Groupon IPO Is Hot, But Are the Deals?

VIDEO: Mason said it?s the path to success that matters
WATCH Meet Groupon Founder Andrew Mason

Maybe they can make it up on volume? Ooops! Turns out that volume is to blame for the $413 million operating loss racked up by online coupon-seller Groupon last year.

That's according to the company's filing for its $750 million IPO. It's one of several problems dogging the fastest-growing company in history, whose value has been put by optimists as high $25 billion. Other problems include shrinking margins, proliferating competitors, restive merchants and subscribers frustrated by the experience of trying to redeem their coupons.

And how about the deals themselves: Are they as juicy as they used to be?

Bloomberg News quotes Groupon Chairman Eric Lefkofsky as saying he expects the company to be "wildly profitable" some day. But in the meantime, it's got a ways to go.

In what has to be the understatement of this or any other year, co-founder and CEO Andrew Mason writes in the registration document that Groupon has made "significant investments to acquire subscribers." Significant to the tune of $262.3 million in 2010, up from $4.5 million in 2009.

The company has grown its subscriber base to more than 83 million customers, up from just 115,000 two years ago. Revenue has surged 2,241 percent last year. But growth of spending (5,732 percent) outstrips it. Largely to keep adding new subscribers, Groupon's IPO aims to raise $750 million.

While some analysts expect the offering to be a blockbuster, generating more excitement that LinkedIn's earlier this summer, others aren't so sure.

Pat Becker, Jr., of Becker Capital Management in Portland, Ore., which manages $2.5 billion, doesn't think Groupon is worth anywhere near $25 billion. Reason: Barriers to entry in Groupon's industry are low. As a result, some 482 competitors (at last count) are nipping at its heels. The largest, LivingSocial, has 28 million members. Smaller ones include Rue La La, Ideeli, BuyWithMe and Jetsetter. Even Glenn Beck has started one: Markdown.

Becker especially worries what will happen when "competitors like Yahoo or Google, who already have their own touch-point with consumers, start to utilize this type of service." Facebook already has started its own version of Groupon, called Deals, and Amazon has started AmazonLocal. Though Groupon has the lead, Becker says it's not inevitable it will keep it.

"We just don't think it takes competitors very long to get up to speed," he says Becker. "Somebody could have a competing product in less than a year."

Groupon's participating merchants, meantime, know they can go elsewhere. Some have started demanding deals better than the company's standard 50/50 split of what the consumer pays. That cuts into Groupon's margins.

A call to Groupon seeking comment for this story wasn't immediately returned.

Retail consultant Bob Phibbs, author of the new book "Groupon: You Can't Afford it," runs a blog containing hundreds of reviews and comments from business owners critical of Groupon and of other online coupon providers, who he sees as being bad for retailing.

Merchants who do business with an online coupon seller, he says, are at first delighted to have a sea of new customers show up. But they soon discover it's impossible for them to make money unless those same customers come back again and pay full price. Says Phibbs, "Hard numbers are what's missing here--the dots you'd need to make a connection between the number of coupons sold and the number of coupon-customers who come back later. That data doesn't exist yet. What's being reported is strictly anecdotal."

Groupon is responsible, he thinks, for "a very big shift in philosophy" on the part of retailers—and not a shift for the better: "Until the last few years, the objective for retailers was to create an exceptional experience for your customers, so that you'd win their loyalty. Now it's all about just getting first-time people in the door by giving away the store--with no guarantee they'll come back."

As for customer complaints, he says they typically result from a promotion's succeeding too well: A regular customer of a local spa, say, will show up one day to discover she can't get in the door: the place is crammed with coupon-clutchers. Or, having bought a coupon herself for some promotion, she arrives at the retailer to discover the entire supply of the discounted item sold out hours ago.

Complaints about Groupon aren't any different, he says, from those directed at competitors. He cites, for example, a recent incident in Toronto where a different coupon seller caused havoc at a local butcher who was offering $175 worth of meat for only $55. "Customers said that by the time they got to the store, all that was left was chicken." Blogged one angry coupon-holder: "I don't even know where to begin. The coupons were not honored."

How about the deals themselves? Are Groupon's as juicy they were a year ago? Yes, says Phibbs, assuming you can fight your way through the door. "They're still as good. You still get $50 of Thai food for $25."