No matter how high you fly in business, there will always be a downturn. The subsequent
struggle could be mild, or it could be severe and it could last anywhere up to a month to ten
years. Business is unpredictable, and amidst all the hype many businesses and investors have
suffered on account of failing to notice the bigger picture.
Groupon learnt this lesson the hard way. Experiencing a period of rapid growth over its initial
start-up years, the brand was very well received by consumers and prospective financiers,
attracting significant funding and media coverage. Everything was going rather swimmingly, and
the company was on track to make over $1 billion in profits faster than any other business in
history. Instead, flaws began to eventually show in Groupon’s business model and the company
reported significant losses year on year.
So how had this success story suddenly turned so sour?
Groupon had focused its efforts on turning its profits into new investments and development opportunities, which is all fine and dandy unless you fail to retain anything for periods of decline. Not only had Groupon entered a ‘cooling-off’ period, but various errors and violations in the deals it was offering had meant they had to be pulled, which would not normally be such a huge problem for an almost billion dollar valued company, except the company had failed to make allowance for these refunds, instead committing its capital to other areas of investment.
Not only was Groupon suffering from a multi-million dollar shortfall, but its merchant partners for which it offered its deals for were unable or unwilling to return the money and had no contractual obligation to do so. Failing to take this scenario into account of its relatively new business model, Groupon had allowed its partners to legally profit from its inevitable losses and had put no procedures in place to prevent such an event.
Groupon survived, but its valuation had severely declined and much of its former growth had stalled or been halted completely. The company admitted its shortfall, acknowledging to the media that it had put poor internal control systems and inadequate policies in place to protect its interests.
Retrospectively, the company should have invested in multiple measures to protect itself, such as financial reporting based on forecasting software. Groupon could have also benefited from legal professionals reviewing its policies, as these problems could have been noted early on and protective measures set in stone.
Growth must always be measured appropriately and realistically, with all aspects of future spending taken into account. Forecasting financial trends and budgeting accordingly would have saved the company millions of dollars, as well as maintained its high valuation.
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