Yes, the shares of Groupon (GRPN) are back down to the IPO price, they've played some interesting games with the accounting, the big internet companies are all looking into the market segment and yes, there's some 350 competitors out there already.
But that's not actually the real problem with Groupon. The problem is that we don't in fact know whether the underlying business model makes sense yet. No, not Groupon's model, but the underlying one.
There's a cautionary tale from the UK about this:
Need a Cake owner Rachel Brown told how Groupon nearly crippled the business after the company that initially created the Need a Cake website was approached and struck up a deal.
It was agreed that 1,000 vouchers would be made available between February and July this year for 12 cupcakes for £6.50 with Need a Cake taking £2.20 and Groupon pocketing the rest.
Clearly such a discount on a physical good (the original price is more like £26) isn't going to be profitable for the supplier: but perhaps a loss leader is a good way to advertise the place? Well, maybe it is and maybe it isn't: what we're beginning to see in those places that small businesses talk to each other about these things is that it isn't.
There are other parts of the story that don't bode well for Groupon:
But the offer was released days earlier than planned and began appearing in other regions across the UK and up to 9,000 people snapped it up, leaving the business snowed under.
Now whether it really happened quite that way is being disputed but there have been other such cases of claimed overselling (one mentioned in the same piece).
But that's not really my point here. I've had mild dealings with one of the other companies (essentially, just talking through what we might make as an offer) and there's much pressure from the corporate end that the offer should be of "something." Cupcakes, a restaurant meal, some physical item: and also that the deal on offer should be at a very large, 50% or more, discount to usual prices.
There's a great reluctance to take services or memberships, intangibles that do or could have the margins necessary to support such large discounts. Sure, this could well be just a refelction of the buying preferences of the customers, but it really is something of a problem for the business model in the long term.
Physical items simply cannot take the 75% or more margin cuts that are near required to be offered as a featured Groupon (and the same is true of the other companies) and yet there's a great reluctance to offer the types of services that can support those margin cuts.
Which rather leaves one wondering where the long-term growth is. 75% off offerings work great if you have fixed or near fixed costs and marginal production costs of near zero. They simply don't if you have a marginal production cost of 30% to 50% of regular cost. Then it's a loss leader and that's a much more risky proposition for a small business.
This is what I regard as the real problem with Groupon. Is the underlying business idea itself viable in the long term? Forget whether they have good management, leave aside competition or financing issues for a moment and ponder: does it actually make sense for a business to sign up to offer a Groupon when they know they're going to lose money on it?
Or alternatively, how long is the supply of such businesses going to last?