SEC to Take a Gander at Groupon

Groupon’s announcement last week that it was revising its financial results for the fourth quarter has apparently caught the attention of the U.S. Securities and Exchange Commission. The agency is taking a look at Groupon’s financials, The Wall Street Journal reported, citing an anonymous source.

This development caps a run of bad news for the company over the past few days. On Friday, Groupon announced it would revise its results for Q4, citing an inadequate amount of money set aside for customer refunds. This has become an issue as more of the deals offered on the site — such as medical packages or vacations — are falling in the “very expensive” category.

The revised figures trimmed revenue by US$14.3 million to $492.2 million, triggering a stock selloff. Groupon shares dropped by 17 percent the Monday after it made its announcement.

Flawed Model or Growing Pains?

The restatements appear to be manageable and could well be attributed to the company’s rapid growth, John Barrett, a consumer Internet expert and managing director with Cook Associates Executive Search, told the E-Commerce Times.

However, the company is clearly in a difficult spot, he continued, and increasingly it is being faced with the existential question of whether its business model is viable.

“While it’s mildly troubling to see that Groupon hasn’t gotten its internal financial controls in place, the more troubling aspect of the company’s restatement is that we’re no closer to understanding whether or not their business model can produce meaningful profits,” Barrett said.

“Any investor in Groupon knows they’re making a bet on a potentially long-term transformational growth story, so let’s not worry too much about short-term hiccups,” he suggested. “Groupon needs to prove that they have a growth story that we can bank on for the next five to 10 years.”

It Is Over

It is possible, however, that Groupon’s trajectory could be downhill from here. The company may be done in by too much competition and a business model that more and more merchants are shunning.

As for consumers, the novelty has worn off, said Dawn Lerman, a professor of marketing at Fordham University.

“Groupon now has a number of competitors with a similar business model and consumers are only going to buy so many deals,” she told the E-Commerce Times. “And sometimes, such offers seem like a good deal at the time but the pressure to redeem them — or seeing yet-to-be redeemed vouchers sitting in your account — can be a disincentive to buying more.”

Disillusionment experienced by some of the merchants promoting their businesses on Groupon also has been widely reported, she noted.

“Some companies do report increased foot traffic along with sales that exceed the value of the coupon. However, other companies find that instead of bringing in new customers, such deals bring in existing customers who are now shopping at a discount.”

In addition, companies need to be careful about issuing such deals too frequently, Lerman added. “Not only can the deals eat into profits — but depending on the business, they could also erode brand equity, particularly if they’re offered too often.”

These are the reasons that Marty Kotis, president and CEO of RestaurantInvestors and Darryl’s Wood Fired Grill, for example, has always been leery of the daily deal model.

“We don’t believe in the couponing model,” he told the E-Commerce Times.

Typically, what happens is that a customer pays US$10 for $20 worth of food, he noted. The restaurant gets $5 and the coupon service gets $5.

“The pitch from the coupon company is that these are new customers who will be exposed to your restaurant and frequent it in the future,” Kotis said.

What he thinks really happens is that the coupon users are often existing customers — so revenues are lower, not higher. Also, these “new” customers are discount-focused and going where the deals are, so the long-term benefit isn’t there.

Groupon did not respond to our request to comment for this story.