Societal Environmental Analysis: Identify key sociocultural, technological, economic, and political factors in the firm’s external environment. Industry Analysis: Use Porter’s

CASE 14

Groupon, Inc.: Daily Deal or Lasting Success?

CASE 14

Groupon, Inc.: Daily Deal or Lasting Success?

I. CASE ABSTRACT

Andrew Mason sat in his office in Chicago, Illinois thinking about the city. His adult life began there—he graduated from Northwestern in 2003. His business originated there not long after—Groupon began as a local Chicago discount service and became a global phenomenon seemingly overnight. Mason knew that Groupon was a great idea. The company was the first of its kind and changed the way consumers spend, shop, and think about discounts. But how could Groupon, based in such innovation and having experienced such exceptional growth, be in such a precarious position? A wave of competition had swelled including the likes of technology giants and both general and niche daily deals services, all replicating Groupon’s business model. How could Groupon compete against large companies and their expansive resources? Would consumers and merchant partners flock to other services that better suited their needs? Mason worried about the increasingly downward trajectory of Groupon’s stock price since the company’s initial public offering. The year 2012 had brought additional scrutiny of Groupon from the SEC as well as the unfortunate title of Worst CEO of 2012 for Mason.[footnoteRef:0] He thought about the barrage of competition facing his firm and the related questions regarding the sustainability of its business model. Groupon was a star as it grew from its Illinois roots, but it now had problems on a global scale. Mason looked out his window over the city where it all started, nostalgic for a time when business was easier and wondered what to do. [0: Herb Greenberg, “The Worst CEO for 2012?” Market Insider, CNBC. April 12, 2012. http://www.cnbc.com/id/47030593 (last visited August 20, 2012). Exhibit 4—B Common Sized Statements CONSOLIDATED STATEMENT Year Ending December 31 2008 2009 2010 2011 INCOME STATEMENT Revenue (Gross Billings of $94, $34, 082, $745,348, and $3,985,501, Respectively 100.00% 100.00% 100.00% 100.00% Costs and Expenses: Cost of Revenue 1760.00% 32.43% 13.71% 16.08% Marketing 3260.00% 34.75% 92.85% 47.72% Selling, General and Administrative 27720.00% 40.22% 62.84% 50.98% Acquisition-Related     64.93% -0.28% Total Operating Expenses 32740.00% 107.41% 234.32% 114.49% Loss from Operations -32640.00% -7.41% -134.32% -14.49% Interest and other Income (Expense), Net 1800.00% -0.11% 0.09% 0.37% Equity-Method Investment Activity, Net of Tax -1.65% Loss before Provision for Income Taxes -30840.00% -7.52% -134.23% -15.78% Provision (Benefit) for Income Taxes 0.00% 1.71% -2.13% 2.71% Net loss -30840.00% -9.22% -132.10% -18.49% Less: Net loss Attributable to Noncontrolling Interests 7.59% 1.14% Net loss Attributable to Groupon, Inc. -30840.00% -9.22% -124.51% -17.35% Dividends on Preferred Shares -5540.00% -38.34% -0.44% Redemption ofPreferred Stock in Excess of Carrying Value -16.90% 2.13% Adjustment ofRredeemable Noncontrolling Interests to Redemption Value -3.97% -3.71% Preferred Stock Distributions -6780.00% Net Loss Attributable to Common Stockholders -43160.00% -47.57% -145.82% -23.19% Net Loss per Share of Common Stock Year Ending December 31 2008 2009 2010 2011 Assets Current Assets: Cash and Cash Equivalents 31.14% 63.28% Accounts Receivable, Net 11.11% 6.13% Prepaid Expenses and other Current assets 3.31% 5.16% Total Current Assets 45.56% 74.58% Property and equipment, net 4.32% 2.92% Goodwill 34.60% 9.41% Intangible Assets, Net 10.69% 2.57% Investments in Equity Interests 0.00% 2.85% Deferred Income Taxes, Noncurrent 3.81% 2.60% Other Noncurrent Assets 1.01% 5.08% Total Assets 100.00% 100.00% Liabilities and Stockholder’s Equity Current Liabilities: Accounts Payable 15.08% 2.31% Accrued Merchant Payable 42.56% 29.35% Accrued Expenses 25.77% 11.95% Due to Related Parties 3.49% 0.01% Deferred Income Taxes, Current 4.51% 4.33% Other Current Liabilities 5.66% 8.14% Total Current Liabilities 97.08% 56.08% Deferred Income Taxes, Noncurrent 0.16% 0.42% Other Noncurrent Liabilities 0.27% 3.99% Total Liabilities 97.50% 60.49% Commitments and Contingencies (See Note 8) Redeemable Noncontrolling Interests 0.78% 0.09% Groupon, Inc. Stockholder’s Equity Series D, Convertible Preferred Sstock Series F, Convertible Preferred Stock Series G, Convertible Preferred Stock Voting Common Stock Class A Common Stock Treasury Stock, At Cost -131.87% 0.00% Additional Paid-in Capital 241.40% 78.23% Stockholder Receivable -0.07% 0.00% Accumulated Deficit -109.93% -39.38% Accumulated other Comprehensive Income 2.59% 0.73% Total Groupon, Inc. Stockholder’s Equity 2.12% 39.59% Noncontrolling Interests -0.40% -0.17% Total Equity 1.72% 39.42% Total Liabilities and Equity 100.00% 100.00% ]

Decision Date: 2012 FY Sales: $1.6 billion

FY Net Loss: $(347) million

II. CASE SUBJECTS AND ISSUES

Online Sales/Technology Brick-and-Mortar Sales

Strategy Formulation Competitive Advantage

Strategy Implementation Core Competencies

Market Segmentation Government Regulation

Competitive Strategy Marketing Promotion

III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS

IV. CASE OBJECTIVES

1. To discuss the integration of online promotion for brick-

-and-mortar retailers.

2. To discuss the impact of the restatement of financials.

3. To discuss domestic/international growth opportunities.

4. To discuss deal fatigue.

5. To discuss cash flow financing for retailers.

V. SUGGESTED CLASSROOM APPROACHES TO THE CASE

1. This is an excellent case for instructor-led discussion.

2. This is an excellent case for an exam or written case analysis.

3. This is an excellent case for a team presentation.

4. This is an excellent case for an individual or team strategic Audit.

VI. DISCUSSION QUESTIONS

1. Does Groupon result in repeat customers or one-time users?

2. What is deal fatigue?

3. Can Groupon maintain its phenomenal growth rate?

4. What Lessons were learned from Groupon’s restatement of financials?

5. How does Amazon’s relationship with Living Social alter the competitive landscape?

6. Is Groupon a business financing business or a marketing business?

VII. CASE AUTHOR’S TEACHING NOTE —Not Available

VIII. STUDENT STRATEGIC AUDIT

I. Current situation

A. Performance

1. History

a. The original concept for Groupon started in 2006, by Andrew Mason when he became frustrated when trying to cancel a cell phone contract.

b. He began developing a web platform based on the “tipping point” principle (the number at which an idea or cause reached critical mass). He called the site “The Point.”

c. Groupon began as a local Chicago discount service and became a global phenomenon seemingly overnight, with its first “deal” launching in October 2008.

2. Economic Performance

a. 2010—Groupon was serving more than 150 markets in North America and 100 markets in Europe, Asia, and South America.

b. 35 million registered users.

c. 2011 – the company raised $700 million in its initial public offering

d. Net loss of only $3.6 million in the first quarter of 2012, compared to $113.9 million for that of 2011

3. Rankings and Accolades.

a. Groupon owned number one market share in thirty-seven of forty-eight countries served as of the first quarter of 2012.

b. Groupon’s stock fell 84 percent from $26.11 to close at $4.15 on August 31, 2012.

c. Worst CEO of 2012 for Mason.

B. Strategic Posture

1. Mission

a. “To become the operating system for local commerce.”

2. Objective

a. Become an essential part of everyday local commerce for consumers and merchants.

b. Grow subscriber and customer base.

c. Grow the number of merchant partners.

d. Position Groupon to benefit from technological changes that may affect consumer behavior.

e. Increase the number and variety of products through innovation.

f. Expand with acquisitions and business development partnerships.

3. Strategies

a. Creating a new way for local merchant partners to attract customers.

b. Use of its technology and scale to target relevant deals.

c. Promotion of its merchant partners.

d. Continue developing and refining technology.

e. Market to merchant partners to grow the number and variety of deals that it could offer customers

f. Use online affiliates to display and promote deals on their websites.

4. Policies

a. Employ technology to improve the experience.

b. Groupon used a common information technology platform.

c. Ease communication with existing customers.

d. Utilize social media to organize collective action.

II. Corporate Governance

A. Board of Directors

1. Eight members

a. One internal and seven external.

2. Publicly traded

3. Board members have diverse work experience, including some international experience.

B. Top Management

1. CEO—founder Andrew Mason.

2. Seven other executives.

a. Diverse work experience.

i. Online retail—marketing and product development.

ii. Application development

iii. Accounting

iv. Strategy

v. Legal

b. Large and small organization experience.

III. External Environment

A. Societal Environment

1. Economic

a. Marketplace is global (O).

b. Uncertain global economic conditions (T).

c. The great recession and its slow recovery (T).

d. Unfavorable foreign exchange rates (T).

2. Technological

a. Communication technology constantly changing modes (O/T.)

b. Communication methods becoming increasingly inexpensive (O/T).

c. Bringing the brick-and-mortar world of local commerce onto the Internet (O).

d. First mover advantage—a web platform based on the “tipping point” principle.

3. Political and legal

a. Consumer protection, marketing practices, tax and privacy rules and regulations (O/T).

b. Evolving regulation of internet business, the Credit Card Responsibility and Disclosure (CARD) Act of 2009 (N/A).

c. The appearance of fee-splitting, kickbacks for referrals, and the ethics of using Groupons and other daily deals (O/T).

d. Restatement of earnings in 2012 (T).

e. Risk of litigation concerning intellectual property infringement suits, and suits by customers (N/A).

f. Groupon had violated the patent, copyright, or trademark laws (T).

4. Sociocultural

a. Increased availability of information pertaining to the prices of goods and services (O).

b. More information conscious consumers, who are skilled at information gathering pertaining to purchases (O/T).

c. Reduced loyalty toward “hometown” suppliers of goods and services if prices aren’t competitive (O).

d. Consumer behaviors regarding how they spend, shop, and think about discounts have changed dramatically.

B. Task Environment

1. Threat of new entrants: high

a. Significant revenue increases didn’t go unnoticed by potential competitors.

b. Business model easily replicated.

c. Applicable in all global marketplaces.

d. Start-up costs can be low if the initial market focus is small enough.

2. Bargaining power of buyers: high

a. Sales break down (North America 40 percent and international 60 percent).

b. Two-pronged dependence on subscribers and on merchants.

c. Tipping point principle that would utilize social media to organize collective action.

d. The larger the subscribers base in local markets, the greater their respective buying power.

3. Threat of substitute products: moderate

a. Company’s offer discounts directly, rather than through a medium such as Groupon

b. Many different methods of providing discounts to consumers exist and can be exploited by larger organizations (i.e. Google, Amazon).

4. Bargaining Power of Suppliers: Low

a. Substantial subscriber base provides Groupon leverage when working with Merchant Partners.

b. Groupon can be very specific with respect to the selection of merchant partners due to the large subscriber base.

5. Rivalry among competing firms: high

a. Expansion of its global sales force.

b. Investments in technology and corporate infrastructure.

c. Increases in operating expenses, however, were in marketing, selling, general, and administrative expenses.

6. Power of other stakeholders: low

a. To retain all earnings for the foreseeable future to finance the operation and expansion of our business.

b. Investors and the Securities and Exchange Commission (SEC) began to question management’s reporting of Groupon’s financials.

c. Groupon disclosed all financial data required by the SEC, management stressed the importance of other, more unconventional metrics.

IV. Internal Environment

A. Corporate Structure

1. Centralized management

2. Not properly organized on geographical lines.

3. Unclear structure

4. Comparable to other companies of this type and size.

5. Does not have any significance differential advantage over its competitors.

6. Groupon was setting out to reinvent the multi-trillion-dollar local commerce ecosystem.

B. Corporate Culture and Values

1. Wide range of knowledge: academic, professional, intellectual.

2. Merchant partners considered the profitability of the immediate deal.

3. Investments in marketing, as a necessary cost to acquire subscribers.

C. Corporate Resources

1. Marketing

a. Overview

i. Objectives—grow subscriber and customer base.

ii. Strategies—focus on demographic most likely to use the service (i.e. younger consumers prone to search for deals via the internet and mobile devices).

iii. Policies—N/A

iv. Programs—use online marketing initiatives, search engine marketing, display advertisement, referral programs, and affiliate marketing.

v. The marketing objectives and strategies are clearly stated in the case and are also evident in Exhibit 4 where the annual marketing expenses are seen dramatically increasing from 2008—2011.

vi. All of the marketing efforts appear to be consistent with the approach of the organization.

b. Market position and marketing mix

i. Groupon is targeting its primary market (Internet and mobile device users) looking for discounts via its current methods.

ii. Groupon experienced many “first-mover” advantages and capitalized on them to the best of their abilities, however, moving forward, competition is increasing via the likes of Amazon and Google, both of which have larger customer bases and resources.

iii. In 2011, 61 percent of sales came from international markets, an increase of 25 percent from the prior year.

iv. Products offered—in 2012; Groupon began offering more than just the “Daily Deals” to its subscribers in order to try and increase the utilization from each of its subscribers. Expanded from offering deals through e-mails to having a local commerce marketplace.

v. Steps are in-line with Groupon’s mission to become the operating system for local commerce.

vi. Competitive advantage was present as Groupon was a first-mover in the industry, however, the advantage is fading as other are entering the market.

a. Competitors—Groupon is among the best in the industry, however, competition from larger organizations, such as Amazon and Google, are threatening due to the size of their respective customer bases and technological resources.

b. Marketing managers—helpful in devising new products in order for Groupon to differentiate itself from its competitors.

c. Marketing in foreign segments—marketing approaches are similar throughout.

2. Finance

a. Revenue increased from $14,540 million to $1,610,430 million (2009-2011)(S).

b. Interest Expense—information not available (still looking for this number).

c. Increase in operating expenses is greater than increase in revenues (117 percent vs. 110 percent respectively) (w).

3. Research and Development

a. Utilized existing technology, but did not bring new technologies to the organization as means of distribution or analyses (w).

b. Utilizing wireless technology to improve product availability to members (s).

c. Use of common analytic tools to help merchant partners track deal performance in the North American segment. Not utilized in foreign markets so information wasn’t as available in those areas (w).

d. No strategic research of target market to help identify merchant partners that provide goods or services wanted (w.)

i. Development of new products that will help differentiate Groupon from competitors, such as Amazon and Google (s).

a. Groupon Now!

b. Groupon Goods

c. Groupon Getaways

d. Groupon Live

e. Groupon Rewards

4. Operations and Logistics

a. Current objectives include: grow subscriber/customer base and merchant partners, leverage technology, increase quantity and variety of products, and expand organically thru acquisitions.

i. Growth was the main focus; all performance and budget were tailored to support future growth at all costs.

ii. Operations are consistent with objectives to grow, however, at some point need to become profitable.

b. Groupon is an internet-based consumer discount provider or goods and services. Sales staff along with marketing people worked with merchants to “build” deals. Only one in ten merchant proposed deals were approved. The distribution of the deals themselves (delivering the product to consumers) was strictly Internet and technology dependent, as all deals were distributed through emails, website, or other online applications. The corporation’s main objectives were to grow subscriber base for the merchants and consumers, their marketing/operations supported this. 2010: 33 percent international and 67 percent North America vs. 2011: 67 percent international and 33 percent North America sales.

i. Products: various types of coupons developed in conjunction with merchants. “City planners” developed specific products to certain cities on a weekly basis with daily deals. No traditional manufacturing facilities necessary. Data Centers serve as host facilities which are located in Texas, Florida, and California.

ii. N/A

c. Data Centers, although mission critical facilities with UPS (uninterruptible power supplies) are not 100 percent immune to natural disasters etc. Product development relies heavily on merchant cooperation and Groupon approval (one in ten proposals get approved).

d. Hosting servers, sales-staff, and revenue grow proportionally to each other.

e. Groupon was a first-mover to the marketplace; they own market share in all markets. Traditional manufacturing metrics do not apply. Marketing costs as a percent of revenue were decreasing in 2012 which means higher utilization.

i. Investment in international markets

ii. Marketing costs have increased at a similar rate as revenues/sales from 2009-2012.

iii. N/A

iv. Groupon has increased sales force linearly as revenue increased in both NA and International sectors.

f. Sales forces are hired to adapt to each facility in each country of operation.

5. Human Resource Management

a. Current HR management strategy:

i. HR not discussed in depth.

ii. Objectives:

a. To hire motivated, internet savvy/entrepreneurial employee.

b. Start-up company, exponential hiring spree particularly in international markets.

c. No similar companies; Groupon was a “first mover.”

d. Corporate Facilities:

i. 555 thousandSF in Chicago, IL, USA

ii. 30 thousand SF internationally (Germany, Berlin, Switzerland, etc).

e. Sales Force:

i. Exponentially growing sales force.

a. Dec. 2011: 1,062 employees in North America.

b. Dec. 2011: 4,134 employees internationally.

6. Information Systems

a. Employ technology to improve experience we offer subscribers and merchant partners, increase the rate at which our customers purchase Groupons, and enhance the efficiency of our business operations.

i. Clearly stated.

ii. Yes.

b. All communication is electronic. Utilize IS platform to document communication and provide the ability to track deal performances for demographic and analytics.

i. Lacking in international markets, need to update and expand for fully operational platform globally.

ii. Growth continues at an aggressive rate.

iii. Yes.

iv. IT is the basis for which Groupon exists and grows.

c. Exclusively uses the Internet. Competitors, such as Google already have a stronghold with Internet popularity.

d. Uses a common IT platform to manage database of customers and business partners alike.

e. IT platform expanding to international markets, a simple platform is utilized. Groupon used commercial grade anti-virus, encryption via SSL, and other various security related technologies to protect and maintain systems.

f. IS Manager’s role is to use business forecasts to project future needs and evolve current IT systems to adapt to growing needs as the company expands exponentially.

V. Analysis Strategic Factors

A. Situational Analysis—(please see exhibit 3)

B. Review of Mission and Objectives:

VI. Strategic Alternatives and Recommended Strategy

A. Strategic Alternatives

1. Present strategies appear to be in-line with company direction.

a. Continue to launch new products to increase the number of customers and merchant partners transacting business through its marketplace.

b. Continue to promote Groupon not only as a discovery tool for local merchant partners but also as an ongoing connection point for consumers to their favorite merchants.

c. Groupon should continue to focus on acquiring businesses with technology and technology talent that can help expand its business.

2. Alternative Strategies

a. Cost Leadership

b. Not currently employed (minimal current competition).

i. Pros:

1. Would make entrance to industry more difficult.

2. Would increase the number of merchant partners wanting to participate.

ii. Cons:

1. May require reduction in quality.

2. Would be difficult to attract high profile merchant partners.

c. Differentiation—not currently employed (minimal current competition on same scale).

i. Pros:

1. Make Groupon appealing to different types of consumers.

2. Could increase number of different merchant partners wanting to participate (more luxurious type vendors).

ii. Cons:

1. Will require more sophisticated sales people.

2. Will require additional advertising and costs.

3. Merchant partners may require more support to participate.

d. Stability—not currently employed

i. Pros:

1. Stable business environment.

2. Mature market

ii. Cons:

1. Difficulty attracting top talent.

2. Difficulty persuading merchant partners to join if already participating in another type of program.

3. Product loses appeal if readily available.

e. Growth—part of current strategy

i. Pros:

1. Increase profits and returns to investors.

2. Increase demand by investors.

3. Increase brand image to both consumers and merchant partners.

4. Company becomes the benchmark for potential competitors.

ii. Cons:

1. Increase in costs.

2. Increase attractiveness of industry to potential competitors.

3. Increased scrutiny of practices and results.

B. Recommended Strategy

1. Stability

a. The company has expanded rapidly and needs to stabilize and actually generate a profit. If growth continues at current rate it may not be sustainable, making Groupon prime for a takeover.

2. Leverage first-mover position in market

a. Groupon needs to differentiate itself from would-be competitors in order to maintain its position in the market.

b. Rather than trying to expand into new territory, they should focus on maintaining current market share.

c. Continue developing new products to offer to exist markets.

d. Focus on mission of becoming the “operating system for local commerce.”

3. Focus on local merchant partners rather than the “big box stores.”

a. Trying to negotiate with merchant partners, who have significant global economies of scale, isn’t in the best interest of Groupon. This effort may yield much lower than required returns and ultimately be a losing strategy.

VII. Implementation

A. Organizational Structure:

1. Restructuring is necessary—current management team is geared toward global expansion and growth. New strategy would require more entrenched management team to work with the existing markets and merchant partners.

B. Programs: Three (3) sets of programs should be developed and implemented:

1. Customer Satisfaction survey to determine level of satisfaction received from product usage. This could be an internal team or an outside consultant performing this research. Groupon’ needs its customers to feel like only Groupon can provide the highest level of product that they value the most. This research should indicate a trend showing what type of products is highly regarded and which ones are not. This will provide a path in which the firm can follow to differentiate itself, this information of customer values will dictate what to focus on specifically and this will make Groupon unique from other competitors.

2. Effectiveness of each product (deal) should be analyzed in terms of the merchant. Groupon’s deals are completely dependent on the merchant. Treating the merchant as a partner, not a supplier, through cooperation is imperative. Groupon should learn each merchant’s strategic plan and how they operate to think with an innovative mindset to develop new products that are both highly valuable to the merchant as well as the customer.

3. Due to Groupon’s growth specifically in international markets, the firm needs to create a structured prog