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Groupon Goes Public: Communication Strategy and Challenges

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Groupon Goes Public: Communication Strategy and Challenges “Groupon, a local e-commerce marketplace that connects merchants and consumers by offering goods and services at a discount, today announced that it has filed a registration statement on Form S-1 with the Securities and Exchange Commission for a proposed initial public offering of its Class A common stock.”1 With these words at the top of its press release, Groupon announced to the financial markets on June 2, 2011 that it was planning an initial public offering (IPO). Its filings with the U.S. Securities and Exchange Commission (SEC) indicated that Groupon was looking to sell about a 5% stake in the company to public shareholders for $750 million to $1 billion. This price implied a $20 billion for the company as a whole.2 The investment community had watched a parade of internet companies go public in the first half of 2011, and Groupon – along with other high-growth, web-based companies like Zynga and Facebook – were widely expected to be the next to come to market. Some analysts, like eMarketer’s Jeffrey Grau, were excited by Groupon’s market position in an area with such explosively high growth: “Although there are risks involved in daily deals and challenges for these companies, local commerce is a huge untapped market... It's very competitive and not all companies will make it, but there's a lot of money to be made.” 3 However, given that the company showed little hope for profitability in the near term, some analysts, including Sucharita Mulpuru at Forrester, were more skeptical that Groupon was an attractive investment: “There is no rational math that could possibly get anyone to the valuation Groupon thinks it deserves. [...] This IPO game isn't about finding value, it's about finding a greater fool who actually believes the valuation is true. Trust me, you will be the fool.”4 Given this broad range of opinions within the financial community, Groupon’s ability to communicate its value as an investment will play a critical role in ensuring that the company obtains the amount of investment and overall valuation it is seeking. COMPANY, INDUSTRY, AND REGULATORY BACKGROUND Andrew Mason and Groupon’s Founding Three months into his first year at the University of Chicago’s Harris School of Public Policy, Andrew Mason dropped out to chase an idea with Eric Lefkofsky, an investor and entrepreneur (and Mason’s former employer). Starting out with a $1 million investment, Lefkofsky wanted Mason to put his unflagging work ethic and talent for web design to use on an entrepreneurial internet venture they called The Point. This website sought to unite individuals to work together toward a variety of social causes. While the concept was intriguing, these socially conscious efforts were not attracting enough subscribers. With The Point in danger of being shut down, Lefkofsky started putting pressure on Mason to find a way to monetize the site.5 Mason had noticed that site’s most popular campaigns had involved group buying, and he decided to create a sub-business on the site dedicated to this concept. This was the beginning of Groupon, which launched its first offer – a two-for-one pizza deal – on October 22, 2008. Twenty-four Chicago residents bought the deal, and Groupon was off and running. After six months of operating solely in Chicago, it expanded to Boston, New York, and Washington, D.C.6 By the end of 2009, after only 14 months, Groupon had 1.8 million subscribers.7 In 2010, the company was expanding into several new cities each month in addition to beginning its international expansion. It received and rejected multi-billion dollar offers from both Yahoo! and Google in late 2010 8 and closed the year with 50.5 million subscribers.9 Groupon’s growth has continued at a torrid pace into 2011; the company has more than doubled its subscriber count in the first half of 2011, reporting 115.7 million subscribers as of June 30,2011. In the two and a half years from January 1, 2009 to June 30, 2011, over 23 million different customers have purchased a Groupon and over half have purchased more than one. The company also reports that it now has 9,600 employees and is offering deals in 45 countries.10 The Groupon Culture “We want the time people spend with Groupon to be memorable. Life is too short to be a boring company. […] we seek to create experiences for our customers that make today different enough from yesterday to justify getting out of bed.”11 This statement from Mason’s letter to potential shareholders in Groupon’s Form S-1 indicates that he has no desire to allow Groupon to become a normal company (See Appendix A for the full letter). This vision, which is an outgrowth of Mason’s own personality and priorities, is to create a company that is intensely focused on its customers and merchants and is proud to be different.12 Groupon’s daily deal descriptions are one of the clearest indications of its offbeat, quirky culture. The following deal description, from a deal offered in September 2011 for a Chicago pizza restaurant, provides a good example of the sorts of inside jokes and winking humor Groupon uses in communications with its customers: 2 “Like planet earth, pizza contains morsels buried in its outer crust that can be pieced together to form a crude brontosaurus. Partake in culinary archeology with today's Groupon to Pizza D.O.C.” Moreover, Groupon customer service employees are strictly instructed never to give in on these jokes. Responding to a deal description claiming that hummingbirds came from cocoons, a customer pointed out that they are actually hatched from eggs. In response, Groupon customer service politely disagreed and provided a photoshopped picture of a hummingbird emerging from a cocoon.13 This example illustrates how Groupon’s quirkiness and pride in being different led it to adopt a unique strategy for communicating with its customers. Groupon’s Business Model Groupon’s core business is the operation of an online marketplace for group purchasing of coupons offered by merchants. These coupons are deeply discounted from the regular price of the actual product or service, often offering a 50% discount or more. A coupon becomes effective and redeemable only when the number of subscribers committed to purchase it has exceeded the minimum number required by the merchant. This process enables consumers to exert group buying power without actually forming a group and ensures that merchants reach enough consumers through this promotional effort. Groupon customers have a limited time to purchase and redeem the coupons, and merchants and Groupon keep revenue from unredeemed coupons. Groupon deals are generally offered by local merchants targeting local consumers. Groupon touts its business model as “creating a new way for local merchants to attract customers and sell goods and services” and providing “consumers with savings and help them discover what to do, eat, see and buy in the places where they live and work.”14 Revenue from the sales of coupons is shared between Groupon and merchants. Merchants generally collect 50 to 70 percent of the revenue from the sales of coupons while Groupon retains the rest.15 Groupon’s financial statements show that its share of the coupon sales has trended around 40% (See chart in Appendix B). Groupon’s business model is ingenious in that it offers an effective tool to local businesses to reach local consumers. The e-commerce revolution has enabled small, local businesses to reach a global audience. However, their needs to connect with local shoppers have largely been underserved. Groupon helped bridge these gaps by enabling small businesses to target consumers locally and to track their response to the marketing efforts, creating an entirely new market for e-commerce. Proliferation of Competitors Groupon’s business model, while innovative, is not difficult to imitate, and its success and large margins have attracted a number of entrepreneurs and established firms to enter the space. Yipit, 3 which aggregates daily deals offered by various firms, lists 689 daily deals services similar to Groupon as of September 30, 2011.16 E. B. Boyd, an industry observer, notes that “few industries have seen more imitators in the last 12 months than the daily deals space.”17 The most notable competitor to Groupon is LivingSocial, which was launched in 2008 as a social discovery and cataloguing network. LivingSocial began offering daily deals in 2009 and quickly became the second largest player in the industry, after Groupon.18 LivingSocial has raised more than $600 million from private and public investors, including Grotech Ventures and Amazon.com, as of April 2011.19 A round of funding in April 2011 valued the firm at approximately $3.5 billion, and the firm is said to be considering another round of funding that could value it at as much as $6 billion.20 Just like Groupon, many of the firms competing in the market are venture-backed startups, but some industry giants have begun to tackle the daily deals business as well. Google, Amazon, and Facebook have all launched their own versions of daily deals services called Google Offers, Amazon Local, and Facebook Deals, respectively. Microsoft has also entered the market in 2011 with Bing deals, where shoppers can purchase coupons as well as discounted products. Facebook, however, discontinued its Deals product in September 2011 only four months after its launch.21 The daily deals market is becoming overcrowded and competitive pressure is increasing. Some analysts believe that the group purchasing of coupons is a commodity business, and Groupon will not be able to maintain its margin in a hyper-competitive market.22 International Expansion and Legal Challenges While Groupon has faced stiff competition in the United States, it has also encountered a new set of challenges involving its intellectual properties as it expanded overseas.
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