Groupon IPO Is Hot, But Are the Deals?

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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."

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