John Gapper Groupon builds local advertising expensively

I have been trying to pin down what makes me uneasy about Groupon, the online coupon business that has just been valued at $6.4bn in its latest round of funding, which involves raising $950m in cash.

Actually, I think the reason is right there – that Groupon has been carelessly described as a social media business like Facebook and Twitter but at its heart, it is a sales-intensive local advertising operation that is costly to build.

In other words, although the front end of Groupon is purely online – involving groups of users getting together to group-purchase discounts from stores – the back end involves thousands of sales people getting out on the streets to sell ads.

Morgan Brown describes nicely on his blog why Groupon may have turned down a reported $6bn offer to be acquired by Google:

Groupon realized that what they needed is a sales-focused organization, not a technology-focused one. And tying up with Google would be a mistake, because at their core the two companies are fundamentally different in what they know about going to market. Google knows that it’s tech and better and more tech; Groupon knows that it’s how many calls can we make in a day. Groupon’s board knew it wouldn’t thrive under Google.

This does not make Groupon a bad business, but it is different from a platform-based social media outfit that gets users to generate all of its content and has a very low cost of sales. Groupon is more like Amazon – a blend of an online enterprise with a far higher underlying cost base.

Anyone buying shares in Groupon through fundraisings or on secondary markets might reflect on that.