Sorry Groupon, , cutting off the head won't save you
As you've probably heard by now, founder and CEO Andrew Mason was ushered out yesterday by the board after the daily deals specialist posted another dismal quarter. The company posted a surprise adjusted loss of $0.05 when analysts had expected a $0.03 profit, and first-quarter guidance was also well below expectations.
Rumors of Mason's ouster had been swirling since November, and it's certainly understandable why he got the axe. As he readily admitted in his farewell letter, in its brief period as a publicly traded company, Groupon had been haunted by an accounting scandal, consistently missed its own guidance, and seen its share price lose roughly 75% of its value.
While it's easy to blame the CEO for such problems, Mason deserves credit for launching a model that many had failed at before, and the company's quirky, sassy style helped it establish itself as the market leader, beating out better-funded rivals like Amazon.com-backed Living Social and Google.
Employees portray a company with a "work hard, play hard" culture with a management style that often seems to be disorganized. Perhaps the next CEO can straighten the staff out, but changing the culture is difficult, especially since many employees signed on in part for the offbeat workplace. As one jaded former salesperson wrote on Glassdoor.com, "Before they went public, this was THE best place to work in Chicago. Now, it's a grind to move the stock price up pennies at a time, with no consideration for the long-term effects." With Mason's exit, the company may be taking one more step in a misguided corporate overhaul.
Co-founder and Executive Chairman Eric Lefkofsky and Vice Chairman Ted Leonsis will take over in the interim while the company searches for a new chief.
Lefkofsky is also Groupon's biggest shareholder, and as an entrepreneur with previous start-ups like Starbelly.com and Brandon Apparel, he has a history of shepherding high-growth companies into ruin. Leonsis is a veteran of AOL, who saw the company through its rise and fall and subsequent modest recovery.
Groupon investors were doomed from the start. A $15 billion initial valuation is generally reserved for healthy, stable companies with a long history of profits, not speculative growth plays in undefined industries with no profits to show for themselves. Household names like Macy's, Whole Foods, Aetna, and Kroger trade in the $15-billion valuation range.
The other problem was the business model. Groupon's launch in November 2008 was perfectly, if accidentally timed, with the financial crisis and subsequent recession. The business thrived off penny-pinching deal-seekers and merchants in need of cash flow. But over time, Groupon rubbed many participating merchants the wrong way, consumers got deal fatigue, and the faddish trend seemed to peak. No. 2 deals site Living Social recently announced layoffs, and Groupon's revenue would've fallen this quarter had it not been for its new marginally profitable direct revenue channel, made up of selling clearance items directly to customers. Gross profit, which accounts for all revenue streams, fell more than 10% in the quarter.
Perhaps some adult supervision can reverse the slide after some housecleaning and layoffs and such, but I wouldn't expect any magic. Groupon was a speculative play all along in a new, exciting, potentially lucrative industry, but there was never an economic moat, and consumer and merchant fatigue took over. Leadership was never the problem.
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The article Andrew Mason Was Not the Problem originally appeared on Fool.com.
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