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Digging a moat

11 June 2012 By Rob Cox

(This column appears in the June 11 issue of Newsweek.)

Groupon founder Andrew Mason has built a castle. His internet coupon empire will harvest some $2.4 billion in sales this year thanks to rapid growth in its wittily-worded email offers for discount pole-dancing lessons and two-for-one chicken parmesans. Mason’s next trick needs to be digging a moat around his business. That’s arguably tougher, and means being more like online restaurant booking outfit OpenTable – or buying it.

Until Chicago-based Groupon persuades investors that it can fend off competition, it will probably continue to rival Facebook as the crappiest big internet IPO of the past year. Last week Groupon’s stock dropped below $9 a share, half last November’s offering price. Mason’s firm at one point was worth less than the $6 billion offer he and his co-founders had rejected from Google a year before going public.

Mason knows he must protect the fruits of Groupon’s aggressive expansion, and his solution is to step it up a notch. The 31-year old wants merchants to come to Groupon for more than one-off email blasts seeking to fill seats. He hopes to provide services ranging from reserving customer appointments and rewarding them for their loyalty to managing deliveries and even payments. He talks of the company becoming “the operating system for local commerce.”

This need shouldn’t obscure the fact that Groupon represents a textbook case of the business principle known as first-mover advantage. According to this theory, by being the first to enter a new market aggressively a company can jump far ahead of potential competitors. As Nobel Prize-winning economist Michael Spence observed, a business that swiftly achieves dominance can gain sustainable cost advantages so long as its know-how remains proprietary and its market share is maintained.

Groupon certainly grew with extraordinary speed. In March 2010, it had 128 salespeople. Today it has some 12,000. Over three years to 2011, sales surged from $15 million to $1.6 billion. Like many first movers, Groupon prioritized growth over profits, losing a net $675 million during that period. But while Groupon is still the top daily deals company its market share has been declining, suggesting its position is at risk.

Mason’s solution is hugely ambitious. But acquiring OpenTable could be one way to make it happen quickly. Once an internet darling itself, the restaurant booker has struggled of late. With a $900 million market value, it is worth only half what it was a year ago. Groupon has $1.2 billion of cash. That means it could swallow OpenTable and take over relationships with 25,000 local restaurateurs and their hundreds of millions of customers that are much more entrenched than Groupon’s own. That wouldn’t be a bad way to start a moat.

(Research by Meg Miller)


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