The screw-up, lie and die business model
Groupon's implosion is following a very familiar pattern, and it's not the only company doing so.
It basically goes like this: First you get investor cash. Then you screw something up. Then you get your accountants to make it seem that you haven't screwed up. Then it's all over.
I call it the "screw-up-lie-die" template. It's been seen in big companies and small, from Enron to penny stocks. It is so old, it creaks. But fear not. It is alive and vibrant, and is currently being played out in real time at Groupon (GRPN), the coupon-deal company whose IPO turned sour in recent days, ever since it disclosed on Friday that its losses were much worse than previously reported.
Seems that the "golden boy tech startup," as the Chicago Sun-Times put it, was not so golden after all. The reason, it was repeatedly explained in the media, was that Groupon's tenuous "business model" had proven too much for the company's beleaguered accountants.
Groupon is in the business of, in effect, peddling coupons for discounts at third-party merchants. Consumers have to pay for the deals upfront. As the company moved into higher-end merchandise, it began to allow customers to back out. Lo and behold, consumers did back out.
The accountants, it seems, didn't get a handle on all the refunds that were pouring in, and the firm's auditors at Ernst & Young reported this as a "material weakness" in the company's internal controls, as required by the Sarbanes-Oxley regulation.
Let's put aside, for a moment, the accounting issues and regulatory implications, such as how Groupon points up the shortcomings of the phony JOBS Act. Let's focus on the first element of the screw-up-lie-die scenario being played out here, the "flawed business model" part.
It requires a certain degree of sophistication to understand the vagaries of accounting, which is why the "lie" part of the template is where investors sometimes get hung up. But very often, all that's required to understand the "screw-up" part is common sense. And that is what I just don't understand about Groupon.
From the first time that spam emails from Groupon (I must have checked off a box somewhere) started to clog my in-box, I wondered: How do they stay in business? Why would I pay upfront for a coupon? Especially coupons for things that I didn't need or want?
No, I don't want to see the exhibit where actual corpses are shown with their skin ripped off ("Bodies: The Exhibition"). No, I've been to Santa Fe and I love it, but if I'm going to stay there I know where to go, and it isn't where Groupon is offering a less-than-fabulous discount. Besides, there is such a thing as Priceline (PCLN), remember? No, I don't want an "iconic lithograph." No, I don't want "gourmet popcorn." No, no, no.
So after a while I unsubscribed, and that was the last I thought about Groupon until all the bad publicity started coming in. But if I was examining Groupon from an investment standpoint, that would have soured me on the IPO from the beginning. My common sense would have told me that Groupon was in the first phase of screw-up-lie-die. And, speaking of deals, look at all the money I'd have saved by not buying into the IPO! Why, if you ask me, that saving is better than pretty much anything I've seen offered by Groupon.
Groupon is certainly not the only company where one or more phases of screw-up-lie-die are being played out. Sometimes, the template is abbreviated, with the "lie" part omitted, but the third part is almost always inevitable.
Green Mountain Coffee Roasters (GMCR) is a fine example of this. Forensic accountants are all over the alleged accounting peccadilloes of this Vermont-based outfit, which has built up an almost cult-like fervor among its shareholders. Critics maintain that the "lie" part of screw-up-lie-die template is under way. That may well be, but, personally, I am still hung up on what the company does -- or, to put it another way, what it doesn't do, which is to sell a product that strikes me as being remotely useful.
Green Mountain Coffee sells "quality" coffee at prices that, I've found, are actually more costly than the terrific beans, ground to my liking, that I can buy at my favorite coffee roaster on Bleecker Street in Greenwich Village. True, Green Mountain's coffee is available in single-serving portions as K-Cups, manufactured by its Keurig subsidiary. But my Mr. Coffee coffeemaker, which I picked up at Walmart (WMT) for about twenty bucks a few years ago, makes terrific single servings of coffee. If that ever goes on the fritz, I've got a French press up on the shelf that works fine. If that breaks, my old percolator will do nicely.
If you ask me, there's something profoundly flawed about a business model that assumes that customers don't know how to make a decent cup of coffee. Maybe a lot of people don't, but I wouldn't bet the farm on it, even if its accounting was flawless.
You might argue that much of the retail sector is in one part or another of the screw-up-lie-die sequence, thanks to competition from the Internet. Take Best Buy (BBY), which recently announced that it was closing 50 stores. Anyone who has actually been to a Best Buy store would realize that this company is a goner. Its salespeople have no idea what they're doing, and its prices are simply not competitive with what's available on the Internet. Smart consumers use Best Buy's stores as showrooms, examining products and then rushing back home to buy them online.
It's not very nice, but it's precisely the same problem that is plaguing Barnes & Noble (BKS), and which pushed Tower Records into bankruptcy. Best Buy is gamely clinging to life, and is talking about employing highly trained salespeople at smaller stores. But common sense tells you that this company is doomed. It may linger for a while, but it isn't going to be pretty.
The same can be said for some Internet companies that are being crushed in the marketplace. That would include Overstock.com (OSTK), whose business model ceased making sense years ago. It has been plagued by mounting losses that are going to worsen, I suspect, now that the states are pressing for sales tax collection by online firms. Overstock recently announced that the Securities and Exchange Commission had terminated an investigation of its accounting without taking action. But that isn't going to stop the relentless march of screw-up-lie-die.
"It does seem like the Commission is doing the nice thing here since the numbers show that the company is more or less doomed," said accounting sleuth Caleb Newquist in the Going Concern blog.
It can take a while for investors to come to their senses when they own shares in companies that don't make sense. Green Mountain shares are well off their highs, but have a long way to go before the inevitable reckoning.
That's probably the only silver lining for people who bought into the Groupon IPO -- they're getting their pain in one mercifully quick dose.
Gary Weiss is a columnist for TheStreet. Opinions expressed are his own. His most recent book, Ayn Rand Nation: The Hidden Struggle for America's Soul, was published by St. Martin's Press in February.
"If that breaks, my old percolator will do nicely."
An old "Dripolater" would be much better. Percolators tend to burn the coffee.
Copyright © 2014 Microsoft. All rights reserved.
As geopolitical tensions threaten to spin out of control, investors are wondering how best to position their portfolios for the global turmoil.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.