Is Groupon becoming a digital Walmart?

Is Groupon becoming a digital Walmart?

Everyone knows I “have a thing” for local search and business metrics. In the past year alone we’ve seen the mega-trend of localized coupons take deep root.

Right now the 800 lb gorilla in the game is Groupon. Groupon has shot ahead of the market by having some fairly substantial investment supporters (substantial in the form of 1.12 billion dollars!)

CNN recently wrote a piece on Groupon,

Here’s a snapshot of the company’s growth: Groupon says it currently has 40 million subscribers to its daily coupon e-mails, up from 1.5 million a year ago. It is offering deals in more than 300 markets in 35 countries, up from just 28 U.S. markets last year.

And Groupon says it has saved its customers more than $800 million so far this year, up from about $50 million last year.

For consumers, that means spending less cash — always a nice thing in tough economic times. And for local businesses, that means bringing new customers in the door, which makes them happy, too. That’s why so many restaurants, stores, and service providers are rushing to get their deals on Groupon that the company has had to change its business model to keep up — no longer just “one deal per day, per city,” but several potential deals, customized for the user.

As for the company itself, Groupon has more than 3,000 employees — up from about 125 last year — including about 1,000 in its wacky Chicago headquarters.

The controversial challenge on the street is that Groupon also claims that it has saved shoppers hundreds of millions of dollars and  that it has generated millions in revenue for the businesses it features.

The ratio of consumer savings vs business profit can kill small business.

The Groupon model is not about promoting the brand of a small business. If we look at the base details the model of Groupon is nearly identical to the long term model of Walmart.

Walmart drives local shoppers into a ‘price reduction’ mindset where they are looking for the best deals on products they use. When a consumer walks into Walmart, they are not looking for brand considerations or premium services: but the knowledge of what they are buying is at or below fair market value.

Groupon uses a similar methodology, driving consumers to subscribe to daily deals at local stores.

With Walmart,

Small businesses simply cannot drive a profitable model when working with Walmart. The simple economy of scale issue requires that a business be capable of scaling it’s business model upwards of 100k units (enough to stock thousands of stores.)

The last decade has presented tremendous news coverage of Walmart disrupting local economies and shifting how national business trends work. Walmart has been held up as both a glowing example of exemplary business strategies and as the harbinger of small business death.

With Groupon,

Small businesses simply cannot drive a profitable model when working with Groupon. The simple economy of scale issue requires that a business grow organically with a consistent revenue trend. A massive spike in “one off” advertising creates customer turn-over, employee challenges, and loss of on-going revenue.

In the past year, Groupon has received tremendous news coverage for it’s inventive market strategy and has been one of (if not the fastest) growing company in America. It has also received it’s share of negative coverage that ranges from poor Super Bowl ads to bad flower deals:

The Difference

There are two primary points to think about:

Item One: the “virtual Walmart store front” that is Groupon is incredibly difficult to perceive. Unlike Walmart, Groupon has the benefit that it’s ‘business’ doesn’t need to work with local city zoning, business committees, or local market leaders.

Item Two: The digital model of Groupon allows it to quickly setup virtual discount super stores without anyone realizing a mega brand has moved in as a competitor. It has little or no issues with local market conditions or the life-blood of the community.

What does it mean?

At it’s core, Groupon doesn’t have any connection to whether it’s business model is good for the local economy.

When Walmart moves into a local area (love it or hate it) – Walmart has multiple challenges that it needs to overcome to gain the support of the local business community. In many cases they need to commit to union rules, labor issues, environmental impact, tax considerations, and community goodwill efforts.

When Groupon moves into a local area (love it or hate it) – consumers drive down prices as they look for deals and a significant portion of revenue goes back into creating an even bigger virtual Walmart (I.E. Groupon) with no consideration for local market conditions.

While regulation is not my first-choice; when examining the these models business leaders need to understand the core necessities regarding checks and balances at the local, state, and federal level. Without proper consideration to the local economy and the community, new business models can cause tremendous market degradation.

As models like Groupon grow,
what types of checks and balances
should local and global leaders think about?

9 replies
  1. William Fulton
    William Fulton says:

    Very insightful Barry. I have been telling my small business customers to avoid Groupon and the like for awhile now. It’s nice to see some detailed analysis on the subject!

  2. Brian Crouch
    Brian Crouch says:

    As you know, I’m very nervous about the amount of capital and consumer cash that has been taken out of local communities and sent to Groupon corporate headquarters. I would feel better about it if only they didn’t harvest such a colossal commission from the suffering merchants. The worst effect on the consumer, that I can see, is that the customer loyalty and praise is accruing to Groupon’s benefit, and the merchant who suffered to provide goods or services to the customer too rarely gets the value of word of mouth.

    I find it impossible to believe Mason’s claim that 97% of business want to do it again. I’d like to see the data on that, because even a cursory survey of business forum discussions will show numerous complaints from commenters who declare they’ll never do it again.

  3. Barry
    Barry says:

    I agree with you, one of the additional areas of concern is the $1.12 billion in funding.

    While Groupon has been heralded as one of the fastest growing companies in history, I think it is also one of the fastest growing marketing/pr budgets in history.

    Between the acceleration of those budgets; I predict an inescapable ‘end point’ where the growth trend cannot continue pass the market opportunity. When it reaches that point everything stops and the cards begin to fall apart.

  4. Barry
    Barry says:

    Thanks William.

    I think this is strictly a small business issue – for larger brands that know how to monetize spikes in local traffic across multiple stores Groupon has some additional merit. The primary difference is whether or not you have a recognizable brand or not. If you are Starbucks or Best Buy, you can get away with a bit of brand degradation from Groupon.

    If you are a small business with an unknown brand, I believe the ultimate pitfall is that your non-existent brand is simply consumed by the Groupon discount brand.

  5. Alexandra
    Alexandra says:

    Great article, Barry! I am re-posting on my law firm’s website at http://www.filutowskilaw.com

    I, too, have been following and blogging about Groupon’s practices. Clearly Groupon is creating a monoploy and violating Washington State Consumer Protection Act laws. See: “No “Deal” When Your Coupon Expires – LivingSocial and Groupon Profiting Illegally” http://www.filutowskilaw.com/2011/02/no-deal-when-your-coupon-expires-livingsocial-and-groupon-profiting-illegally/

    Perhaps through consumer activism in Seattle area, Groupon will modify its practices to play fairly in today’s progressive marketplace.

  6. Barry
    Barry says:

    Thanks for the FYI on your article. It is a good tie-in concept here.

    I think Groupon (and several other social media services) have some fundamentally flawed advertising and privacy models.

    From my point of view the fast trend of social media adoption has given a ‘green light’ for hundreds of dot.com business models appear that either question how “we the people” expect our lives to operate, or simply violate different local, state, and federal laws.

    I believe it is only a matter of time that class action lawsuits and federal regulation come into existence.
    Of the $1 billion in funding, I predict a good chunk of that is going to be spent in court.

  7. Jackson Heuer
    Jackson Heuer says:

    none. Stop acting like local businesses deserve to succeed. The groupon business model is succeeding because the target customer base (consumers and businesses) have decided it adds value to them. Just like Walmart.
    Small businesses will suceed or not based on the same criteria. All businesses have to deal with competition and find a way to compete, win, or fail. Yeah, some companies have gotten so big and have so many advantages as a result that it’s near impossible to compete..boo hoo. Find another line of business or find a way to beat them…that’s all you can do, you aren’t entitled to any level of success. Neither Groupon nor Walmart started out in the position they are in now, but they found a way to get there.

  8. Barry
    Barry says:

    I don’t think that local business needs to succeed, but the Groupon model doesn’t work without a local business model in place.

    The Groupon model at the core is a decay accelerator, turning the marketplace into a faster meat-grinder of processing small businesses at the local level.

    In a comparison to Walmart, if the decay acceleration exceeds a certain level – then the local community becomes corrupted and the niche economy falls apart. Unlike Walmar (who has spent billions researching local economy models and attempting to mitigate local economic support) – Groupon is simply applying an accelerated decay model and then moving onto another greener field.

    From my perspective this is like unleashed a family of rabid goats onto your farmland and expecting it will yield a crop next year.

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  1. fact, it can be even simpler when you consider this article about Groupon becoming the online Walmart that kills small business. he ratio of consumer savings vs business profit can kill small business.

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