Groupon's Problem Is Not The CEO, It's The Business Model

| About: Groupon, Inc. (GRPN)

Investors are clearly happy after Groupon's (NASDAQ:GRPN) stock jumped nearly 13% after the board fired CEO Andrew Mason. Mason has been under pressure due to poor earnings and a falling stock price. Since its IPO, Groupon's stock is down more than 82%. Not quite the return shareholders were expecting.

So with Mason out, the market seems to believe Groupon has a fighting chance given the sharp rise up after the announcement. However, I honestly don't believe his firing changes anything. Groupon's business model is the problem, not Mason.

Groupon fails because the small businesses offering the discounts end up losing money. Not only will a business have to offer a steep discount for a product or service, but will also have to pay a high commission structure to Groupon, just for listing the deal.

The theory behind small businesses doing this is even though they would lose money on the coupons, they believe they can attract long-term customers. Unfortunately, this theory is wrong. The businesses find customer volume falls off after the deals are done and they are not much better off than before they offered the coupon.

Business owners have no incentive to list deals through Groupon. In fact, it would end up hurting the business by doing so. So why would a business owner renew a deal on Groupon?

The company's problem is not related to who is CEO, but is about the business model. In fact, the next CEO will run into the same issues that Mason had. Unless the new CEO can change the entire business model, it's very unlikely much can be done to turn the company around.

Even with Mason gone, investors should just stay away. This is a company which should have never gone public to begin with. Eventually the volume of coupons will drastically fall and no matter how big Groupon's sales force is, it won't be able to stop the bleeding when the coupon issuers do not benefit. Groupon's best option is to adapt to a stronger business model and not just focus on management change.

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.