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.
Groupon shares closed Tuesday at $16.01 -- well below the company's Nov. 4 IPO price of $20.
Post continues below.
Groupon is the biggest daily discount provider in the world, competing with Google (GOOG), Amazon (AMZN), LivingSocial and thousands of other companies.
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.
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.
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?
Copyright © 2014 Microsoft. All rights reserved.
Investors are anxious to see if hiring can maintain its strong pace in the second half of the year.
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.