Can Groupon Still Be Saved?

| About: Groupon, Inc. (GRPN)

Here's an anniversary story for you: Groupon (NASDAQ: GRPN) went public one year ago, with great fanfare and a last-minute price hike to $20 per share. It was the biggest Internet IPO since Google (NASDAQ: GOOG) in 2004. On Monday, Groupon closed at $2.66 a share. With luck, it might survive into the new year.

In an effort to increase its chances of survival, Groupon just announced a free shipping offer through the holidays on most of its Groupon Goods. It even rolled out its first-ever holiday catalog.

Groupon Goods is the newer division that sells deeply discounted products. Investors don't like it any more than they like Groupon's core business, selling coupons online for local businesses. It's lower margin, since they manage the inventory in-house. And it's got better-established competition with vastly larger inventory, like Overstock (NASDAQ: OSTK) and, owned by eBay (NASDAQ: EBAY).

What went wrong at the world's "fastest-growing company" (at least according to Forbes) ever? Nothing that wasn't obvious a year ago. Sure, it was growing fast, with a "marketing reach" of 150 million people. It also was losing money, its revenue growth was flat, and neither of those facts was adequately disguised by some truly squirrely accounting practices.

In fact, some of its accounting is still a tad squirrelly. The Wall Street Journal points out that Groupon has a respectable $1.2 billion in cash, but half of that is money owed to merchants but not yet paid out.

Worst of all, the local merchants who were the drivers of its business were running like bunnies. They were telling horror stories about mobs of bargain-hunters who bought the loss leaders and never came back. These weren't big operators, they were mom-and-pop shops, like the British cupcake baker who wound up selling 102,000 cupcakes at a loss.

Still, Groupon was trying to make "local" work, and "local" is the Holy Grail of the Internet. Local information, local services, local news and coupons and advertising. Such an alluring idea, and nearly impossible to implement.

Nearly impossible because of its high people costs. It takes a lot of people to go door to door, from pizza parlor to dentist to dog groomer, peddling coupon offers. Groupon was trying to do that on a worldwide basis.

The latest sign that this was not a good idea came only last week, when Groupon announced its quarterly results. Superficially, a lot of the numbers looked good. Revenues were up more than 80%, to $292 million, for the US and Canada. Europe was a disaster area; no surprise there.

But the company still lost about $3 million in the quarter, and its net profit for the first nine months of 2012 was just $13.7 million. For the year as a whole, it expects to break even.

So, can this company be saved? Surprisingly, the answer is maybe.

Groupon is working on automating the process of implementing its coupon business. It's also clearly working on its tools for merchants, including a new payment app as well as marketing and bookkeeping services. These don't have much to do with coupons, but they could keep plenty of small merchants in the Groupon loop.

Another interesting twist is its acquisition of Savored, a New York-based startup that helps restaurants fill tables by offering discounts for reservations at non-peak hours.

Put it all together, and it starts adding up to a strategy. It might have been a good idea to get all that stuff in place before it expanded. But it looks like it's now or never for Groupon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.