Let’s say you and your best buddy from college decided to launch a me-too business patterned after Groupon (GRPN), and after two years of 80-hour weeks pounding on local merchants’ doors, and flogging your deals online, your annual revenue run rate was up to about $750,000.
Oh, and you’d taken on two support workers to help out.
Exhausted, and not yet profitable, the two of you wonder: how can we re-engineer this thing to achieve the kinds of economies of scale Groupon is getting? Where do we buy the software?
Amazingly, these fictional college buddies are already matching the productivity of Groupon. The company may seem like an Internet wonder, but in reality it is an exquisitely labor-intensive sales operation, a massive consignment shop that tele-markets to bring in unsold inventory of products and services from local businesses and then hawks the stuff online.
Groupon shares have taken a tumble this past week on news that it had to restate its fourth-quarter results to take into account larger-than-expected refunds to consumers who decided they didn’t want the stuff they’d bought.
This, of course, wasn’t Groupon’s first accounting flap. Pre-IPO, it had used the term revenue to describe its gross billings – half or so of those funds go to merchants, not to Groupon – and been forced to restate results such that revenue was roughly half the original figure. So, the folks running Groupon are a little pushy with numbers; they’ll earn the benefit of a doubt when a restatement makes their results look better, not worse. It’s not comforting, and credibility has suffered.
But the management task they’ve set themselves seems the far bigger challenge and concern for investors in the stock. At December 31, Groupon employed 11,471 people. Using the fourth-quarter revenue figure of $492.2 million (annualized to $1.97 billion), that’s an annual run rate of revenue per employee of about $172,000.
That’s roughly equal to the revenue per employee at R.R. Donnelley (RRD), a decidedly old-economy company that prints magazines, catalogs and such. Google (GOOG), an actual Internet company, has revenue per employee of more than $1 million.
Nearly half the Groupon work force is made up of sales people – 1,062 in North America and 4,134 in international markets. The North America reps are more productive, but they also make more money. The combined sales force – at the fourth quarter 2011 revenue run rate – was bringing in about $379,000 apiece. (We’re using quarter-end employment numbers here, which understates sales productivity a bit, but not horribly.) The sales productivity was up from a run rate of about $332,000 for 2011’s first quarter. Progress!
As our fictional college friends discovered, it’s a living but not yet a great business. In its 10-K just filed, Groupon has some nice examples of local merchants that greatly benefitted from their Groupon experience. The sales productivity figures suggest, however, that the service remains a tough sell to many merchants.
On the consumer side, Groupon spends heavily to get people to sign up to get its daily emails on deals. When those subscribers actually buy something, they become an active customer, and there were about 34 million of them last year. They spent an average of about $187 and Groupon saw $75 and change of that as revenue. That was up from $67 and change in 2010. Progress!
From the exterior, this doesn’t look like a business that’s going to double its productivity by employing some fabulous new technology. It looks like a grind-it-out operation in which across-the-board incremental improvement is required. So, while some were calling for the head of Jason Child, Groupon’s CFO, this week over the accounting mess, investors might instead want to focus on the operating experience and personal mettle of the CEO, 31-year-old Andrew Mason.
It may well be that Mason’s in the process of becoming the equal to Gary Kelly, CEO of Southwest Airlines (LUV), or John Stumpf, CEO of Wells Fargo (WFC), to name two CEOs running companies famous for operating brilliance and incremental improvement. Maybe the operations at Groupon are far tidier than the books. But strong skepticism is warranted at this point.
It would be more reassuring if Groupon’s board was packed with executives like Kelly and Stumpf. It isn’t. Mostly investors. Howard Schultz, the Starbucks (SBUX) CEO, is the only one who comes close. His company has turned itself around by slowing growth and adopting a McDonald’s (MCD) like devotion to improving quality and efficiency, but it’s in the early stages of that effort, and from the outside it appears Schultz’s attention tends to wander.
The departure of Groupon’s chief operating officer, Margo Georgiadis, last fall wasn’t reassuring either. It’s true that Groupon is a new business model and that Mason helped create it. But the work Groupon’s 11,471 workers do isn’t new, especially the 5,196 who sell. Turning it into a highly productive business, especially one worth even the reduced Groupon market cap, would be tough even with seasoned managers at the top.