One, Two, Three Strikes You're Naked
Liz is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Hans Cristian Andersen's "The Emperor's New Clothes" entertains and cautions with a tale of an Emperor and two con artists. The scoundrels promise to design a fabulous new suit of clothes for the vain, royal fashionista and proclaim that this special garb will be invisible to anyone who's unintelligent, incompetent, or unfit to serve. So when the new suit is finally "finished" and consists of nothing, neither the Emperor nor anyone else is keen to admit it. Ultimately the Emperor ends up parading around naked with all his subjects oohing and ahhing until finally a small child yells out "But he isn't wearing anything at all!"
I recall this story since it provides the premise for my latest take on Groupon (NASDAQ: GRPN). I read an interview of Andrew Mason, Groupon CEO and couldn't help but be reminded of Hans Cristian's famous tale. Further, I checked the latest ratings and saw that while most analysts are bearish, there are still a few who rate GRPN a buy. They must believe that he's wearing a fine set of clothes and so let's see if that's the case.
Here are some of Mason's choice quotes that one must embrace in order to see the magical, invisible suit:
1. "We are a $5 billion dollar company that's growing 45 percent year-over-year after four years and we invented a new industry."
Terrific news, although there are two pesky questions that mute my adoration and applause. One is the fact that I see limited profitability attached to this $5 billion in sales. Suppose I sell brand new 7-series BMWs for $15,000 a car? We could all guarantee that my sales would go through the roof! But sadly, there would be little to zero profitability and sales volume sustainability - two metrics that drive company and shareholder value. I'm far more interested Groupon's Return on Sales of -2.33% (ttm), ROE of -8.75% (ttm) and income per employee of $-4,155 (ttm.) I feel as if everywhere we look (other than at sales) the news is bleak.
Further, Groupon did not invent a new industry. They were the first to group together and leverage multiple individuals to create buying-power at a discount and that's clever, but that's not creating an industry. The couponing industry and promotions of various types have been around since before some of us were born. Companies like News America (NASDAQ: NWS) and Valassis (NYSE: VCI) to a lesser extent, are two dominant players in the coupoining business space with an online presence, an in-store presence, a mobile app (for example News has SmartSource Xpress), and direct mail (to name a few.) These promotional powerhouses are the gold standard for couponing.
Strike one! Off with the imaginary jacket!
2. "We strongly believe from the consumer point of view that we need to do a better job at fulfilling demand and not just generating demand. "
For all you non-marketing types out there - you can't generate demand for a product when there is no perceived need. You can give people an incentive to purchase and subsidize trial - but that's not sustainable demand. The exception would be with a genius like Steve Jobs. Mr. Jobs generated demand by articulating (through technologically-superior products) a need that people had (even though they didn't know it) to connect effortlessly and communicate easily via one interactive tool. He then satisfied the very need he created with more and more Apple products. That's why Apple (NASDAQ: AAPL) can command such a premium price because for many consumers, only an Apple product will do. That is in no shape or form the situation with Groupon.
What Groupon does do is to create deals based on the numbers of consumers interested - but again, they are just "deals" which isn't the same as "demand." People do want deals, but most people do not utilize Groupon when they are in search of a book, a toaster-oven, an iPod, or any other of the multitude of items searched and purchased on Amazon (NASDAQ: AMZN). Can Groupon steal share from Amazon with their new offering Groupon Goods? Doubtful since Amazon is a well-established deal-maker with everything, and further, Amazon has part stake in their own on-line 'group deal' offering with LivingSocial.
Therefore, strike two! Off with your shirt!
3. "Groupon has the opportunity to be the world's first marketplace for local commerce in the same way that Amazon is the dominant marketplace for retail commerce."
Large, national retailers can offer ongoing loss-leaders and deep discounts on Amazon since they have a portfolio of many products that in total, balance out to provide a sustainable profit margin. Local commerce does not however, since the vast majority are small Mom-and-Pops that have tight margins and limited capacity. Therefore, they would not have the ability to sustain repeated Groupon activity and render it the "first marketplace for local commerce."
Further, let's circle back to Marketing 101 and the distinction between promotionally sensitive individuals versus the promotionally insensitive. The kind of deep-discount-driven individual that patronizes Groupon on a consistent basis may not be the type of customer that a local merchants want. They are not loyal and are more into the pursuit of the 'deal' than of anything else. There has been lots of backlash from local businesses who tried Groupon and the Groupon customers that showed up en masse where discourteous, demanding, and declared that they would never patronize the establishment at full price.
Strike three! Lose the pants!
Well, it seems that with three strikes we're out and the Emperor is naked! But then again, there are some analysts rating Groupon a "buy." What's your take, do you see the imaginary suit or not? Brrrr, it's sure getting cold in here . . .
CoachLizzy has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Amazon.com. Motley Fool newsletter services recommend Amazon.com and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.