As small businesses across the country evaluate the risks and benefits of group coupons and discount sales, it would be wise to peek under the curtain of Groupon, the company that launched the craze. There aren’t many opportunities to do this, especially with companies that are privately held because there is no requirement for them to disclose anything about their businesses to the general public—unless of course they plan to sell securities to the public through an Initial Public Offering or IPO. Then everything changes.
Groupon recently announced that they plan to sell securities to the public through an IPO. The numbers around that IPO are mind-boggling. Like many companies Groupon has not stated publicly what the valuation of the company will be at the time of the IPO. Some sources indicate that they may seek to raise as much as $3 billion on a $30 billion valuation. No, that’s not a typo. The original announcement indicated that the company planned to raise $750 million but it’s common for this to change throughout the IPO process. The company currently has 14 investment banks as advisers.
When a company decides to go public they must file a form with the Securities and Exchange Commission known as an S-1. This form is available to the public. You can see Groupon's S-1 here. The S-1 contains basic business and financial information important to investors considering an investment in the company offering its securities. So what can we learn about Groupon from its S-1 filing?
Its growth is astronomical
Groupon formally launched in November 2009. To date it has sold over 70 million coupons. In 2010 Groupon sold 30 million coupons and achieved revenues of $713 million. That is amazing for a company that is only a few years old. This pace continued into this year. In the first quarter of 2011 alone the company sold 28 million coupons and generated sales of $645 million.
A significant portion of its revenues—nearly 40 percent—come from coupon sales outside of the United States. This isn’t surprising considering Groupon has already expanded into 43 countries. As of the time of the filing of the S-1, Groupon had amassed an e-mail subscriber list of over 83 million people and had over 7,000 employees. How the executives at the company manage this almost unprecedented growth is worthy of multiple cases studies.
It has a voracious appetite for cash
This growth doesn't come cheap. Groupon lost $413 million last year. The majority of this loss is related to marketing costs associated with the acquisition of new coupon subscribers. It cost $241.5 million last year in marketing expense to sell those 30 million coupons. That works out to roughly $8 per coupon. During the first quarter of 2011 they spent $180 million in marketing to sell 28 million coupons. This is a significant reduction to $6.43 per coupon sold but is still a significant amount.
It faces numerous legal challenges that could have massive consequences on its business model
Groupon is currently party to 15 class action lawsuits. While they aren’t being sued directly, companies that issued Groupon coupons are being sued because they offered these discounts. The underlying theme to the litigation is answering the question of whether a Groupon coupon is really a gift certificate. If at the conclusion of the legal process they are considered as such then they would be regulated by consumer protection laws. These vary by state and require in most cases that gift certificates not have an expiration date. If that’s the case it would drive up the cost of offering a Groupon promotion dramatically for a merchant. It might even kill Groupon's business. But given the company's ability to pivot in real-time they will most likely find a way to address this issue.
Small business owners should take a look at the Groupon S-1 to learn about a potential vendor and also to benchmark some of the management decisions they have made to manage growth at a rate unheard of in business.
One lesson you should not take away from Groupon is the use of creative accounting measures. The company has come under significant scrutiny for devising new financial ratios to measures its valuation and profitability. Specifically it uses a metric called “adjusted consolidated segment operating income.” This does not comply with Generally Accepted Accounting Principles, or GAAP, and leaves out key costs. Stick to the basics. Using creative accounting never ends well.
