Sunday, March 20, 2011

Groupon: The Fastest Growing Company Ever…But Will It Be The Fastest Declining Ever?

I have had some interesting discussions with a few friends recently on whether Groupon is “for real” or not. One friend is building an online startup on the side and has connections to the Palo Alto world. The other works in finance and is more well versed in looking into companies’ financial reports. Both are smart but disagree completely on whether the success of Groupon is sustainable. Listening to both sides of the argument, I would say that I fall somewhere in the middle. I think that the fate of Groupon rests within the hands of the leadership of the company.

There is a very well written article in Businessweek that details the rise of Groupon and where it is going. The article, found here, sheds some interesting insight into the company and may have you formulating your own take on the fate of the growing online deal-of-the-day startup.

Mason is the 30-year-old chief executive officer of the digital couponing comet known as Groupon, the Google-spurning, Super Bowl-flopping startup that sends deal-of-the-day e-mails to more than 70 million subscribers around the world. He's wearing a heavy winter coat, a lime-green track jacket embroidered with the Groupon logo, sneakers, and garish red Christmas socks. ("Only clean socks I could find," he says.) Holding his iPhone before him like a tricorder, he logs into the new service, called Groupon Now, and shows off two simple buttons that have the potential not only to transform humankind's lunchtime habits but also to alter the topography of the multibillion-dollar market for local commerce.

The two buttons: "I'm Hungry" and "I'm Bored."

It's only 11 a.m. Mason clicks the "hungry" button, and his phone transmits its location to Groupon's servers and then displays a list of deals from nearby restaurants. Across a bridge spanning the Chicago River, the Asian fusion restaurant Thalia Spice is testing Groupon Now by offering $20 worth of food for $12. A block to the north, an eatery named @ Spot Café is dangling a $10 coupon for $6. Each restaurant has specified that its discount is good only during select hours on that particular day, when a few of their tables would otherwise be empty.

The simple expose detailed above is what CEO Andrew Mason is banking on as the future of Groupon. The vote is out on whether retailers will be on board with a more ‘permanent deal’. In fact the verdict is still unclear on whether retailers are completely satisfied with Groupon’s daily deal approach. Groupon repeatedly advertises a significant return rate for vendors but the media loves to highlight disgruntled users who claim to have lost significant amounts of money through the Groupon imposed deep discounts. What is clear is that there are still plenty of local businesses willing to give Groupon a whirl which should fuel company growth into the future whether it be through traditional daily deals or the new Groupon Now deals.

As I read the article a few things jumped out at me:

1. Easily Replicated Business Model – This is the primary point of contention in the polarized argument between my friends. Anyone can create a daily deal business model and many have. With the flood of players coming into the market, how long will Groupon be able to maintain their incredible growth? More specifically, what if an online player with significant influence (i.e. Facebook, Google) unleashes a similar service? I think that Groupon’s ability to maintain their position as the dominant player in the market segment will hinge on their ability to stay ahead of the competition with regard to where the segment is headed. Is Groupon Now the first step in warding off the competition? Only time will tell.

There were a few things that were discussed in article that I did like about how the company views itself and its challenges ahead. "We had this realization probably a year into launching Groupon that this was highly copy-able," says Lefkofsky. Adds Mason: "We have always been thinking about how to solve these fundamental problems of our model. We have known since very early on that some form of real-time deal optimization is where this had to go." First and foremost, I like that they are aware of the reality facing their business model. Obviously it is much easier to combat your weaknesses and seek new opportunities when you are actually aware of the challenges you face. Mason also made some interesting comments regarding his company idols. "The company I admire most is Netflix," he says, referring to the movie-streaming company that purposefully disrupted its original DVD-by-mail business. "They have figured out a way to be successful and cannibalize their core business. Nothing is more romantic to me." Not only does Mason not mind revolutionizing their business model, he seems to see it as a sign that a company is truly successful. This tells me that they at least have the right mindset for success. Execution is another thing entirely, but one has to look no further than Netflix or Google to see how a business can grow, shift, and change to capitalize on new markets that in many cases have yet to be created. I see the success of Groupon hinging on their ability to do the same.

2. A Battle Against Creative Destruction – The term creative destruction, which was popularized by economist Joseph Schumpeter in the 1950’s, is defined as a “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one." As companies grow they become more bureaucratic, less flexible, and typically less innovative. These growing rigid organizations are destroyed by smaller, more innovative companies who either revolutionize the marketplace they are in or simply create a new one rendering the old way of doing business obsolete. Every company faces these growing challenges. However one would assume that as the ‘fastest growing company in the world,’ Groupon should expect to face these challenges sooner than an organization with a more traditional growth pattern.

There are a few examples within the article that indicate that Groupon, despite its extremely rapid growth, seems to be operating in a similar manner to its early startup days.

Groupon occupies parts of six floors in the former headquarters of Montgomery Ward, the erstwhile catalog retailer and department-store chain that along with another Chicago merchandiser, Sears Roebuck, defined retail during much of the 19th and 20th centuries. Aaron Montgomery Ward might not recognize much of the building he put up in 1908. Groupon employees are jammed in practically elbow to elbow. Doodles and cartoons festoon walls and whiteboards. Shelves are strewn with cartons of bagels and coffee. Adding to the flavor, blue yoga balls, which the company gave to every employee at an all-hands meeting in December, clutter the office and sometimes substitute for desk chairs. A conference room on the sixth floor, the "war room," is the launch pad for Groupon Now. A whiteboard is covered with giant maps of the initial target cities, with tallies of the number of merchants who have signed up in each Zip Code. The company plans to go wide with the service in early April.

Detailing corporate strategy on the walls. Doodles throughout the office. A war room with maps targeting launch cities. People packed together. So what you ask? I think those simple descriptions speak volumes on how the company is currently operating. When you are outlining corporate strategy in brainstorming sessions versus creating bureaucratic point papers and fancy presentations you are doing something right. The idea is what is valuable, not the process to present it. For a company that has grown that much and has had that much capital infusion (i.e. additional vested interests), I think it is pretty cool that they have still managed to operate in that fashion. Perhaps they are taking a page from the Facebook playbook, a company where CEO Mark Zuckerberg is said to sit office-less amongst fellow employees and where conference rooms are nothing but glass rooms without shades.

3. Purposeful And Incremental Strategy Improvement – It is quite clear that from the beginnings of Groupon the leadership has been looking ahead to the next step. When you hear company leadership say things like “We have known since very early on that some form of real-time deal optimization is where this had to go,” you see that they are not just riding the daily deal train mindlessly hoping to cash in. Turning down Google’s estimated $6B buyout dispelled cash in motives as well. In the tech sector I think it is all the more important to continually balance knowing where you want to go and capitalizing on changes that may not even be visible yet.

Mason referenced Netflix in the article and it got me thinking about what they have done. I have known about Netflix forever. They were a consistent case study in disruptive markets throughout college. Their DVD mailing model changed the industry. I haven’t joined Netflix yet but I have been thinking about doing it lately. When I went to the website the other day I was amazed that their DVD mailing model is hardly even traceable on the site. Everything is about streaming media now. Their model has changed entirely. With changes in technology and social trends Netflix has incrementally changed direction over the years, evidently without me fully realizing it. If they had offered the strategy shift in one massive roll out it probably wouldn’t have worked out so well. Yet by having a rough strategy in mind and by reacting to world changes over time they have been able to emerge as the market leader in monetizing streaming online media. Mason undoubtedly sees the parallels to his industry and it looks as though they are trying to do the same.

I would love to see the argument on whether Groupon is the next big thing or next big bust continue in the comments section.


Brian T. Reese said...

Groupon already is the next big thing. Reports are estimating that the company is planning an IPO (in the very near future) that has them valued at $25 Billion. Groupon has the team, the vision, and the innovation it needs to stay successful for a long time.

A couple things to think about: Why didn’t Google just create its own YouTube (it tried and failed so it bought them)? Google didn’t want YouTube for the videos. It wanted YouTube to change the entire online media industry. Google didn’t want Groupon for the daily deal. It wanted Groupon because of the chance to own small and medium sized markets as well as social advertising (something it hasn’t been able to grasp).

To the average Joe, Groupon is a daily deal website much like all the others. To me, Groupon is much much more than that. It’s a beacon of innovation with an amazing team that’s changing the way small businesses interact with customers. It’s changing an entire industry.

Matt Bader said...

Thanks for your insights Reeser!