Maybe Groupon's Problem Isn't Its CEO

Daily deals may be losing their allure.

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Andrew Mason, founder and CEO of Groupon, attends the Allen & Company Sun Valley Conference in Sun Valley, Idaho, July 6, 2011. The conference is typically attended by many of the world's most powerful media executives.
Andrew Mason, founder and CEO of Groupon, attends the Allen & Company Sun Valley Conference in Sun Valley, Idaho, July 6, 2011. The conference is typically attended by many of the world's most powerful media executives.

Now that Groupon has fired its colorful and controversial CEO Andrew Mason, it may finally be time to find out if the daily deal site has a sustainable business model.

Mason founded Groupon in 2008 and led it to a successful public offering in 2011, with shares priced at $20 each. That set the value of the company at nearly $13 billion. The company's revenue has grown since then, yet the stock has plunged to less than $5, with Groupon's value falling to about $3 billion.

Groupon's problems during the last year read like a list of "don't" recommendations for anybody starting a business. The company expanded too fast overseas and spent lavishly to buy other tech companies without explaining the strategic fit to shareholders. Worst of all, accounting irregularities forced Groupon to restate earnings, one of the surest ways to zap investor confidence.

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As CEO, Mason was responsible for those decisions, so his departure gives Groupon a chance to break from past mistakes and start over, to some extent. Groupon, however, would be under pressure even if it had expanded cautiously and examined every penny with a microscope. "We continue to believe Groupon is a local eCommerce leader," Morgan Stanley analysts wrote in a recent report. "However, we remain on the sidelines as the company experiments with myriad operating levers and strategies."

Andrew Mason, founder and CEO of Groupon, attends the Allen & Company Sun Valley Conference in Sun Valley, Idaho, July 6, 2011. The conference is typically attended by many of the world's most powerful media executives.
Andrew Mason, founder and CEO of Groupon, attends the Allen & Company Sun Valley Conference in Sun Valley, Idaho, July 6, 2011. The conference is typically attended by many of the world's most powerful media executives.

The biggest challenge is that Groupon's business model, while clever, can be copied easily by competitors. Groupon got its start by offering to increase foot traffic for local merchants if they'd offer discounts Groupon could pitch to consumers through E-mail deals and its website. The novel plan worked, but also drew copycats, including other startups such as LivingSocial. Groupon now faces competition from two industry Goliaths: Amazon and Google. And it's not clear that Groupon can distinguish itself enough to push back giant competitors.

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There's also the chance that consumers will develop deal fatigue and lose interest, especially since disposable income remains tight. Discounts obviously help people save money, but analysts worry that Groupon's "deal quality" could erode, meaning it could be forced to offer lower discounts on less appealing merchandise people don't really need.

Merchants already have their doubts about the effectiveness of daily deals. Some shop owners report increased business from such deals, which essentially help with marketing that small business owners may not be able to do on their own. But other merchants gripe about losing money on the discounts they offer, without being able to make it up through other types of sales. Competitors, meanwhile, have offered merchants similar deals on better terms, basically undercutting Groupon's take.

Groupon seems to have anticipated the intensifying competition and the fatigue factor, which probably explains why it moved so fast to expand into international markets and ancillary businesses, such as travel deals and an e-commerce site, Groupon Goods, that resembles Overstock.com.

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But that doesn't seem to be saving the company. In its latest earnings release, Groupon reported the largest quarterly loss in a year and a half. The company blamed the weak European economy, but also acknowledged that its e-commerce site was underperforming and merchants showed continued reluctance to offer the steep discounts Groupon demands as part of its business model.

The company's new interim leaders, Eric Lefkofsky (who's also executive chairman) and Ted Leonsis (vice chairman) may move promptly to tighten up corporate strategy. But whether they can make Groupon profitable might not be up to them. Consumers and merchants have a say, too.

Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.