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1,000 Jobs Gone At Groupon And LivingSocial; Can The Daily Deal Sector Turn It Around? (GRPN)

Source: http://www.businessinsider.com/layoffs-at-groupon-and-livingsocial-2012-11

The daily deal world is in turmoil.

LivingSocial just announced the firing of 400 employees, which is about 8.9% of its total workforce.

What’s more unnerving is that over the past six months, Groupon reduced its workforce by 648 positions.

More than 1,000 reductions across both businesses is a huge deal. Those reductions aren’t all layoffs; some are through attrition.

To cap it all, Groupon CEO Andrew Mason’s job was in question all week, and he only received his board of directors’ seal of approval late Thursday.

If this was happening at Facebook or Twitter — or any other major tech brand — people would be freaking out.

So why isn’t anyone freaking out yet?

Arguably, this is a recession in the daily deal business.

It’s the industry’s first, given that it didn’t exist until about four years ago.

LivingSocial told Business Insider via email about the job cuts. “After two years of hyper-growth from 450 to more than 4500 employees, these moves will align our cost structure against our 2013 plans and will help us set the company on a path for long-term growth and profitability. Specifically, they will allow us to invest more in critical pr! iorities like marketing, mobile, and the hiring of additional technology staff.”

LivingSocial told CNNMoney that it is moving much of its customer service from its headquarters in D.C. to Tuscon, “so some job openings will be available in that area.” Sales and editorial, however, have simply been “streamlined.”

The job losses reflect the shaky economic underpinnings of the daily deal business, which Groupon and LivingSocial have yet to wrestle into control.

LivingSocial posted a net loss of $566 million in Q3 2012. $496 million of LivingSocial’s loss stems from a huge writedown of some of its acquisitions from 2011, the Washington Business Journal reports. LivingSocial’s revenue also fell to $124 million in the three-month period, down from $138 million in the second quarter.

As of market close today, Groupon’s stock price is currently sitting at $4.54, according to Yahoo Finance. The 52-week range is shocking: it reached a high of $25.84. That followed six months’ of shrinking total billings at the company. (Its American business is robust; the international arm less so.)

A Groupon spokesperson tells us that its layoffs were largely due to new technology the company invested in that made those jobs irrelevant. In fact, we’re told, Groupon has 200 job vacancies open across North America right now.

And, of course, the job cuts don’t mean that Groupon and LivingSocial are going to vanish tomorrow. They’re huge businesses after all. But they are cause for concern as they illuminate potential weaknesses in the daily deal ! business model.

The main problem is operational scale.

Both companies are dependent on large salesforces. It is very difficult for them to leverage operation scale: To sell more, they need to employ more people. Groupon historically has prided itself on the long-term relationships its salesforce builds with its merchants. They have struggled to leverage self-serve, turnkey sales the way Facebook has.

In fact, Groupon and LivingSocial aren’t even tech companies. Rather, they’re email companies. Although email is here to stay for a long time, the tidal shift among consumers is away from email to instant messaging, social media messaging, and mobile phone messaging. They need to pivot into alternate methods.

Groupon is trying just that, with Groupon Goods, which so far has been a success. And both companies need to do what Groupon says it is trying to do, which is replace human-to-human selling with tech that can increase each individual worker’s selling power.

Lastly, the downturn ask whether the daily deal business has hit one of its natural ceilings: new merchants. Both companies need a fresh supply of new merchants to offer more deals, or to re-up on repeated deals. It’s an open question that both Groupon and LivingSocial now have to prove: Is there enough new merchants or incremental repeat business from merchants for the sector to continue to grow?

A thousand-plus layoffs suggest that, for now, the question lacks a satisfying answer.

Don’t Miss: Groupon CEO Andrew Mason Keeps His Job!

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Groupon is bleeding in the water, and the sharks are circling.

On Friday, we learned that Groupon under reported the number of returns it had in Q4, and that the company had to revise its earnings.

Then Groupon’s auditor filed a “statement of material weakness,” basically telling the SEC it would not vouch for the company’s numbers.

Yesterday, the WSJ reported that the SEC is investigating the company.

That’s not all the company has to worry about. 

Institutional investors put big money into Groupon’s IPO.  

Since that day’s highs, the stock is down more that 50%. It tanked 16% yesterday alone.

If those institutions can blame somebody else for those losses and recoup any of their own investor’s money, they will.

That means if those investors catch even slight whiffs of fraud out of Groupon – and trust me, they are sniffing – the lawsuits and subpoenas will come in rapid succession.

Ever seen a shark frenzy?

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See Also:

• Groupon’s Andrew Mason: We Were ‘Toughened Up’ By Quiet Period
• Groupon Eyes Foursquare Territory And Acquires Location Database Startup, Hyperpublic
• San Francisco Puts Hackers To Work Fixing The Horribly Broken Taxi System

The Securities and Exchange Commission is looking into why Groupon revised its first quarterly earnings report as a public company, according to a report in the Wall Street Journal.

Groupon made the revision on Friday after market close, when the company discovered that a higher number of customers than usual returned their coupons unused in January, says the report. The revision increased Groupon’s loss by $22.6 million.

Groupon’s stock plunged almost 17% today.

The Journal reports that the company’s chief accounting officer Joe Del Preto discovered that the number of refunds in January was higher than all of Groupon’s models had predicted.

According to the Journal, Groupon did not have enough money in its reserves to cover the refunds.

The SEC has not launched a formal investigation, says the report. Groupon’s top execs have reportedly examined the situation and are confident that only certain types of coupons are being returned.

So this could all blow over and turn out to be no big deal. But drawing the attention of the SEC is never a good thing. Especially when Groupon had to amend its IPO filing twice after the SEC complained.

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Join the conversation about this story »

See Also:

• Groupon’s Andrew Mason: We Were ‘Toughened Up’ By Quiet Period
• Groupon Eyes Foursquare Territory And Acquires Location Database Startup, Hyperpublic
• San Francisco Puts Hackers To Work Fixing The Horribly Broken Taxi System