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The Rise, Fall, and Improbable Comeback Strategy of Groupon

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The discount deal site is at a crossroads. Is the already-crowded food delivery space its saving grace?

Getty/Scott Olson/Staff

Last week, news broke that e-commerce deal site Groupon would be joining the ever-increasing number of restaurant delivery services with its new program Groupon To Go. Beginning in its home city of Chicago, Groupon To Go — which offers food-delivery deals — aims to expand services rapidly, with plans to launch in Boston and Austin this fall. Earlier this month, Groupon acquired the multi-city delivery service OrderUp, proving just how important the company's leadership wants to expand into the $70 billion delivery industry. But for many, Groupon is nothing more than a memory of discount deals gone by, a butt to an ongoing joke about internet startup over-evaluations and failed next big ideas. So what is Groupon today and is food delivery the key to its future?

What Is Groupon?

Groupon stepped onto the internet's dance floor in 2008 — the same year that the American economy took a severe beating in the midst of the cascading financial crisis. A spin-off of a socially-minded site called the Point, Groupon was founded by Andrew Mason to allow users to get discounted merchandise and services by buying as a group with a bulk discount. Joining Mason in the founding were investors Eric Lefkofsky (who owned the Point) and Brad Keywell. Business Insider describes the original concept:

"Mason flew with this newfound hope and he and his team of seven others called hundreds of vendors each day to create daily deals... To get vendors to agree to the deals, Mason and his team set tipping points. The deal would only go through if a certain amount of people bought the Groupon. If they reached this tipping point, Groupon took some of the profits. If not, Groupon took nothing... The key here: Groupon was not only satisfying customers with great deals, it was also satisfying the vendors. All each vendor got from putting a deal on Groupon was new business; they didn't have to pay one cent."

Groupon Was the Future of Shopping

The first-ever Groupon deal was two-for-one pizzas at a pizzeria located in the same building as Groupon's Chicago office. And so began Groupon's plan to change how people buy and how vendors sell their goods. Coupons were made cool by the veneer of technology and made shareable via social media. In 2009, AdAge wrote that Groupon had "revived couponing for the Facebook and Twitter generation." A Wall Street Journal report from the same year suggested that Groupon was a perfect expression of the national zeitgeist: "The economic slowdown has helped spur Groupon's rapid growth. Even though many of the Groupon deals are non-essential items, businesses are hungering for consumers and consumers are on the hunt for deals." The service was so popular that Groupon even set up a "Groupon addiction hotline" for over-zealous users and had to warn business owners that offering a deal on Groupon could lead to a massive surge in customers that would require advance preparation.

Extreme Startup Success

Within six months of its founding, Groupon was operating in multiple cities with an impressive user base. By 2011, the company was in 160 U.S. cities, 35 countries, and was called "the fastest-growing company ever" in press spots like Andrew Mason's Forbes cover story. At the end of 2010, Groupon turned down a $6 billion offer from Google and filed a $750 million IPO the next year. As the Wall Street Journal reported on November 4, 2011, Groupon closed its first day of trading up 31 percent, with a market value of $16.5 billion. Groupon "was one of the original unicorns," according to Fortune.

Signs of Failure

But after the gangbusters IPO, things at Groupon began to go wrong. For restaurant owners, alarming aspects of its business model began to emerge. In 2011, Portland restaurateurs revealed their problems with the deal site to Willamette Week, describing horror stories of being completely overrun with customers — some of whom went on to leave scathing online reviews — only to lose money in the revenue share. A study that year confirmed anecdotal evidence that offering Groupon deals could result in lower overall Yelp ratings. Some restaurants also complained that Groupon's sales reps would use shake-down tactics to get them to sign up. Chef and owners of many high-end restaurants didn't want anything to do with Groupon: New York City chef Amanda Cohen said in August 2011 that she was fed up with getting cold calls from deal sites. It didn't take long for customers to assume that restaurants offering Groupons must be failing. Jeopardy hero Ken Jennings summed it up with one great Tweet: "I subscribe to Groupon because it's good to know which nearby restaurants have mediocre food & will probably be out of business soon."

In February 2012, Groupon reported a $37 million loss in the previous quarter, but Mason defended the company. "It's still the early days," he said. "We believe we are on the cusp of a sea change in consumer behavior." But in early June 2012, the company's valuation dipped below Google's 2010 asking price of $6 billion. "Groupon's stock ended nearly eight percent lower on Monday, sending shares to a new low of below $9 per share," reported CNNMoney, down $11 from its $20 per share IPO. Other issues had been nagging at the company since going public, including an accounting problem that artificially inflated stock prices.

By late 2012, there were articles pondering what Groupon could do to turn the ship around. In a FastCompany article titled "How Groupon Could Save Itself," Noah Fleming suggested that Groupon's real issue was prioritizing new customer acquisition instead of customer retention. By the end of February 2013, Groupon fired CEO Andrew Mason and quickly became a symbol of over-hyped, over-valued tech IPOs.

From the vantage point of 2015, it's harder to tell whether or not Groupon is, in fact, a failure, in large part because Groupon still exists. Fortune's Dan Primack made a thoughtful case in January that we should all "stop laughing at Groupon," because "not only was [it] an original unicorn, but it remains a successful one." Primack points to Groupon's multibillion dollar market cap ($4.9 billion at the time of his article and "higher than it ever was valued by venture capitalists") and its growing revenue as a sign of its overall health. "Obviously the team isn't where it ultimately wants to be, but it wasn't the one making bold predictions," Primack argues. "Nor has it collapsed." In a counter-piece, Fortune's Erin Griffith mounts a compelling rebuttal, concluding "Groupon was on such a crazy train ride that it didn't have enough time to prove its model actually worked before going public."

Groupon to Go

Can Restaurant Delivery Make Groupon Relevant Again?

Groupon's foray into the restaurant delivery business began in earnest last month when it acquired OrderUp, a startup in 40 cities nationwide that promises "top-notch delivery [from] restaurants that are otherwise considered undeliverable (think drive-thru palaces and attractively staffed saloons)." In a press release, Groupon CEO Eric Lefkofsky explained that "online food ordering and delivery represents an untapped opportunity for Groupon and serves as a natural extension of our local marketplace." He seems to be doubling down on this view with the launch of Groupon To Go, a delivery service currently in a trial phase in Chicago.

When Groupon acquired OrderUp, OrderUp CEO/founder Chris Jeffrey explained how Groupon's deals business created a perfect platform to leap into the larger world of delivery. "Groupon's reach and ability to connect supply and demand at scale make it the perfect destination for us to grow even faster," Jeffrey said. There are some other key similarities between offering deals and offering restaurant delivery online. Both services will require sales reps to secure restaurant participation and convince restaurateurs to do a revenue share. Both services place the issue of fulfillment in the restaurant's hands. Both services require customer-facing portals and experience in credit card processing.

The restaurant delivery business is estimated to be worth some $70 billion, so it's not so hard to see why a company with digital know-how and flagging consumer interest would want in. Fortune points out that Groupon's growth when it comes to its original deals business has been "stagnant" where Groupon Goods — a discounted retailer launched in 2011 — "has grown to represent the majority of Groupon's income, but the margins are significantly smaller: 88 percent for daily deals versus 20 percent for goods." While Fortune uses this as evidence of Groupon's failures as a company, with the right model, perhaps diversifying could be Groupon's savior.

Still, it's not totally clear what Groupon To Go will offer that Seamless/GrubHub or Delivery.com doesn't. The Verge points out that as of right now, there aren't many reasons to actively switch from Seamless or GrubHub beyond the fact that Groupon is, of course, offering a deal: 10 percent off on all orders, a temporary offer only. But if Groupon can figure out the delivery space, there are plenty of lazy diners who could transform Groupon from sad joke to a startup success once again.

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