Monday, April 2, 2012

Groupon's Risky Business

Said a source who implored not to quote 'im:
"Selling coupons? There's risk to promote 'em.
If one's merchants one pre-funds,
But buyers want refunds,
Well then, they've got one by the scrotum."

Groupon (NASDAQ: GRPN), the discount coupon provider that went public in a social media frenzy last November, recently shocked investors with the disclosure that its fourth-quarter results had to be restated downward. Reuters financial commentator/blogger Felix Salmon explains: "In the US, Groupon sells a bunch of deals for a given merchant, gets lots of revenue as a result, keeps roughly half that revenue for itself, and then passes on the other half to the merchant in question." This policy engenders significant risk because of the company's unconditional refund policy. Says Salmon: "That policy is good business for Groupon: it gives people a lot of confidence to buy a Groupon for merchants who might otherwise seem a bit sketchy. But it also creates dangers, because if Groupon does a deal with a sketchy merchant, then Groupon can be on the hook for a lot of refunds." It turns out also that Groupon's customers tend to demand refunds on big-ticket items more frequently, and the company did not plan for this when it began selling pricier products and services.

All this has led to the downward revision of 4th quarter net income by $22.6 million. Groupon had to make an embarrassing SEC filing, and the shares were down 17% on Friday. Says accounting expert Francine McKenna: "They just need to get their act together."

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