Did groupon drive a DC waffle restaurant out of business?

D.C. recently gave LivingSocial a $32 million tax break, but now one local restaurateur is claiming that a competing online coupon service drove it out of business.

Over the weekend, Shaw's Back Alley Waffles—named because its located in an alley between Ninth and 10th Streets NW—closed its doors, claiming on its website and on a posted flyer that the "shocking business practices of an obscenity known as 'Groupon'" made it impossible to stay open. (Major hat tip to Flickr user thisisbossi for noticing the closure and snapping the picture above.)

Last week, Groupon offered one of its usual deals on the waffles: 50 percent off on waffles for two or four. Over 670 coupons were bought, but Craig Nelson explained what took place behind the scenes:

Grouponistas, sorry, but I'd rather have my hand slammed in a car door than honor your Groupon coupons. You'll have to seek refunds from your new insect overlords. If you act quickly, you should get your money back by Christmas. 2015.

 Here's our Groupon story:

Groupon promises to send you lots of new customers. The customers buy 50% off coupons (two waffles for the price of one, for example). They send the money to Groupon, which issues them a code. The customer brings the code into the shop. The shop gives the customer the two waffles, collects the code, and then "redeems", or verifies, the code with Groupon.

 Does Groupon then electronically deposit the money that the customer paid them for the coupon into the business' bank account overnight like credit card companies do? No. After taking a big chunk of the money as its share, Groupon holds on to the business' share, using it while the business waits. And waits. And waits. And waits.

 After about a month, Groupon issues the first of three payments to the business. By check. Then it has to "process" the check, which can take up to ten days. Then it snail mails the check. A month later, the process is repeated for your next installment. Then, a month later, the process is repeated again for your final installment.

 Now, keep in mind, the bulk of the Groupon activity (i.e., the big surge in customers) occurs at the outset of the Groupon campaign. That means the business has to lay out all the money (in our case food and labor) up front to service this expensive campaign, but it takes roughly a month for Groupon to send the (deeply discounted) payment for the waffles those customers ate. And even then its only half or less of what is owed. The business has to wait for most of the remainder of its money until two months after laying out the cost of the food and labor. And for some of the money, it will be three months after honoring the customer's Groupon coupon in the shop before the business is paid for that customer.

That's the part that I didn't expect and the part that put our new business out of business.
On the restaurant's website, Nelson, who's also an artist, hints that while he's closed for now, he's still open to selling waffles, albeit at a much higher price—$450. For the price, he says, you'll not only get the waffles, but also a "4' x 4' mosaic...of the subject matter of your choice," the materials to make the mosaic and the "unparalleled experience of creating your own piece of art." Waffles (and art) will be available by appointment only.

This certainly isn't the first time that a small business had groused about Groupon or LivingSocial. In fact, many businesses have decided that it's not worth it—for a number of reasons. Others argue that it's simply a matter of reading the fine print: "I hate to say it of a neighbor and purveyor of tasty fare, but unfortunately with this information I would best place blame on him," says Bossi.

Source

Why Groupon is bound for a collapse

Groupon was forced to restate fourth quarter earnings, sending its stock down 6% in after-hours trading. This surprised me as much as my $2 investment in the Mega Millions jackpot not paying off.

The reasons for Groupon’s restatement were higher refund reserves and weakness in internal controls. These are issues I’ve repeatedly discussed. I raised them directly with Groupon PR in September (back when they still would speak to me) and I was assured that refunds weren’t an issue for Groupon.

I also spoke with a former Groupon salesperson who claimed he was fired because he raised concerns about poor internal systems that didn’t track deals correctly and complaints about poor risk management when it comes to running deals.

So what’s happening at the coupon company?

Well, for starters, it’s not a coupon company nor a marketing company. At its core, Groupon’s U.S. business is a receivables factoring business, as I wrote last year. They give loans to small businesses at a very steep rate (the price of the discount plus Groupon’s commission). They get the money to fund these loans from credit card companies such as Chase Paymentech. Groupon is essentially a sub-prime lender that does zero risk assessment. And as word continues to spread about what a terrible deal running a Groupon is for many categories of businesses, the ones that will choose to run Groupons are the ones that are the most desperate. For U.S. based businesses, the only time I can definitely recommend running a Groupon is if it is otherwise going to go out of business.

Another factor is that Groupon is selling bigger and bigger deals and many of these have requirements for use. Some deals have medical qualifications. The former salesperson told me about Groupons for a procedure called “cool sculpting”. In this procedure, fat is frozen off the body. In order to get the treatment, patients must be medically qualified. But Groupon has no way of medically qualifying purchasers and will sell it to anyone. When they go to the doctor and find out that they aren’t eligible, they call Groupon for a refund. If this is several months later, after Groupon has paid out the entirety of what it owes the provider, this can mean a refund loss for Groupon.

Travel is another risky category for Groupon. Unlike Expedia, Travelocity, Priceline, Jetsetter and nearly every other major travel provider, Groupon does not require consumers to pick their dates and confirm availability at the time of purchase. When a consumer finds he can’t use his Groupon months later, he calls for a refund. Groupon also hides material restrictions on travel deals, something I pointed out in September and Groupon still hasn’t rectified.

Because these are higher ticket items that cost hundreds or thousands of dollars, consumers are more likely to ask for a refund than on lower ticket items. In the short term, it means a revenue boost to Groupon, which the company needs as its once torrid growth cools. In the long term, it means refund losses.

The “Groupon Promise” is another risk factor. It’s an overly broad promise designed to allay consumers’ concern about using Groupons. Because it is so broad, it results in higher refund rates than would otherwise be the case.

Yet another concern is that Groupon does not track how much outstanding Groupon “debt” there is. No one in the world can tell you how many and how much Groupon value is outstanding. Unlike typical gift card sales, Groupon books revenue immediately and then does not show the Groupons on its balance sheet. By my estimates, Groupon has between $500 and $750 million in liabilities that it doesn’t show on its balance sheet.

In theory, Groupon’s exposure to that risk is covered by its refund reserves — but we don’t know the size of those reserves. And as yesterday’s restatement shows, the company’s calculated them poorly. Unless Groupon begins to do risk assessment on deals before they run, changes its payout terms to businesses, or drastically changes its refund policies, I expect refund rates to continue to rise. If they do any of those things, I expect revenue declines because it will make running Groupons less attractive to businesses and buying Groupons less attractive to consumers.

Groupon has also worked hard to hide its refund rates. While going through its S-1 process last year, Groupon continually revised its accounting. At one point, I discovered a way to calculate the company’s refund rates and found they had likely increased more than 40% year-over-year. In the next amendment to its S-1, Groupon changed its accounting again to bury that data.

Investors should also be concerned about the fact that Groupon’s lockup should end in early May, releasing a lot more shares onto the market. I wouldn’t be surprised to see Groupon trading in single digits after that and heading to zero within the next 36 months. Groupon’s best bet is if it can acquire its way into a sustainable business model; I’m doubtful that will happen considering the companies it has purchased to date.

With its restatement, Groupon said that its guidance for the first quarter remained the same as earlier. Given that its lockup should end shortly before it reports first quarter results, I would take that assessment with a mine full of salt.

Source

Groupon Today: Spend $25 and get $50 worth of clothing at American Apparel

I've wanted a new purple zip-up hoodie from American Apparel for a while but couldn't stomach the $46 price tag. Alas, now is my chance to get it without the guilt!

GroupoOn has a deal where you can spend $25 and get $50 worth of American Apparel clothing either online or in-store. Or you can spend $50 and get $100 worth of clothing.

Just remember to specify which one you want ($50 or $100, in-store or online) when you purchase your deal!

Fine print: You must spend $75 over the Groupon discount to get free shipping online and you cannot use the deal towards sale items.

Here are some items (that aren't v-necks or hoodies) you can use your deal on :

Earmuffs

Circle scarf

Flannel-lined Rain Parka

Silky Keyhole Top

Groupon Today: $4 IMAX Tickets at the Smithsonian

Today's Groupon deal is $4 IMAX tickets at the Smithsonian Museum theaters! Below is a list of the theaters and films you can use the deal at:

Samuel C. Johnson IMAX Theater, National Museum of Natural History

• Tornado Alley
• Grand Canyon Adventure 3D: River at Risk (closes January 19, 2012) - I've seen this one and it's a great film and the soundtrack was done by Dave Matthews Band.
• Coral Reef Adventure (opens January 20, 2012)

Lockheed Martin IMAX Theater, National Air and Space Museum

• Legends of Flight
• To Fly!

Airbus IMAX Theater, Steven F. Udvar-Hazy Center

• Legends of Flight
• Fighter Pilot

Get the deal here.