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Groupon ousts CEO as the daily-deal fad dwindles

What a difference a year makes: Groupon CEO Andrew Mason outside the Nasdaq Market following his company's IPO in New York in this file photo taken November 4, 2011. Reports now suggest his board is looking to turf the youthful CEO.

BRENDAN MCDERMID/REUTERS

The love affair with the daily deal is dying.

Groupon Inc., the largest player in an industry that burst into prominence a few years ago, fired its co-founder and top executive late Thursday, a day after it revealed disappointing financial results that sent its stock price plummeting 24 per cent. The company's woes underscore the trouble that purveyors of daily discount offers are having keeping the fad alive, amid a growing number of copycats and waning customer interest.

With CEO Andrew Mason's departure – he admitted in a public posting that he was axed – the company's future now remains uncertain, despite its plans to plow ahead with growth initiatives and expand into selling goods directly from its website.

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"Its glory days are long gone, in terms of the rise of daily deals," said Edward Woo, an analyst at Ascendiant Capital Markets of Irvine, Calif., who recommends selling the stock. "People are fatigued with it."

"There's just too much competition. Groupon is trying to transition into being a retailer, but it's a lot less profitable and it's a work in progress."

The daily-deal business has foundered in part because a host of rivals, including conventional retailers, started to offer their own limited-time online discounts. But Groupon's move into e-commerce is costly and difficult – it's a field already crowded with giants such as Amazon.com.

Mr. Mason, 32, a music graduate who has been criticized for his direction over the past year, issued his own version of the parting of ways in his quirky style, addressing employees but posting his missive publicly "since it will leak anyway."

"After four and a half intense and wonderful years as CEO of Groupon, I've decided that I'd like to spend more time with my family. Just kidding – I was fired today," he posted on Jottit, a social media site.

"If you're wondering why … you haven't been paying attention. From controversial metrics ... to our material weakness to two quarters of missing our own expectations and a stock price that's hovering around one quarter of our listing price, the events of the last year and a half speak for themselves. As CEO, I am accountable."

He said Groupon is doing "amazing things" and deserves the outside world to give it a second chance.

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"I'm getting in the way of that. A fresh CEO earns you that chance. The board is aligned behind the strategy we've shared over the last few months, and I've never seen you working together more effectively as a global company – it's time to give Groupon a relief valve from the public noise."

In its fourth quarter, the Chicago-based company reported a loss that swelled to $81.1-million (U.S.), or 12 cents a share, from $65.4-million or 12 cents a year earlier, pinched by international pressures and the declining profitability of its operations, especially its direct-sales business, which it calls Groupon Goods.

Aaron Kessler, an analyst at Raymond James, lowered his rating on the shares to "underperform" (which is like a sell recommendation) from "market perform." He expects limited sales and profit growth, leaving shares under pressure "until growth and margins recover, likely not until late 2013 at the earliest," he said in a report.

Groupon reported fourth-quarter sales of $638.3-million, which failed to meet analysts' projected $640.2-million. It said first-quarter revenue will be $560-million to $610-million, while analysts on average had expected $647.7-million, according to Bloomberg data.

The company's gross margins fell to 55.7 per cent in the quarter from 80.4 per cent, mainly as a result of the less profitable direct sales.

At the same time, Groupon Goods sales are becoming a larger part of the overall business – 35 per cent in the fourth quarter compared with 26 per cent in the previous quarter.

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Mr. Woo estimated that the direct-sales business can ring up margins in the high single digits compared to margins of between 30 and 40 per cent in the daily-deal segment, while also incurring increased costs and inventory risks.

"Groupon is the biggest and the strongest but the category is not growing," Mr. Woo said in an interview. "For the near term, it's going to be challenging for them, with low growth and reduced profitability."

The company appointed executive chairman Eric Lefkofsky and vice-chairman Ted Leonsis as chief executives while a replacement is found.

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About the Author
Retailing Reporter

Marina Strauss covers retailing for The Globe and Mail's Report on Business. She follows a wide range of topics in the sector, from the fallout of foreign retailers invading Canada to how a merchant such as the Swedish Ikea gets its mojo. She has probed the rise and fall (and revival efforts) of Loblaw Cos., Hudson's Bay and others. More

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