After Bakery Fiasco, Is Groupon Really Better Than Traditional Advertising?

GRPN: Groupon logo

Source: Groupon's S-1 Filing Dated 1st November 2011

Groupon’s (NASDAQ:GRPN) biggest pitch to merchants and small businesses is that its the perfect alternative to traditional advertising means such as print and electronic media. However, the recent case where a UK bakery lost around $20,000 on a Groupon deal, [1] highlights how Groupons can potentially be dangerous to many businesses, especially ones with high marginal costs. Groupon is the biggest daily discount provider in the world, competing with companies like Google (NASDAQ:GOOG) and LivingSocial.

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Groupons Can be a Raw Deal for Food & Drink Based Businesses

According to reports, about 8,500 users signed up to buy around 12 cupcakes for $10 from the merchant, which were actually worth $40. That is a 75% discount faced by the merchant for each deal, the usual for most of Groupon’s merchant base. For a small business, a $20,000 loss is hefty by all accounts.

The above example brings to light the potential losses merchants can run into, especially those with high marginal costs, namely tangible goods food & drinks. For both U.S. and international markets, food & drinks comprise of 24% and 17% of the total deals run by Groupon respectively, which is a significant number. [2]

While Groupon claims that is assesses the capacity of each business before it runs a deal, it’s clear that a single error on the company’s part can lead to dire consequences for small-scale merchants. Given that Groupon’s stock has already slumped below the IPO price, bad merchant reviews brings with it negative press which can further add to the company’s problems.

We recently launched coverage on our analysis of Groupon with a $13 price estimate. Refer to our note on why Groupon’s valuation has fluctuated significantly over the past 2 years.

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  1. Mashable: Large Groupon Discount Leads to Excessive Cupcake Baking []
  2. SEC: Groupon’s S-1 Filing Dated 1st November 2011 []