After firing, Groupon turns focus to bottom line

Bloomberg NewsMarch 1, 2013 

— Groupon’s decision to fire Andrew Mason puts pressure on Chairman Eric Lefkofsky to find a replacement who can create a money-making business after the daily-deal provider lost $723.8 million in the past three years.

As chief executive officer, Mason presided over a plummeting stock price, restated earnings and at least three quarters of results that missed analysts’ expectations. Mason, 32, addressed his ouster Thursday in a letter to employees, joking about needing a “fat camp” to lose weight even while accepting responsibility for Groupon’s shortcomings.

Lefkofsky, who co-founded Groupon with Mason in 2008, will run the company with Vice Chairman Ted Leonsis as they search for a new CEO. The board members are charged with finding fresh leadership while accelerating a risky push into e-commerce and away from daily deals, a market Mason helped create. Mason’s exit caps a tumultuous period that saw Groupon emerge from nowhere to hold the biggest technology initial public offering since Google’s – only to plunge on the public market.

“They grew too fast, and sometimes that can cause management to lose a little bit of focus on profitability,” said Arvind Bhatia, an analyst at Sterne Agee & Leach Inc. in Dallas, who recommends buying the shares. “Eric and Ted will bring in a new CEO with a strong operating background to move the company forward, so they not only grow the top line but more importantly the bottom line.”

Shares of Groupon, based in Chicago, climbed 13 percent Friday. The stock had plunged 24 percent Thursday following Groupon’s fourth-quarter earnings report.

Mason’s stake in the company, worth $938.7 million at the time of the IPO, has plummeted to $212.6 million at yesterday’s close, according to filings and data compiled by Bloomberg.

Mason’s successor inherits a company that has courted controversy since rejecting a $6 billion takeover offer from Google in late 2010, opting instead to explore an IPO. That decision looked prescient when Groupon boasted a $16.7 billion valuation after its first day of trading on the public market.

From there, the stock dropped precipitously, losing half its value in six months. The company suffered from accounting missteps, including backtracking on an unconventional approach to bookkeeping outlined in its S1 IPO filing. It also failed to come to grips with ebbing demand and rising competition.

The forecast released Feb. 27 hastened Mason’s departure. Groupon said that first-quarter revenue will be $560 million to $610 million, trailing the $647.7 million analyst average, according to data compiled by Bloomberg.

Mason had been racing to push Groupon into the broader e-commerce market by focusing on sales of products. He was working to boost growth as demand for online discounts faded and pressure from investors and his board mounted.

Groupon Goods, a service started in 2011 to help retail companies such as Dell Inc. and Garmin Ltd. peddle thousands of marked-down items via two-day sales, is on track to reach about $2 billion in annual billings, Groupon said this week.

Even so, that business has lower gross margins than daily deals, and competition with the likes of Amazon, EBay Inc. and Overstock.com Inc. will probably erode profitability, said Abe Garver, managing director of West Palm Beach, Fla.-based supply chain consultant BG Strategic Advisors.

“Under a best-case scenario, redirecting resources to Groupon Goods makes it a direct competitor of Amazon, EBay, Overstock and other top 500 Internet retailers,” Garver wrote in an e-mail. “The margins are thin and professional investors already have exposure to the sector.”

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