Groupon – marketing services, group buying middleman or loan shark?

The bottom line is that investors will have to take a massive leap of faith to get anywhere near the $20-25bn MV estimates that seem to floating around. And this doesn’t even include their aim to disenfranchise new equity by offering non-voting shares or the potential bad debt problem that could emerge from the explosive geographical expansion and inherent business model.

As a piece of financial engineering, Groupon’s model is interesting, although not without risk. When I initially looked at Groupon I thought it might be a cross between a marketing services business (providing promotional services to local merchants) and a group buying middle man. From the perspective of some local merchants however, Groupon may also be seen as a lender of last resort to ailing traders. Notwithstanding Groupon’s negative working capital characteristics (paying merchants in stages up to 60 days after selling a Groupon), merchants may also end up receiving cash ahead of actually having to deliver on the Groupon obligation. For a Merchant in a cashflow crisis therefore, a Groupon could offer a merchant a quick cash injection, albeit at exorbitant rates. If one looks at Groupon from this perspective, it could be a lender of last resort, but at loan shark rates of 100% plus (with Groupon keeping 50% of the face value of the Groupon).

This might also lead to an adverse selection problem of a deteriorating customer profile as the weaker the merchant, the more likely they need new customers and financing on these terms. It is not clear whether unscrupulous merchants have learnt to game the system yet, but accrued merchant payables are already at over $291m (as at March) and the pace of expansion could well open up a significant bad debt problem that the negative working capital position would help to disguise so long as they keep growing. Should growth stall however, it could all look very messy indeed!

Perhaps the Greeks could use a few of these Groupons