Growing pains at Groupon as it tries to grow business

Groupon is facing increasing doubt about its financial viability and long-term future in the wake of an accounting and reporting error that it recently revealed.

On Monday, the stock dropped some 17 percent, on Tuesday another 2.5.

Goupon has had several high-profile missteps recently, including making an accounting error that gave an overly optimistic picture of the company’s finances. Groupon recently issued a revision to its fourth quarter financial results, revealing it had overstated its revenue by $14.3 million.

Douglas MacMillan, a technology reporter for Bloomberg who has followed the Groupon story, thinks the company is sending out the wrong message.

“They came out and told investors and the public that they have to restate their earnings. If you’re a new public company, this is a big no-no,” MacMillan said. “You want to be telling investors you’re confident in your model. They’re doing the opposite. They’re telling investors that their internal financial controls aren’t working.”

Under the law, Groupon was not obligated to report problems with its previous financial statements, even if it learned of them months ago, until it filed its first quarterly report — which they just did.

On Thursday, President Obama is expected to sign into law the Jumpstart Our Business Startups Act (JOBS Act). The JOBS Act will make it easier for start-ups to get on their feet by allowing companies that have only recently gone public to wait up to five years before providing investors with internal control reports. Some critics are wary the JOBS Act may lay the groundwork for more Groupon-like errors.

Groupon works by connecting customers to businesses through discounted products and services. Customers subscribe to a daily email to receive listings of discounts such as meals and dance classes at a reduced price.

Groupon offers what it calls the “Groupon Promise.” “If the experience using your Groupon ever lets you down, we’ll make it right or return your purchase. Simple as that,” the website says. According to MacMillan, this lenient return policy has caused problems for the company.

“Over the past year they’ve gotten into more high-priced deals, so they’ve started offering luxury spa packages and airfare,” MacMillan said. “At these higher price point deals, the refund rate is higher. The amount that they set aside to refund that money was not big enough so that cut into their revenue.”

Groupon encourages merchants to offer discounts on the premise that they will draw in new customers who will become loyal patrons. The problem, according to MacMillan, is that this model doesn’t always pan out. In a survey of 400 merchants who had previously offered discounts through Groupon and other similar sites such as LivingSocial, 52 percent reported that they were not planning to run a daily deal in the next six months.

“A lot of times you’ll just get people in the door who are frugal, or just subscribe to Groupon and go from one restaurant to the next each night,” MacMillan said. “We found out anecdotally that this model doesn’t work for every small business.”

MacMillan thinks mismanagement of the company can be traced to it’s 31-year-old CEO, Andrew Mason. Mason launched Groupon in 2008 using start-up funds from a friend.

The company recently hired Paul Taaffe as its new public relations guru in order to create a more serious image for the company.

“Paul is trying to get his footing right now but his work is cut out for him,” MacMillan said.