It is June 2011, and Groupon is fast heading towards a $30 billion valuation in an initial public offering. That is a big number for a company with $645 million revenue and 83 million subscribers. How do we know this valuation makes sense? We probably don’t. There are a lot of metrics that financial analysts would use, but I’d like to point out one that my firm uses — identifying the relevant business analogy and understanding that in order to shed light on the implications for the company one is studying, in this case Groupon. This methodology is an externally focussed “best practices” approach.
The immediate analogy that comes to mind is the quick-service restaurant business. Why? Because the operators of this type of business have basically the same value-creation strategy as Groupon. They keep adding outlets to support their high-growth model. The real issue starts to occur when they reach saturation. Groupon does somewhat the same thing but in a totally different industry. They are bringing deals to their subscriber base on behalf of clients where they have negotiated a deal-sharing arrangement, e.g., once-in-a-lifetime daily spa treatment for one-third the normal price. As they add sales reps (think restaurant outlets), they add new subscribers (think restaurant patrons), and they sell more deals (think meals) and grow revenues.
We know that listed restaurant chains can do phenomenally well until they hit the wall that we call market saturation. Starbucks is a good example of someone who hit saturation a couple of years ago, and the stock suffered. The chain has since gone back to basics, retreated from poor outlets, and rejuvenated the offer in order to get back on track, but there is a lesson to be drawn here by the Groupons of the world.
Implications for Groupon et al.
Groupon is adding staff, subscribers and deals, but basically it’s the same story as for the expanding quick-service chain. We as subscribers are starting to suffer deal fatigue. I know because I get a couple of daily feeds from cities to which I frequently travel. In my consulting world the key strategic challenge is helping key decisionmakers figure out the next step before it even occurs – looking forward to the eventuality and trying to make it work in your client’s favor.
In the quick-service restaurant world, operators respond by thinking about how to increase same-store sales (a year-on-year comparison of sales for outlets that have been open at least a year). This is a key metric of the overall vitality of a quick-service restaurant chain. Those who will invest long-term in Groupon need to identify what they same metric is and how Groupon or a similar company is responding to it. The initial look is pretty sobering. The New York Times did some nice analysis on Groupon metrics, as sourced from their S-1:
What can we do
The moral of the story is that for all the success of Groupon, they still need to be thinking one step further ahead in order to justify their proposed valuation. Each of us works in different industries, probably less dynamic than this, but there is the same opportunity to help identify new sources of value creation by better understanding business analogies. This is one of the things we do at Faculty Partnership. If you are interested in discussing further, please do get in touch.