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Saturday, November 5, 2011

Pity The Fools Who Invested In Groupon

Planethype

In December 2010, shocked that Groupon had rejected a buyout offer from Google, I suggested that they were a commodity and should take the money - either $5 or $6 billion depending on whether you read the Chicago Tribune or the NYT - and run.

Yesterday, November 4, 2011, Groupon went public in what is being called "the largest tech IPO since Google went public in 2004," (though to me it's a coupon company not a tech company). At $20 a share the resulting "value" of the company is $12.7 billion

It is common knowledge on Wall Street that this company is a lot of "hype." As former CNBC financial reporter, now Yahoo! Finance blogger Matt Nesto writes in "Groupon IPO: Shares Debut With A Bang, But Questions Remain:" 

"Once the hype of Groupon's trading debut fades, investors will closely evaluate the entire realm of opportunity and risk that lies within the 'daily deals' industry."

In the short-term Groupon is succeeding because it's got the mechanics of a successful business, absent the brand. It combines a little bit of innovation with a lot of hype and some basic customer service intelligence to establish itself as a trusted business with widespread reach:

1. Innovative technological advance - "delivering deals straight to a person's email inbox" (Nesto) - and these deals are routinely deep discounts

2. Marketing itself to vendors - they pay Groupon for the privilege of being a featured business-with-a-deal (John Abell, Wired.com, on PBS)

3. Distribution to a large user base - "30 million subscribers in 45 different countries" (Nesto)

4. Trusted business - the "Groupon Promise" offers money back, no questions asked, if you don't like something you've purchased - and they honor the promise

5. Friendly and highly localized user interface - the website is simple, well-designed, and appealing, and it is absurdly easy to sign up

Looking at all of this it seems like a no-brainer that such a company would succeed. Indeed, Groupon has rocketed to nearly $313 million in revenue (and 10,000 employees) with this model. 

The only problem is that Groupon has little, if any, brand equity. You can use any methodology to assess this that you want; I like Brand Asset Valuator because it's simple and has been used over time. According to the BAV the greater the following assets, the more valuable the brand.

* "Differentiation" - By now the business model they've invented has been copied. Can you tell the difference between Groupon and LivingSocial? (Weak)

* "Relevance" - If you spend a lot of time on leisure activities then yes, it's probably relevant to your life. (Somewhat)

* "Esteem" - Do people have "respect for and attraction to" the brand or do they just like saving money? (Weak)

* "Knowledge" - This is a huge challenge that Groupon has overcome, clearly. (Strong)

Any company that can copy the Groupon business model and improve on it in any of the weak areas above will by definition have a better brand.

This is where knowledge of branding (not to mention marketing) would be enormously helpful to investors yet unfortunately the investor community seems relatively illiterate in these areas, instead falling victim to greed and the crafty tactics of Groupon's promoters.

For example they offered up less than 5% of their stock for purchase - pumping up demand. Stanley Crouch, Chief Investment Officer at Aegis Capital, told Olivia Oran at TheStreet.com:

"The IPO was very engineered and very artificially crafted. The bankers came out with the right balance and they created demand."

In the same article, Josef Schuster, founder of IPOX Schuster, an IPO research firm, expresses surprise that people actually fell for this:

"The price dynamics in these low float deals make the stock trade up in the short term, but it's a long-term risk. We saw this during the '90s but investors seem to be repeating this." (!)

Groupon has succeeded so far because it's established itself as a technology-based trusted intermediary between merchant and customer, able to deliver a deep discount and still make money. Amazon already does this and does it better. Does anybody doubt that they are going to get into this market? And with its extensive reach into customers' lives and status as a trusted provider of information, of course Google is going to try, further notes TheStreet.com:

"Despite a strong opening on Friday, the company still faces obstacles ahead including competition from tech giants like Amazon and Google."

Not only Amazon and Google, but also LivingSocial and many others are going to try to make money from this business model:

While it's true that Wall Street insiders see Groupon as a risky investment - "too far, too fast" - they fail to grasp the importance of brand in influencing the rise or fall of a business. And so do investors.

Anyone can be innovative. Anyone can hire a techie to do code. Anyone can identify an unmet need. Anyone do marketing. And anyone can provide customer service. But very few have the genius to build a mystique that envelopes all of those other things. Howard Schultz did it, as did Estee Lauder, Mark Zuckerberg, Steve Jobs, Ralph Lauren, and Asa Griggs Candler (Coca-Cola). 

What distinguishes brand-builders from ordinary businesspeople is that they knew how to take a product/service and elevate it to a cause. It can be done, but Groupon has failed utterly. And that is why, if you've put any money into this company, it is probably a good idea to reevaluate that investment.

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A separate but related commentary:

Regarding "Occupy Wall Street" - while it is certainly true that any powerful institution will do things to further its own ends, what has happened to critical thinking and personal responsibility? There is no shortage of analysis of Groupon or any other company available freely on the Internet...and yet we continue to tell ourselves what we want to believe, make stupid investments or buy things we can't afford, and then blame someone else when we can't pay for those things. 

At what point do we have to stop blaming somebody else, and start taking personal responsibility for the choices that we make, or don't make? A culture of victim-ology and finger-pointing isn't going to get any of us out of the current economic mess that we're in. And while it's easier to refuse to think and just join a movement mindlessly, in the long run it's a lot more productive to think critically and get involved in a thoughtful way.

Have a good weekend everyone...and good luck!

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