That plop you heard? That was the other shoe dropping as struggling daily deals site Groupon ousted its CEO, just a week after rival LivingSocial raised $110 million in what some critics said was a desperation move.
Andrew Mason, the company's 32-year-old co-founder, was shown the door yesterday by the Groupon board of directors after the company reported a worse-than-expected quarterly loss amid heightened skepticism about whether the Groupon/LivingSocial business model is fatally flawed.
"After four and a half intense and wonderful years as CEO of Groupon, I've decided that I'd like to spend more time with my family. Just kidding—I was fired today," Mason said in a note to the Groupon staff.
Mason's departure was hardly a surprise following Wednesday's dismal earnings report, when it revealed a net loss of $81.1 million, shrinking margins, declining cash flow and weakening sales.
Mason was seen as eccentric even by Internet standards. He is a musician by training and started the Chicago-based site that became Groupon more as a community organizing tool than a business.
It had been reported that tensions had flared between Mason and Groupon Chairman Eric Lefkofsky, who will serve as interim co-CEO with board member Ted Leonsis, a wealthy former AOL executive and sports impresario in Washington, D.C., where he owns the NHL Capitals, the NBA Wizards, the WNBA's Mystics and a big chunk of the downtown Verizon Center.
"Groupon will continue to invest in growth, and we are confident that with our deep management team and market-leading position, the company is well positioned for the future," Leonsis said.
Whether shuffling the chairs in the executive suite will do the track is a good question. Daily deals sites in general are suffering from fading customer interest, skepticism among local retailers and questions from investors are whether their business plan is fatally flawed.
Even if the business model can be tweaked, daily deals sites have a big problem: Google has tweaked its advertising sales model, making it easier for merchants to do daily deals and discounts along with their other online ads.
Cash in, dollars out
The problem analysts see with Groupon and LivingSocial is that their business model relies on a rate of growth that may prove unsustainable. Both companies take in wads of cash from consumers but a large percentage of that cash must be paid back out to the merchants who floated the discounts that drew in the consumers.
Back in November, Groupon was reported to have about $1.2 billion in the bank but it owed about half of that to its merchant partners. Meanwhile, it has high sales and overhead costs that must be paid.
Over time, as growth slows, incoming revenue may not be sufficient to cover the merchants' share, raising the scary prospect of running out of cash.
Late last year, observers thought that crunch-time for one or both of the sites would come early this year. It looks like that prediction was just about on target.
Bearing the risk
So who's at risk if one or both companies flame out? Investors, of course, and the merchants who are the cash cows for both Groupon and LivingSocial.
Both companies are essentially financing their operations with the money they owe to their merchant partners. If either company fails, or seeks bankruptcy protection, the merchants as unsecured creditors will be last in line.
The merchants would not only lose the money owed to them by the daily deals sites but would still be obligated to make good on the coupons purchased by consumers.
Consumers' losses in this scenario would amount to pocket change.
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