Analysis: A trimmer, sharper Groupon seen in the post-Mason era

Groupon Inc under a new chief executive should look a lot trimmer with a sharply reduced international arm, a more focused business - and minus its large and once internally celebrated editorial staff, analysts and investors say.

The exit of co-founder and CEO Andrew Mason - fired after another disappointing set of quarterly results slashed Groupon's market value by a quarter - may usher in a new, more "serious" era marked more by careful, painful decisions rather than reckless geographical and market expansion.

Consumer and merchant demand is sliding for Groupon's daily deals - online vouchers offering discounts on local goods and services. And a slew of new businesses Mason acquired or expanded into are either lower margin or have yet to gain traction.

"It's time to change Groupon from a start-up into a mature corporation," said Jason Jones of HighStep Capital, a technology investment firm that does not own Groupon shares. "They will probably go outside and find a CEO who has run a major multi-national brand before. They need to tame the beast."

Ted Leonis and Eric Lefkofsky - an early mentor of Mason and Groupon's largest shareholder, respectively - are serving as co-CEOs until the company finds Mason's replacement.

Groupon shares jumped 12 percent to $5.06 on Friday on hopes there will be more focus on profits. But those gains still leave the stock down more than 70 percent from its IPO price, highlighting the challenges ahead for Mason's replacement.

"Changing the CEO is not going to change the fundamentally tough aspects of the business," said Dan Niles, chief investment officer of tech-focused hedge fund firm AlphaOne Capital Partners, which does not own Groupon stock.

Underscoring the uphill climb for any incoming CEO, LivingSocial, Groupon's main rival, has struggled so much that it was recently forced into a painful new financing round by existing investors - offering a spate of concessions to snag a $110 million lifeline.

"Mason built a good business, but it is difficult to run at scale," Niles added. "The new CEO will have to be somebody with a strong stomach."


Rocky Agrawal, a Silicon Valley-based independent analyst, expects Groupon's editorial staff to be cut. These employees write the quirky descriptions of deals that made Groupon famous, but it is not clear how much value they provide, Agrawal said.

Some merchants get annoyed when Groupon's writers try to be funny but end up describing their businesses inaccurately, he explained.

This editorial department "was Andrew's baby," so now that he has gone, it is at risk, Agrawal said.

Such a change would be part of a broader shift in Groupon's culture that will come with a new CEO.

"Groupon will be less quirky, more serious," said Rob Solomon, a former COO at the company. Groupon will be "all about execution."

Groupon is also likely to ratchet back its global ambitions, according to Agrawal, Solomon and others.

Groupon would be more profitable if it cut its 10 percent or 20 percent worst-performing markets, Jordan Rohan, an analyst at Stifel Nicolaus, said during a Wednesday conference call following the quarterly results.

"I'm wondering how you make sense of being in 500 different markets in 48 different countries," Rohan added.

Kal Raman, the current COO, noted that more than twice the number of people are needed to handle an international division deal, than a deal in the United States.

"We are continuing to evaluate every single market, every single city we are in to make sure that we are able to take care of the merchants and customers, more importantly our shareholders," Raman said.

A Groupon spokesman said there are no "definite" plans for international job cuts, but he noted that there were staff reductions in the United States when the company automated processes there last year.

Groupon's new CEO may also cut the company's goods business, which offers discounts on products such as electronic gadgets, some analysts said.

Groupon Goods is on course to generate $2 billion in annual revenue, but it is less profitable than the original deals business and it is not focused on local merchants, according to Sameet Sinha, an analyst at B. Riley Caris.

Groupon will likely become a more focused online local advertising and marketing company, the analyst said.

"The torrid growth story is gone. It will be more about consolidating at this point." Sinha added.

(Editing by Peter Lauria, Martin Howell)