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aresant

Andrew Mason's desire is for Groupon to be where you go when you think "I'm hungry or I'm bored"

If you're calling bubble and confused about how they're running at a loss don't miss this line:

"Participating Merchants: 56,781 in the first quarter of 2011, up from 212 in the second quarter of 2009"

That database of 56,781 merchants is GOLD.

The way their sale staff works is to create direct relationships, phone contact etc - that is not a cheap proposition.

In terms of growth potential there are 10x as many restaurants in the USA as Groupon's entire universe of merchants today.

If they continue to capture the consumer mind that they're the best in the world to answer those two questions, their valuation and growth potential is insane.

Refs:

http://answers.ask.com/Food_and_Drinks/Restaurants/how_many_...

http://www.geekosystem.com/groupon-im-hungry-im-bored/

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I'll confirm the sales model, my mother runs an (awesome) coffee shop in Abbotsford, British Columbia, "Chapleos" - and she routinely gets a call from her Groupon Rep. I suspect that their direct sales staff are incented to contact small business, and update the database on them. To some degree, the principal assets of Groupon are (A) their Brand, (B) their Mailing list, (C) their direct sales force, and (D) That database of business which will soon, if not already, be the finest database of businesses in the world.

Both Yelp/Google have an issue with their data freshness on business. I'm constantly updating open/close times, (and even whether a business exists) on Yelp. And business (particular taxicabs) have long ago figured out how to Game Googles Small Business directory to get in fake listings.

It will be interesting to see what they do with their database.

A funny example of how local merchants try to game Yelp: Plumbers and the like will frequently try to update a competitor's phone number to their own. This is hard to police without calling the merchant.

A have a friend who used to verify these listing changes for Yelp -- but it's all been outsourced to Indian now. Who knows if that will effect quality.

I find particular amusement and disgust with the local merchants who blatantly rate their own services with 5 stars from an account that clearly belongs to them.

Yelp has a pretty massive sales force and existing relationships with local businesses. I wouldn't count them out so easily.

I'm no fan of Groupon, but by not having user-submitted reviews (AFAIAA) they avoid the issues Yelp runs into by trying to please both businesses and users.

So some rough math shows that if you assume that the valuation of Groupon at $20 billion is based on that database of 56k merchants, you come out with an expected value of around $350k per merchant. That seems highly dubious to me, for a few reasons.

1. Many of these businesses are small restaurants, bars, etc. Notorious for going out of business.

2. The ones who don't go out of business can easily switch to other discount coupon providers.

Personally I've somehow ended up with way too many discount coupon providers sending email to my inbox. I suspect I'm not alone. Presumably I'm also not alone in the other behavior I see in myself - of those providers (Groupon, Living Social, Gilt Group, Bloomspot, Yelp deals, ... there might be more... I could care less), I am least likely to open Groupon emails.

Your back of the envelope calculations do show how seemingly ridiculously overvalued Groupon is.

However, one also has to look at what kind of business you can compare Groupon with. My guess it is taking over part of coupon and other marketing companies.

What kind of valuations do those kind of "old school" companies have? I take the market is rather segmented. That is what kind of cash flow were they producing, what is their price to sales ratio and EPS?

Just sticking to restaurants, how many of those restaurants are potential customers for the groupon product as it exists today, let alone repeat customers?

Off the top of my head, I'd say the top 10-15% of restaurants would have no interest in trying Groupon because it cheapens their brand. Then account for chains who don't really need Groupon's reach to offer such promotions (or rather will find it more cost effective to do something like this themselves).

As for the rest of the restaurants, once the novelty of groupon wears off, how often will they come back to give the general public 50% (actually close to 75% off, because Groupon takes half the cut) off meals ?

The Groupon Now idea is a bit more interesting but I think it's something that's going to be best captured by a less physical method of scaling (i.e. not emplying 4000 sales people)

Disclaimer: I'm currently working for a startup in the restaurant space though it does not have any element(s) of a daily deals/groupon clone.

I don't have any special info but based on news reports it seems that restaurants aren't a great fit for massively discounted deals.

The type of businesses that do benefit the most are those that will operate anyway but have excess capacity to use (eg. beds and breakfasts).

I don't have any special info either, but after getting a couple of Groupon deals for restaurants, I've stopped.

Dining out simply isn't pleasurable when the waiting staff treat you like a 'coupon customer'.

Restaurants also have unused tables and surplus food. Is there another reason why they are not great candidates for deals? Because the reasoning above does not seem sound.

Selling food is a low margin business because food are high. Whereas other businesses with excess capacity and most of the costs are operational don't have these problems

I thought the biggest expenses were the staff and rent. No?

EDIT: OK, maybe not, only estimate I was able to find: http://en.allexperts.com/q/Running-Restaurant-2285/Ideal-res...

> The way their sale staff works is to create direct relationships, phone contact etc - that is not a cheap proposition

Isn't that in itself a reason to be skeptical about whether they can actually scale? The whole point around most internet businesses is that they can scale for very little cost. For Groupon to scale they need huge capital input (to hire staff) but then importantly that expense needs to be maintained to keep the treadmill going.

I'm in this business and I routinely hear from my sales staff that merchants who have done a deal with Groupon, want to do a second deal but never get a call back. Also once the deal is inked the sales person goes silent. I know there is a lot of turnover with the sales team there but more often than not we hear of a lack of relationship building at Groupon but rather "pump and dump".

Why is the growth of that database over 2 years so flat? What exactly will they do to actually make money from that database that they haven't done yet?

The value is less in the database and more in the relationships they've developed. We're not just talking rows in a table here. These are businesses which have bought into Groupon as a lead generator & who Groupon should be able to bring on board quickly to whatever future products develop.

And with all these businesses they've been consistently losing money. Personal relationship management is not something that gets cheaper with scale, so size of potential market doesn't really help as far as I can see.

I haven't seen any particular mention of amount of businesses retained as repeat customers, either.

Future products? Maybe they'll sell lucky moose.

The market is getting saturated with Groupon copycats. Plus, high quality merchants can't repeat Groupon offers all of the time or they risk cheapening the brand.

I have a neighbor who owns a "Moe's" franchise -- many of his customers refuse to do business without a discount.

I'd find the operating loss slightly disturbing, because it means they are relying on repeat business down the road in order to crank out profit. Not saying they are going to bomb, but as an investor I'd be more bullish if they could expand and profit at the same time - because it's possible that expansion will be a regular component of their business. Obviously if you believe they will do a lot of repeat business then this is not a problem at all.

Doesn't it boil down to choosing the rate of expansion?

They could probably expand at a slower rate and keep a profit; or they could spend what would otherwise be a profit to expand at a faster rate. At the moment they seem to be going for option 2 which may be a debatable choice but also very normal for a company in the high-growth phase. Amazon is the classic example for this.

If they are investing in growth, good. If they are just buying top-line revenue, no.

Many tech businesses typically like to leverage their debt if growth looks solid and steep and there's a land grab (which there is considering the people entering this space like LivingSocial, Yelp, Facebook, etc.).

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