After bakery fiasco, can Groupon maintain its appeal?

A single error on the company’s part can lead to dire consequences for small-scale merchants.

By Trefis Nov 30, 2011 8:16AM
Groupon's (GRPN) key pitch to merchants and small businesses is that it's the perfect alternative to traditional advertising in the newspaper and on television. However, the recent case where a U.K. bakery lost some $20,000 on a Groupon deal highlights how the company's daily-coupon structure can potentially be dangerous, especially for businesses with high marginal costs.

Groupon shares closed Tuesday at $16.01 -- well below the company's Nov. 4 IPO price of $20.

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Groupon is the biggest daily discount provider in the world, competing with Google (GOOG), Amazon (AMZN), LivingSocial and thousands of other companies.

See our full analysis for Groupon

Groupons can be a raw deal


According to reports, some 8,500 users signed up to buy 12 cupcakes, normally worth $40, for $10 from the "Need a Cake" bakery in Woodley. That 75% discount promised by the bakery is not unusual for most of Groupon's merchant base. For a small business, a $20,000 loss is hefty by all accounts.


Groupon International Featured Deals Take Rate
The example brings to light the potential losses merchants can run into, especially those with high marginal costs, namely tangible goods food & drinks. For U.S. and international markets, food & drinks comprise of 24% and 17% of the total deals run by Groupon respectively.


While Groupon claims that is assesses the capacity of each business before it runs a deal, it's clear that a single error on the company's part can lead to dire consequences for small-scale merchants. Given the recent slump in Groupon's stock price, bad merchant reviews bring negative press which can further add to the company's problems.


We recently launched coverage on our analysis of Groupon with a $13 price estimate. Refer to our note on why Groupon's valuation has fluctuated significantly over the past 2 years.

Tags: GOOGGRPN
1Comment
Nov 30, 2011 11:53AM
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The SEC should be investigated for allowing Groupon to go public.  Groupon's SEC filing outlined in plain English that their whole business model is a sophisticated pyramid scheme.

Their own SEC filing outlined how their business model is admittedly unsustainable and that they use revenues from the groupons sold today, to pay businesses their share of revenues from groupons sold 3 months ago.

Isn't that the definition of a pyramid scheme?
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