Groupon Shocked to Find it is Actually Losing Money
Instead of earning $60.6 million for all of 2010, as Groupon originally claimed in papers filed for its IPO, the firm now says it incurred a $420 million operating loss.
This sounds like a simple oversight. Quite innocent.
Some suggest Groupon was trying to hide a half billion loss. How silly. I'm sure that management honestly felt it was more transparent to invent a new metric called "adjusted consolidated segment operating income," or ACSOI, than to try and explain why losing half a billion dollars wasn't really losing half a billion dollars.
If you don't understand this logic, you probably ought to take the new Dupe a Group Accounting course coming soon to your local community college.
Groupon CEO Andrew Mason wrote, "We exclude those costs because, unlike our other marketing expenses, they are an up-front investment to acquire new subscribers that we expect to end when this period of rapid expansion in our subscriber base concludes."
To understand this statement, you have to understand Groupon's business model, which is to convince struggling merchants to give them money in an often futile effort to attract profitable new customers.
Instead of simply having a "50% off" sale, these merchants pay Groupon to help them have something like a "50% off" sale, generally paying Groupon about half of the money they receive in the sale. In other words, the merchants get about $1 for every $4 worth of merchandise they sell.
In a starting turn of events, most merchants find it is hard to make money selling services for 25 cents on the dollar.
They do this because Groupon has an Immense Marketing Machine and is the Next Big Thing. Wait, that's not fair. Groupon actually has an ASCOI Marketing Machine, which is funded by a $480.6 million loss, I mean investment, in getting so big that Groupon can buy small nations.
What does ASCOI do for Groupon? It creates the perception that Groupon has a sustainable business model. But will Groupon ever have a large number of loyal customers? Most businesses can't afford to discount this deeply.
If I sound anti-Groupon, it's because it is almost never a good idea for companies to compete based on price. You learned this when you took $20 worth of your parents' lemonade, sold it for $5, and discovered your parents weren't all that eager for you to have a second sale.