Why did Groupon pay $8-15 million for Grouper in Israel?

Question

Etai Raz · Accepted Answer

It's all rumors. The amount is not really confirmed. I've heard numbers ranging between $8M and 8M shekels (~$2M).

Why they paid for Grouper instead of just barging in and conquering the market is a good question. 
There are plenty of examples showing that in the Israeli market people would actually prefer an international brand over a local one, even if the local one was there first (see MacDonald vs. Burger-Ranch, for instance).
On the other hand, while Israelis tend to immediately adopt international brands (see the lines outside of H&M on opening day), they also tend to eventually stick around only with those businesses that actually deliver on the promise (see MacDonalds, vs. Starbucks or Dunkin Donuts). It would therefore make sense, in the long run, for Groupon to grab a team of people who already know how to run a local coupons business.

Is it worth $2M ? Could they have done it for cheaper if they were to recruit people and open a local branch from scratch? Perhaps.... how much money would they have saved? Who knows... For sake of argument let's say 50%. Is it worth the risk, when the alternative means starting with a working infrastructure? I don't think so, especially when Groupon can most certainly afford it...

All in all, good choice on Groupon's behalf most probably (despite making me envy-green).

Michael Goldman · Answer

Groupon's acquisition of Grouper was simple: To get market share in Israel, which is a dynamic environment where Hebrew and English speakers work, live and consume many products/services. The valuation of $8 - $15 million was over-inflated and was based more on potential clients in 2012 - 2014 then actual profitability and health of balance sheet.

The problem with Groupon's acquiring Grouper is that they are not able to get the same share of voice and market penetration in large cities like Tel Aviv and Jerusalem as compared to their counterparts in London, England or New York City.

If you look at Groupon's offering in London or London Special, you will see less than 10 offers per day, but if you look at Groupon's competitors in Tel Aviv then literally dozens of offers exist daily in Tel Aviv alone.

Unless Groupon can bend its business model to adapt to various countries, cities and consumers buying behavior they risk spending lots of cash on acquisitions without seeing the return on investment from money spent.

This is a classic business challenge that has been covered in top MBA programs globally, but the stakes are higher today as compared to 10, 20 or 30 years ago because the speed at which a consumer develops loyalty and loses loyalty to a product or brand is at a much faster pace.

Online coupons or social deals need startups to keep springing up and their founders have to stand by their convictions and say no to appealing offers by Groupon, Facebook, Google or any other big fish.  Israeli startups in particular need to have a constant updating of their 3 year business plans and if they stick to those plans they will not be tempted to go off-course by getting acquired.

There are geographic and country specific needs that only a startup would be agile enough to meet, where that startup could become as big as or even bigger than Groupon if they just let the online coupon sector mature.

In summary, Grouper was acquired by Groupon because of the desire to get market share and the fact that Groupon had zero market presence in Israel before the acquisition.

If I had to put my money on who will have top marketshare in Israel for online coupons, I would list the following firms before Groupon: Tavo.co.il; Baligam.co.il; DealHayom.co.il; Buy2.co.il and Facebook deals.

Ron Pick · Answer

They most likely wanted to buy the founders and necessarily the business.

They wanted to build in immediate team who understands the local market and has some roadmap for how to gain market share.

To my understanding, the Grouper team is a very well experienced group of entrepreneurs.

In regards to the valuation, i think that it makes little difference what the number is. They wanted to make sure that the founders have the right tools and means to become market leaders in as little time as possible.

Jesse Farmer · Answer

James' answer is right, but I want to expand on it.

Groupon didn't start out as Groupon.  They started out as a site called "The Point" which was more philanthropic, but still based around the tipping-point mechanic.  My understanding was that local merchants started to use the service to post coupons in the Chicago area, and the team there decided to experiment with that model.  "Groupon" for a long time resided at http://groupon.thepoint.com.

Group-buying websites are not new, however.  Mercata went bust in the first tech bubble, and their model was very similar[1].  So one question ought to be "why now?"

The answer to that is Facebook.  Before Facebook it was very difficult to buy demographically targeted advertising at scale.  The Groupon demographics are overwhelmingly young, urban, and female.

Since your goal is to get email subscribers, a keyword-based model doesn't make much sense.  You want to target 18-34 year-old women with college degrees in Chicago, period, and don't much care about what they're searching for or browsing online.

This worked very well for Groupon because even a year ago Facebook ads were very cheap.  The only people buying ads at that scale were Zynga, so there wasn't really anyone to bid against.

Once they found Facebook was a positive ROI channel, they started flooding it and saw huge gains.  The novelty of the site and the "groupon phenomenon" compounded their momentum and got them a lot of PR.

I also think it's unfair to say LivingSocial is trying to copy Groupon, although I know that's what the people at Groupon would say.

In terms of growth they are right behind Groupon, so they might yet have the last laugh.

http://siteanalytics.compete.com/groupon.com+livingsocial.com/

The bidding war between LivingSocial and Groupon has also driven up the cost of demographically-targeted Facebook ads, making it difficult if not impossible for a new entrant to start from scratch the way Groupon did.  Social game companies like Playdom and Zynga add their own fair share to this, although I don't know to what extent they care about geographically-targeted ads.

LivingSocial even had a massive userbase from a previously successful Facebook application -- you'll notice the last few months of that on LivingSocial's Compete graph.

[1] One key difference is that Mercata (as I understand it) sold physical goods.  The group-buying model is harder when you have COGS.

Eric Jordan · Answer

Probably because Groupon never deserved the higher valuation.

I certainly would not have valued it that high.

There is something like groupon in in Asia called Metro Deal but it is much better (in my opinion) and has in my experience in using it. and speaking to others in Asia; has a MUCH BETTER REPUTATION than Groupon.

Jaeson Brown · Answer

It's not hard to believe Groupon is worth the rumored 4.75 billon or even 7.8 billon. They live within the domain that many companies wish to live within. They operate in both the digital and physical world successfully. They're positioned to become the Google of local advertising by using their pay-for-performance model in online to offline advertisements. Think of the potential for Groupon when it comes to mobile advertisements. Being able to come across a Groupon mobile ad for something based on your location, share that with you friends in the area and then you all go to redeem it off a discounted price. Now, that's real collective buying power, it's what we as consumers have always wanted but never had the power to do. Remember much of Groupon's user model is built around social and discovery. Because they didn't make social a layer, they're primed to take advantage of that. Their business model is centric to today's buyers by providing an easy to use accessible app via web or mobile for buying in your location and saving you time and money while doing it.

Local merchants benefit a lot from Groupon too. They've been in a dilemma for years with the choice of online advertising vs. traditional advertising and have been reluctant to make the switch to digital because the economics have never been in their favor nor was the technology easy enough to use. It's obvious to all and even the non-tech mom & pop shops that their is real opportunity in digital, whether that be web or mobile. Groupon offers them an opportunity to get in the game. They get exposure regardless and only discount if enough people redeem. This is great for small marketing budgets because it ensures that you'll get exposure no matter what. People will at the minium see your company and probably learn more about it. The deals and the new personalize deals help companies reach their target market that they may have been missing and those just interested in the deals for the entertainment or fun. Once people get to the merchant's place, all merchants have to work on is the second most important thing to sales for their business; which is, customer retention. Groupon is easy to use and doesn't require hiring a graphic designer or copywriter for your ad, whether it's online or off. Groupon is here to stay because they executed on the right things and that's why everyone wants to copy them and those big enough want to buy them.

Abhishek Anand · Answer

It's not solely about the publicity. Sure, publicity and the added traffic never hurt anyone, but the intent is to "always sell more". The agenda is to sell other stuff to the same visitors to came in looking at the onion campaign. After all the onion will be delivered at home, you can't order more than 1kg, and though I haven't ordered myself - I'm expecting there would be a minimum order value to be eligible for free delivery. (Although even if it isn't there - the buzz this campaign has brought to them is tremendous, the value of which would be more than what they will end up taking as a hit)

I'll give you a slightly unrelated example here. A retail chain used to sell products with your digital photos printed on them. The option you had was to either wait for 3 days to get it at home or pick it up from their neighbourhood store in 3 hours. As per an analysis done by the company, when a customer walked in to pick up their order, they were making additional purchases worth $45. So even if they had to sell their printed merchandise at a loss of $1-2, they were happily doing so.

(Ebay India also keeps on giving you offers like toothpaste for Rs. 10 or other variations. Tradus and others have been known to do this as well. Infibeam is well known for its "magic box". Groupon India just took it a notch up.)

Also, if you look at it, by selling a daily necessity at such a low price (there has been an ongoing outcry on the sky high prices of onions), they were able to create a lot of buzz. Every media house covered this news. Hell, WSJ gave it coverage. And there are catches - you obviously need to be a registered member, and you can only get 1kg onion at this price.
Cost of acquiring a new customer, even if we take the price of one kg of onion, is lesser than Rs. 80 - something none of the marketing campaigns could have provided. And this will prove to be a campaign that will give them a much better paced new customer registrations than anything else.

Brenden Mulligan · Answer

Groupon is a startup that focused on revenue from day 1. Therefore, every step in its very successful evolution has been driven by generating a ton of revenue. And as it's become more successful, the apparent value of working with Groupon has grown, so now more and more companies want to create offers on the service.

They just turned down an apparent offer from Google for $5-6 billion, so they are at least going to raise money at that point. And the logic, if Google was willing to buy them today for $5-6bn, then after growing the company with another $950m, they'll be worth a lot more.

It's THE de-facto choice in one of the hottest markets right now (local deals, group buying).

Ankur Warikoo · Answer

We just wanted the price to be of shock value. Rs.9 sounded so - anything lesser would have been too less. Anything more would not have had shock value.

Once we did decide the price, we realized that this price of onion was last seen in India in 1999! That added another shock twist to the story! :)

Vladimir Mirzoyan · Answer

16.7% - Thanks to Sean Everett [ https://www.quora.com/profile/Sean-Everett ]'s direction ... here's that part of the report..

John Binkley · Answer

Obviously supply and demand, so the question really is why is the supply of grouper such that, in view of demand, the price is high compared with other species.

Side note: technically, there really isn’t such a thing as “grouper.” I believe something along the lines of 50 distinct species are allowed to be sold as grouper in the US (oddly, FDA makes the rules pertaining to seafood, so they specify which species can be sold under any particular common or “market” name).

If I’m not mistaken, all those species are found around reefs, so they are hard to catch relative to fish that run in schools in open water, or farmed fish. So that means they have to bring a high price to induce fishermen to go catch them, which depresses the number brought to market (too many lead to low price leads to less fishing of them sends prices back up). So the intersection of supply and demand curves for grouper leads to a higher price than other fish. It is likely also true, as others have noted, that like many fish their numbers are being reduced by overfishing and other environmental problems. Looked at strictly as a free market supply-demand matter, this means that more effort is needed to catch them, driving up the supply curve and thus the price.

Sean Everett · Answer

This is publicly available information that Groupon, or any public company, is required to file with the SEC every year.

Google the SEC's Edgar site, and click the "search for company filings" then enter Groupon's ticker.

The filing you're looking for is colloquially referred to as a proxy statement, but will be officially listed as a DEF 14A.

Once you're inside the document, you can search for the Beneficial Ownership table. It will show all the major shareholders in the company and how much he/she owns.

Hopefully that helps future fisherman fish :)

Bruce Byers · Answer

Supply and demand. Grouper is an apex predator, and the harvesting of them is strictly controlled. Grouper is also a very tasty fish, so lots of people enjoy eating them. Small supply, high demand = high price.

Koby Menachemi (קובי מנחמי) · Answer

Apparently yes (-;

Groupon announced today (Jan 11) of the acquisition of Grouper

Majaliwa Bass · Answer

That's somewhat of a loaded question. From a pure cost perspective you typically have to discount your services 40% and Groupon takes a portion of your proceeds (can't remember how much).
From a more psychological perspective, when people buy your product or services on Groupon they mentally anchor to the low price they paid which makes it extremely difficult to get them to pay regular price for your product or service and often results in a ton of "one and done" customers.
I personally don't recommend Groupon for that reason. I think the latter "cost" to your business is far greater than the tactical cost.

Kevin Saito · Answer

Based on public statements at the time, Groupon bought TicketMonster because they felt it was a good investment based on the price to sales ratio it exhibited (I believe they bought it for $260 MM and its prior year's sales were in the $300MM range) and the fact it was growing well in a market Groupon wasn't doing exceedingly well in. As a result, the purchase allowed them to acquire an entity cheaply that would help them increase their global footprint and presence in a key Asian growth market.

That said, from more recent earnings calls its pretty clear that TicketMonster has continued to gro

That said, from more recent earnings calls its pretty clear that TicketMonster has continued to grow at an accelerating rate and that Groupon folded its Korean entity into it as a result.  So essentially, it looks like they bought the stronger local competitor and got out of the way and let them do their thing.

Yuya Motohashi · Answer

Theres always a possibility of Groupon being acquired if the price is right. Otherwise there’s no point in purchasing a business that is not performing well.

What I mean by price is right is when a company is struggling and perhaps approaching bankruptcy. Groupon doesn’t look like it’s in that phase but it looks like they are struggling on providing value to their customers and do not have a strong offering. The price is right when their value keeps going down, and if they have assets and intellectual property that would be add value to a company that would be willing to purchase them. But right now they have a $2 billion market cap so that’s very expensive.

A quick win to help turn them around is to build stronger partnerships so that they can offer better deals, and hire designers who can help make their website more user friendly and clean looking.

Roj Niyogi · Answer

How many users do GoNabit or Cobone have?

It's about user acquisition and buying into a market.  If an existing player already has an email list that allows Groupon to jump into a market quickly, they are a solid candidate for acquisition.  Otherwise, Groupon will jump in themselves and run SEM campaigns to grow their list.

Marcelo Burbano · Answer

No financial terms were disclosed, but Fortune has learned that the purchase price was between $15 million and $20 million (including earn-outs). At least some of it was paid in cash. 
http://finance.fortune.cnn.com/2012/09/25/groupon-savored/

Nathaniel J. Casey · Answer

Reports came out recently showing that Groupon was actually doing about half a billion a quarter in revenue (so 2 Billion a year) - when you get to those numbers and you are closing in on an IPO - 8 Billion is not out of the question.