to be outdone, Groupon is testing an application for mobile devices that allows people to click one of two buttons: “I’m hungry” or “I’m bored”. Based on the location relayed by the device, an electronic coupon is instantly delivered for a nearby retailer—maybe a place for lunch or, perhaps in typical Groupon fashion, an eight-week salsa dancing course. At the same time, Groupon’s core product—the daily email—continues to be rolled out in more locations as it strives to develop what Solomon says is a category of local e-commerce that didn’t exist before. It’s a high stakes game that, given the history of the Internet, seems certain to end badly for the vast majority of players.
“There’s only been five or so iconic Internet companies that have stood the test of time and are global,” Solomon says. “The first three were Yahoo!, Amazon and eBay; then came Google and Facebook. I think we have a chance to be one of those iconic Internet companies if we keep executing well and make the right strategic choices and get this thing right.” It seems those choices must now be made without him.
Published by AFR BOSS, June 2011.