29 Jun MKTG 464-Groupon for Local Businesses
Question
For the exclusive use of J. Joiner, . 9-514-047
NOVEMBER 5, 2013 THALES TEIXEIRA
LEORA KORNFELD Groupon for Local Businesses
The Company in 2013
Following a period of remarkable growth between 2008 and 2011, with revenues growing four
times in the last year, and a high profile initial public offering in November 2011, Groupon had
become the name that everyone used when referring to the larger sector of online daily deal offers.
Forbes reported that Groupon was the fastest growing company in the history of the web, noting that
it had reached $1 billion in sales in its third year of existence, which not even online giants such as
Amazon, eBay, and Google had achieved.1 But by November 2012, things were looking quite
different. In a rise and fall that the Chicago Tribune called both “stunning and dispiriting,”2 Groupon
stock had shed more than 80% of its value, and its market cap had shrunk from an all-time high of
$16.7 billion to a low that hovered around the $2 billion mark. (See Exhibit 1 for stock performance.) Old Boss Out, New Boss In
In November 2012 as Groupon’s stock fell, rumors circulated about the next phase of the
company’s evolution, and in particular about the fate of its 32-year old founder and CEO Andrew
Mason. Even during a precipitous market slide, Mason cultivated an anti-corporate and irreverent
business culture, causing many to question whether he fully understood what was involved in
leading a publicly traded company with a multi-billion dollar valuation. Antics such as hiring a
performance artist in a tutu to circulate amongst staff, for no particular reason, and providing a
dedicated office space for a fictional character3 were the kinds of things that marked Mason’s tenure
as CEO according to the media.
On February 28th 2013 the company’s Q4 2012 earnings report was released. Gross billings4 were
$1.52 billion, an increase of 24% from the previous year, but analysts’ expectations were missed, due
to the rising costs of SG&A (Selling, General, and Administrative expenses), which were up 44% year
over year,5 and difficulties expanding outside of the North American market. The stock plunged over
26% that day,6 and when trading closed, Mason was let go. In his memo to Groupon’s 10,000
employees he wrote: “I was fired today. If you’re wondering why…you haven’t been paying
attention.”7 Company stock rose 13% on the news of Mason’s departure,8 and a few months later
Groupon board member Eric Lefkofsky was officially named the company’s new chief executive.
________________________________________________________________________________________________________________
Professor Thales Teixeira and Research Associate Leora Kornfeld prepared this case. This case was developed from published sources. Funding
for the development of this case was provided by Harvard Business School, and not by the company. HBS cases are developed solely as the basis
for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective
management.
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514-047 Groupon for Local Businesses Concurrent with Lefkofksy’s takeover was the continued rise in popularity of the Groupon app
for smartphones. It had been downloaded 7.5 million times in Q2 2013, bringing its total user base to
50 million.9 The app allowed users to search for offers through a mobile phone. The Daily Deals Industry
During 2010 and 2011 thousands of new online daily deal sites appeared. Some sites specialized in
particular products or deals targeted at specific demographics or cities.10 Among them were
Eversave, Dealster, Woot, and Shoparatti. Others, such as Yipit, were created to become aggregators
of as many as 2,271 other daily deal sites, and sent personalized offers via email based on the user’s
interest profile11. But by the end of 2011, an estimated 798 daily deal sites, or 7.6% of the global daily
deal industry, had closed operations.12 (See Exhibit 2 for daily deal sites market share in 2012–2013.)
As the market became more saturated with online deal sites, a significant portion of merchants
grew confused and unsure about which sites to use and, more importantly, their value as a customer
acquisition tool. Once heralded as the savior of both small business in need of local promotion and
budget-conscious consumers during a weak economy, offering daily deals was becoming less
attractive as negative stories surfaced in the press. News headlines announced the abrupt shift in
opinion, referring to local merchants “souring on daily deal sites”13 and the “affair being over”
between small business and daily deals.14 Point of View of Local Businesses
In early 2013 a survey of 1,300 local businesses across the U.S. asked owners about their approach
to marketing their goods and services. The results showed that two thirds of local merchants spent
$2500 or less annually on marketing and advertising, that 59% of them were unhappy with their
return on investment for paid search, and that 85% of them had not used a daily deal site to promote
their products or services during the first half of 2013.15 But interest in the market appeared to be
high. Historically, local promotion spending, online and offline, was growing faster than local ad
spending. As of 2010, promotion had skyrocketed, which coincided with the huge growth in the
online daily deals industry. (See Exhibit 3 for comparison of local advertising and promotion
spending.) A separate study on local business spending on digital promotions between 2011 and 2013
showed that of all the categories of digital promotion available to them, such as free samples, events
and sponsorships, 83% of those dollars went to online coupons and deals.16
As Groupon’s stock slid throughout 2012, articles with headlines such as “Is the daily deal model
dying a slow death?”17 and “Is the daily deal site on its deathbed?”18 abounded online and in
newspapers. Some categories of deals seem to have been hit harder than others. The most popular
deal categories made available were health and beauty (31%) and food and drink (23%), with the
remainder of offers coming from the sectors of other services (events and activities), and retail.
Between 2011 and 2013 deal offerings in other services and in products waned, while those in the
category of health and beauty grew. (See Exhibit 4 for Groupon’s categories of deals, 2011 vs. 2013.)
The owner of TravelKiddy, a website for children’s toys, signed up to offer several daily deal
promotions in 2011. “We have a 40 percent profit built into our pricing”, said Jennifer Untermeyer,
the owner, “but we lost a significant amount of money on each deal, so we ended up in a wash
position for the year…. Customers who redeemed the coupons did not come back, and more than
half bought just the coupon amount.”19 2
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Groupon for Local Businesses 514-047 For Muddy’s Coffeehouse in Portland, Oregon, the effect of running a Groupon deal was even
more detrimental. Muddy’s offered $24 worth of food and coffee for a Groupon in the amount of $12.
Customers showed up in such large numbers that there was far more money going out the door, in
the form of drinks and food, than there was money coming in. “I pretty much had to take a loan out
to cover the loss”, said owner Dyer Price, “or we would have probably had to close. They don’t warn
you that you’re going to get hit really hard and that you have to be prepared. We will never, ever, do
it again.”20
Online t-shirt seller Kevin Stecko of 80sTees.com did a Groupon deal for $20 off a $40 order. 971
Groupons were purchased almost immediately, and most of the customers were new to his site. Still,
Stecko lost an average of $2.96 per order, and only nine of the Groupon customers came back to buy
an order at full price. The thing that saved him was the fact that 136 of the purchasers did not redeem
their Groupon.21 Research conducted by a Rice University professor in 2012 reported that the
percentage of purchased and unredeemed daily deals was, on average, 22%. Despite the negative
experiences reported by some merchants, the percentage of small businesses repeating Groupon
offers increased with each quarter, going from 30% at the end of 2011 to 41% by 2012.22
There were also merchants that had an overwhelmingly positive experience with daily deals.
“You just can’t get a better bang for your buck,” said Heather Speizman, owner of Bottles ‘n’ Brushes,
an art studio located in South Carolina who ran a Groupon for half-off art classes. “It was the buzz
without us speaking a word. It’s a great thing for new business….”23 Chloe Minyon of Richmond,
Virginia, the owner of English Tea Paperie’s, an online business which specialized in customized
stationery, was also pleased with the results of her daily deal offer. “There are hundreds and
thousands of stationery companies in the United States and to compete with that is hard. Then
Groupon called,”24 said Minyon. “It’s the cheapest form of advertising, as long as you’re making
above your material costs,”25 she added. Before running the Groupon offer, her clientele was
dispersed across the country. Groupon gave the online business visibility locally and built a new
clientele of locals in the Richmond area.
With such a range of experiences, local businesses debated whether using daily deals to attract
new customers was right for them. For which businesses were daily deals an effective form of
customer acquisition? And what should those businesses for which daily deals was not effective do? 3
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514-047 Groupon for Local Businesses Exhibit 1 Source: Groupon Stock Price IPO to Q3 2013 Casewriters’ analysis. Exhibit 2 2012-2013 Daily Deals Market Share, by
Billings, in North America Daily Deal Site Market Share (%)
Q1 2012
Q1 2013 Groupon 56 61 LivingSocial 20 17 Amazon Local 2 3 Travelzoo 2 2 All Other 20 17 Source: Yipit, May 30, 2013, via eMarketer. 4
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Groupon for Local Businesses Exhibit 3 Local Advertising and Promotions Spending (in $ billions), 2005–2013 2005
Source: 2006 2007 2008 2009 2010 2011 2012 2013 http://www.marketingcharts.com/wp/direct/local-biz-spending-onpromotions-easily-trumps-ad-dollars-28011,
accessed September 2, 2013. Exhibit 4 Source: 514-047 Deals Offered by Groupon by Category in 2011 vs. by Industry in 2013 Groupon S-1, released on July 2011, based on Q1 and Q2 2011 data, and IBIS World Industry Report OD5452:
Daily Deal Sites in the U.S., released on August 2013. 5
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514-047 Groupon for Local Businesses Endnotes
1 Christopher Steiner, “Meet the fastest growing company ever,” http://www.forbes.om/forbes/
2010/0830/entrepreneurs-groupon-facebook-twitter-next-web-phenom.html, August 12, 2010, accessed
September 18, 2013
2 Ameet Sachdev and Robert Channick, “Groupon CEO Andrew Mason to staff: ‘I was fired today,’”
http://articles.chicagotribune.com/2013-03-01/business/chi-mason-out-at-groupon-shares-jump20130228_1_groupon-ceo-andrew-mason-tech-scene-matt-moog, March 1, 2013, accessed September 18, 2013
3 Douglas MacMillan, “Groupon ousts Mason after CEO fails to confront coupon slump,”
http://www.bloomberg.com/news/2013-02-28/groupon-removes-andrew-mason-as-ceo-appoints-lefkofskyleonsis.html and, February 28, 2013, accessed September 26, 2013
4 Gross billings, which reflect the total dollar value of customer purchases of goods and services, excluding
any applicable taxes and net of estimated refunds. Source: Groupon, Investor Relations page of website,
http://investor.groupon.com/releasedetail.cfm?ReleaseID=743818, accessed September 23, 2013
5 Groupon
SEC Form 10-k for 2012,
Earnings%20Releases, accessed September 24, 2013 http://investor.groupon.com/releases.cfm?ReleasesType= 6 Tomio Geron, “Groupon shares dive on earnings miss”, http://www.forbes.com/sites/tomiogeron/
2013/02/27/groupon-shares-plunge-on-q4-earnings-miss/, February 27, 2013, accessed September 18, 2013
7 Matt Buchanan, “Groupon’s Bad Deal”, http://www.newyorker.com/online/blogs/newsdesk/2013/03/
groupons-bad-deal.html, March 2, 2013, accessed September 19, 2013
8 Samantha
Bomkamp,
“Groupon
shares
climb
nearly
13%
after
CEO’s
ouster,”
http://articles.chicagotribune.com/2013-03-01/business/chi-groupon-ceo-20130301_1_grpn-data-grouponshares-ceo-andrew-mason, March 1, 2013, accessed September 18, 2013
9 Drake Baer, “How Groupon Bounced Back,” http://www.fastcompany.com/3017854/bottom-line/howgroupon-bounced-back, September 20, 2013, accessed September 25, 2013
10 Shayndi Raice and Stu Woo, “Groupon’s Boston Problem: Copycats,” http://online.wsj.com/
article/SB10001424052702303763404576420090000910026.html, July 8, 2011, accessed September 30, 2013
11 http://yipit.com/about/, accessed September 27, 2013 12 Fast Company staff, “Do Groupon and Living Social Do More Harm Than Good?”,
http://www.fastcompany.com/1822518/do-groupon-and-livingsocial-do-more-harm-good, March 19, 2012,
accessed September 19, 2013
13 Stephanie Clifford and Claire Cain Miller, “Merchants and Shoppers Sour on Daily Deal Sites,”
http://www.nytimes.com/2012/08/18/technology/merchants-and-shoppers-sour-on-daily-deal-sites-likegroupon.html?_r=0, August 18, 2012, accessed September 19, 2013
14 Karen E. Klein, “Small business and daily deals: The affair is over,” http://www.businessweek.com/
articles/2012-11-12/more-small-retailers-sour-on-daily-deal-sites#r=hpt-ls, November 12, 2012, accessed
September 13, 2013
15 Reply.com survey research: “State of the US economy: Marketing,” http://www.reply.com/About/
PressReleases/survey-results_2013_07_17.aspx, July 17, 2013, accessed September 6, 2013
16 Borrell Associates, 2013 Report on local digital advertising and promotion spending,
http://www.borrellassociates.com/component/virtuemart/?page=shop.product_details&flypage=garden_flyp
age.tpl&product_id=1125, accessed September 18, 2013 6
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Groupon for Local Businesses 514-047 17 Brad Tuttle, “Is the daily deal model dying a slow death?,” http://business.time.com/2012/11/16/is-thedaily-deal-model-dying-a-slow-death/, November 16, 2012, accessed September 13, 2013
18 Sean Ludwig, “Look out Groupon: Nearly 800 daily deals sites folded in the past 6 months,” January 19,
2012, http://venturebeat.com/2012/01/19/800-daily-deals-sites-folded-past-6-months/, accessed September 13,
2013
19 Karen E. Klein, “Small business and daily deals: The affair is over,” http://www.businessweek.com/
articles/2012-11-12/more-small-retailers-sour-on-daily-deal-sites#r=hpt-ls, November 12, 2012, accessed
September 13, 2013
20 Stephanie Clifford and Claire Cain Miller, “Merchants and Shoppers Sour on Daily Deal Sites,”
http://www.nytimes.com/2012/08/18/technology/merchants-and-shoppers-sour-on-daily-deal-sites-likegroupon.html?_r=0, August 18, 2012, accessed September 19, 2013
21 Stephanie Clifford and Claire Cain Miller, “Merchants and Shoppers Sour on Daily Deal Sites,”
http://www.nytimes.com/2012/08/18/technology/merchants-and-shoppers-sour-on-daily-deal-sites-likegroupon.html?_r=0, August 18, 2012, accessed September 19, 2013
22 Distribution of featured Groupon merchants in North America from Q3 2011 to Q1 2012, Data collected by
Yipit.com, accessed via Statista, September 5, 2013
23 Tim Donnelly, “How Groupon can boost your company’s exposure,” http://www.inc.com/guides/
201101/how-groupon-works-for-small-businesses.html, January 24, 2011, accessed September 12, 2013
24 Jennifer Warnick, “Groupon saved my business,” http://www.nbc12.com/Global/story.asp?S=14236221,
March 11, 2011, accessed September 13, 2013
25 Ibid 7
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