Groupon's Growing Crisis

Jeff  Carter
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Posted: Apr 05, 2012 12:01 AM

Groupon ($GRPN) has been in the news again for accounting irregularity. It restated fourth quarter earnings. What was amazing is that it went public in the fourth quarter…..and it had a couple run ins on accounting before it went public.
 

GRPN data by YCharts

“Three strikes and you’re out.”, is the saying. The market is punishing the company.

Whether you agree with the business model of Groupon or not, you have to respect how quickly it grew. Venture Capitalists aren’t stupid, and they tossed a lot of money in succeeding rounds of Groupon. Some think the business model is about to collapse.

GRPN Chart

I can’t weigh in on those things. But I can weigh in on the accounting issues. The longer this drags out, the more Groupon starts to resemble Enron. They will get into more trouble, and the stock will become worthless. They only have themselves to blame for the crisis that confronts them today.

That means some pretty big problems. First, no doubt, employees received options when Groupon went public. Where were those options struck? Because as the stock price decreases, the employees get poorer. Once the stock goes below the strike price, the options are worthless. Employees will leave.

The macro effect of a Groupon crater is the shadow it casts on Chicago. Prominent people in the Chicago community have said all along, “If we are still talking about Groupon a year from now, we are in trouble.” I know that they meant talking about Groupon’s success, and not accounting. There are a lot of great start ups forming and operating in the city of Chicago right now. There is real momentum. Groupon is so big, and so associated with Chicago that its failure could cause people to look at Chicago start ups as a bunch of pretenders. Chicago already has a well deserved reputation as a politically corrupt place. We don’t need that to seep into the start up community.

Many were counting on the newly minted wealth of the Groupon employees to create the third wave of successful innovative start ups in Chicago. That’s not happening if the stock value goes into hibernation.

If I were the Groupon, the first thing I would do is a mea culpa. The company should speak for itself. Going into a shell isn’t the right strategy. Instead, they need a public face to speak that gives the company breathing room to analyze what path they want to take. Right now, the market is speaking for the company and filling up the void with news. Questions are left unanswered.

It’s better for the Groupon to go out, face the public and say, “I don’t know the answer to that but we are working on it.”, than to say nothing at all.

The next thing I would do is be very transparent. I would have a closed investor call and tell my investors how I reached the accounting decisions I did. I would tell them what assumptions I would be making in the future so they could better predict the numbers. I would make sure that those assumptions were really conservative. Shore up your investor base first before reselling the company to the market.

There may be problems with the business model. Only time will tell. Strategically, when analyzing some of the companies in the Groupon universe like Belly and Gtrot, they look like they have a goal of building some compelling services for small fragmented businesses. That’s tough to execute, but if they are the champion of that segment it will be very lucrative.

Small independent businesses, and the customers that love shopping at them aren’t going away. With the new paradigm of social media and the internet age, they might even become more popular as people seek out unique places for their wants and needs rather than generic chain retailers. That’s also why so many big chains are beginning to look at how they do business so they can utilize the same technology to provide choice to their customers on an economical basis.

The book isn’t closed on Groupon. It’s a parlor game to decide if they would have grown as fast as they did, raised the money they did had their accounting been different from the beginning. What matters is how they go forward. Their current strategy of going into a turtle shell is not the way to go.