Groupon Should Spare Investors the Pain and Sell NOW

Amazon’s (NASDAQ:AMZN) recent launch of group buying site AmazonLocal is another example of why Groupon is going to get killed. Groupon rhymes with coupon for a reason. It’s not just the phonetics that are the same but the business model as well. Like coupons, group discount buying will be subsumed into the retail tactics of every major retailer. It will not be owned by one company. Like coupons, the real money of the model is probably in infrastructure and database management, not owning a dedicated front-end site. Every major retailer employs coupons and discounts, and they will do the same with group buying. The list of heavy-weight retailers launching group buying is growing and growing. Amazon through AmazonLocal and LivingSocial, Google (NASDAQ:GOOG), Walmart (NYSE:WMT), and Facebook are the short list. Now that’s some very interesting competition and things are just getting started.

Groupon’s IPO will be a great event for founders, employees and early investors. It’s a trap for retail investors and Groupon should save investors the pain and sell to someone like Visa or one of the guys above now.

Groupon will continue to grow and could remain the leading direct player in the space, but there will never be any profit in it for them. There are four major reasons competition is going to kill Groupon. Any one of them could do it, let alone all four combined.

1. Groupon’s main competitors can subsidize discounts through other revenue streams and do not need to make a profit on them.
2. Existing retailers and large players like Google have distribution that will make Groupon’s direct acquisition costs a huge disadvantage.
3. The sheer volume of companies leveraging group buying programs will commoditize any brand or footprint Groupon creates.
4. Companies like Facebook and Google can create synergies with other offerings like Facebook’s social graph or Google’s mobile maps and Places.

Now anyone of these would be a major headache for a money-losing operation that thinks marketing costs are temporary. The reason it’s an investor trap in the making is that things look good for Groupon now.

Source: compete.com

Revenues and traffic are growing at a healthy clip. Groupon has the leading brand in the space. It’s also got a good headstart on local merchant penetration. It probably makes for a good IPO roadshow. However that’s what makes a trap a trap, it looks good on the surface.

Source: Groupon S1

Similar to say a company like Vonage, Groupon has some serious acquisition cost issues. Ignore what Groupon management is saying. These costs are only going to get worse and are not a temporary cost of growing. Stiff competition means that Groupon’s economics are not going to get better anytime soon.

Groupon will IPO with much fanfare, but they should really save everyone the pain of a hyped tech IPO followed by economic reality setting in and subsequent retail investor losses. Companies like Visa or a foreign firm like Baidu looking to break into the American market could bring natural synergies and scale. However acquirers aren’t likely to pony up the short term pop to founders and VCs the way an IPO will. So will we probably see this predictable drama play out in the market, much to retail investors chagrin.

This post was submitted by guest contributor Edward Daciuk on Trefis.com