After Andrew Mason founded Groupon (GRPN) in 2008, companies like Google (GOOG) and LivingSocial rushed to imitate the daily deal business he created. Less than five years later, the allure of discounted spa packages and wine-tasting classes has faded. With the company’s board and other co-founders losing patience, Mason is betting on early-stage, low-margin businesses to turn Groupon around—and save his job.
The value of daily deal coupons sold by Groupon grew from $745 million in 2010 to $4 billion in 2011. But growth has slowed, with the value increasing to an estimated $4.2 billion in 2012, according to Evercore Partners (EVR). Evercore predicts it will decline 38 percent, to $2.6 billion, this year. The company’s stock price has fallen more than 70 percent since it went public at $20 a share in November 2011. Daunted by the deteriorating business model, sluggish international growth, and a series of accounting missteps, investors have shaved more than $13 billion from Groupon’s market value in 14 months—one of the worst IPO runs since the dot-com bust. The company is now valued at $3.3 billion, a little more than half the amount Google offered to pay for it in 2010.
Groupon will turn a $6.68 million profit in 2012, according to average analyst estimates, after a loss of $279.4 million in 2011. It has $1.2 billion in cash. Yet the clock is ticking for Mason. Late last year, Eric Lefkofsky, Groupon’s executive chairman and largest shareholder, approached an outside adviser to discuss replacing the CEO, says a person familiar with the conversation who asked not to be named because it was private. Lefkofsky and his business partner Brad Keywell, along with Mason, control stock with extra voting power as part of Groupon’s governance structure. If Lefkofsky and Keywell did want to oust Mason, it would be difficult to stop them. Mason and Lefkofsky did not respond to requests for comment.
Investors have shown signs they want Mason out, sending shares up 5 percent when tech blog AllThingsD broke the news on Nov. 27 that the board was considering a successor. During a meeting later that week, directors agreed to give Mason a few more quarters before beginning a search for his replacement, according to two people familiar with the meeting who asked not to be named because the board’s deliberations aren’t public. Spokesmen for the company and the directors declined to comment on the discussions.
Groupon has tried several ventures to offset the declining coupon business. Its best prospect is Groupon Goods, a service that uses the company’s list of 40 million e-mail addresses to sell Garmin GPS units, Dell (DELL) laptops, and all kinds of other marked-down products. Groupon Goods, combined with its discount travel service Groupon Getaways, accounted for 18 percent of the company’s billings in 2012 and will provide 49 percent this year, according to Evercore.
Increasing reliance on Groupon Goods compromises one of the most appealing aspects of the company’s business: margins. Unlike coupons, which net Groupon about 35 percent of the price of a sale, items it has to store and ship usually yield less than 15 percent. Groupon also has invested in building a suite of software and hardware products to simplify common tasks for local businesses, such as booking reservations, managing reward programs, and processing credit-card payments.
The turmoil suggests a new CEO is needed, says Sameet Sinha, an analyst at B. Riley & Co. “If this business model needs to be reset, that’s better done by an outsider,” he says. “Somebody new, if he gets the mandate from the board, can come in and do his own thing and not get too much push back from his employees or senior management.”
Edward Woo, an analyst at Ascendiant Capital Markets, says fresh blood may not be enough: “I think that by this time next year, the company will have struggled through a difficult 2013, and the likely scenario would be to try to sell itself.” Google could reemerge as a suitor, says Tom Forte, an analyst at Telsey Advisory Group. Other companies could also benefit from Groupon’s customer list, says Woo, including JPMorgan Chase (JPM), which recently paid $35 million for daily deal site Bloomspot. He estimates Groupon would fetch as little as 60 percent of its market value in a sale—meaning the company’s biggest discount may be on itself.
The bottom line: Groupon shares have fallen over 70 percent since 2011. The company’s now valued at less than half what Google offered for it in 2010.
