Commercial awareness: think like a professional about... Groupon IPO

The Gateway reveals how a banker, lawyer, accountant and consultant react to the Groupon IPO

Internet discount voucher site Groupon raised $700 million (£437 million) through its NASDAQ IPO at the beginning of the month. The pricing of its shares at $20 by the underwriters, led by investment banks Credit Suisse, Goldman Sachs and Morgan Stanley, valued the company at $12.65 billion. The IPO was the biggest IPO by value of a US internet firm since that of Google in 2004, yet the slice of the company on sale to investors - around a tiny 5 per cent - also made it one of the smallest IPOs of the past decade by equity proportion on offer.

Groupon was launched in Chicago in 2008, and since then has spread across the globe, now offering daily cut-price deals in cities across the US, Europe, Asia and South America. These encompass a huge range of goods and services - as well as a plethora of food and drink, fashion and beauty deals, browsers of the site might also be able to get discounts on anything from a giant beanbag to tickets for a nighttime visit to London Zoo. These special offers have been wildly popular with consumers, particularly female ones, at a time of global belt-tightening. The company is now estimated to have 100 million customers, and has been widely anointed as the world's fastest growing company ever in the financial and business press.

However, not all has run smoothly for Groupon. It faces stiff competition from websites offering similar products and others, most notably offerings from both Facebook and Google, look set to debut in the near future. In addition, it has also had to contend with a plethora of complaints from regulators, the businesses it works with, and consumers on everything from the expiry dates on its vouchers to the exact wording of its offers. Finally, Groupon has been pulled up for accounting errors and had question marks placed over the long-term sustainability of its business model. Perhaps most damningly of all, the company is yet to make a profit.

There is no doubt that consumers will continue to use the power of the internet to hunt down offers and that businesses will persist in attempting to harness it to attract customers more effectively. The question of how dominant a role Groupon will play in these activities in the future hangs in the balance.

Thinking like an

  • Doing the maths: It's all smiles for Groupon now (those cheap tooth-whitening treatments have done the job) but the company has been much more down in the mouth money-wise on a couple of occasions over the past year. In August it was told off by regulators for misrepresenting its costs, and in October it announced that it was cutting its reported sales figures for the first half of 2011 by more than 50 per cent from $1.52 billion to $688 million - due to an adding up error.
  • High stakes: And the worst is yet to come: despite all the hype, Groupon has not yet made a profit. In fact, in 2010, it reported losses of $450 million, which surely places a question mark over its £8 billion-plus (almost $13 billion) valuation - that's about the same as clothing giant Gap, by the way. But none of this should worry Groupon's founders unduly - the equity stakes that Andrew Mason and Eric Lefkofsky hold in the company mean that now they're worth $1.3 billion and $3.6 billion respectively. We're sure they'll still be keeping an eye on their daily deals to save a few pennies though.

Thinking like a

  • IP IP hooray? Like many dotcoms, Groupon is all about creativity. Its founders dreamed up a whole new market, or at least saw its commercial potential. Sadly though, this innovation on which the company is based and on which its lightning early success relied cannot be protected by intellectual property law, unlike branding, a database, or a new technological invention. Therefore Groupon is extremely vulnerable to having all or a part of its market gobbled up by copycat competitors, especially if they're internet players with much larger existing customer networks.
  • Brazil nuts: We lawyers take contracts extremely seriously - and it might be a bit shorter than some we read, but a discount voucher still counts. So we've watched with interest how Groupon has been repeatedly rapped on the knuckles by the Advertising Standards Authority for misrepresentation - it's been hauled up to adjudications no less than ten times since December 2010. Consumer complaints included unavailable products, exaggerated discounts, and misleading descriptions of how offers worked - rest assured that I'd certainly be suing if a "£9.80 South American banquet for two" turned out to mean that one person had to pay full price.

Thinking like a ...banker

  • Buy now! There was quite a scramble for Groupon shares as they hit the market, with the price rocketing from $20 to a high of $31 on their first day of trading (no chance of a discount on these, it seems.) Why? It's partly to do with the small number on offer, though it could go up to 6 per cent if an over-allotment is exercised. But, to be honest, I've seen it all before - it's usual for the value of a newly public company to leap on its first day of trading. Many funds make a lot of money buying into IPOs at the offer price and then coming out again quickly after the share price has risen, a process known as "flipping" - and, worryingly, it's how the 2001 dotcom bubble happened...
  • Twiddling my thumbs: Some of the frenzy is surely just because of the paucity of IPO deals in the US market this autumn - I can count the ones which have happened on one hand. But at least it's given us financiers plenty of time to hop out of the office for cut-price manicures and special offer sushi lunches. We may have lots of money, but remember that we always like a good deal!

Thinking like a ...consultant

  • Whose loss? Groupon's business model is somewhat unusual. It offers the businesses it works with the chance to lose money and potentially be overwhelmed with more customers than they can cope with. Of course, loss-making offers are a well-established part of conventional marketing wisdom, but the trade-off is usually the fact that the warm and fuzzy feelings that half-price theatre tickets or free drinks create mean that customers end up spending more money on other products or services, or become regulars. I worry that all that's being created here is a loyalty to Groupon. And if too many of Groupon's businesses customers think the same thing, they certainly won't be feeling particularly affectionate towards the website.
  • More carrots, less stick: Although Groupon has come in for a lot of criticism, I see some reasons for optimism. The business appears to be taking some steps which will address some of the problems it's facing and move it in some exciting directions. New programme Groupon Rewards, essentially a loyalty card scheme run through the website, is designed to encourage customers to return to participating businesses, hence keeping them in turn loyal to Groupon. And the company continues to expand into new products and markets.