There’s an excellent Japanese restaurant in Chicago’s Wicker Park neighborhood. The place has been around for years and still draws a crowd, a trendy mix of tattooed hipsters and business-casual professionals. Black-clad waiters with spiky hair shuttle plates of sashimi, which is pricey but worth it, judging from the reviews on Yelp. On weekend nights, customers might be directed to their tables by the most absurdly overqualified maitre d’ on earth: Andrew Mason, who is also the chief executive officer and founder of Groupon (GRPN).
“In addition to actually greeting customers as they come in,” says Mason, “I’m running between the front of the house, where we have one system, and the back of the house, where we have another system, entering redundant data from one into the other. I’m just managing the mess that is this technology infrastructure for the business.”
Mason says his hosting gig, which he agreed to discuss on the condition that the establishment not be named, helps him understand what makes local merchants tick—how they book reservations, accept payments, and manage inventory. It’s all the stuff businesses do behind the scenes. It’s also, he says, the future of Groupon. Mason co-founded the company in 2008 as a website for selling marked-down spa packages and half-off pizza. Just four years later, it’s a 12,500-employee public company that e-mails daily deals—on everything from 43 percent-off Android tablets to discounted beekeeping classes—to 36 million customers in 48 countries. Mason built his empire by persuading retailers and restaurant owners to offer deals, but he’s rethinking what a tech company can offer such businesses, and a good way to understand them is to work at one. “I didn’t realize how hard it was to run a small business,” he says.
A Mason skeptic, and there are a great many, might say he doesn’t know how to run a large business either. Groupon has gone from “Fastest Growing Company Ever,” as Forbes magazine once called it, to Wall Street whipping boy. The business model is under siege from daily deals offered by competitors such as Google (GOOG), Amazon.com (AMZN), Yelp (YELP), and LivingSocial, and merchants complain that Groupon brings in deal hunters, not repeat customers. “The demand for deals has cooled,” says Greg Sterling, a senior analyst with Opus Research. Since its initial public offering last November, Groupon’s stock has lost more than half its value.
Exacerbating that downward trend has been Mason’s reputation for being something of a goofball. Groupon has blundered through a series of accounting restatements, public gaffes, and shareholder lawsuits. The CEO often looked like he’d just gotten out of bed and seemed more dedicated to maintaining a comical vibe than running a company. Groupon hired actual stand-up comedians to write the prose for its daily deals. In Groupon’s Chicago main office, which used to be Montgomery Ward’s headquarters, staffers famously created and maintained a furnished living space called Michael’s Room. The gag was that the resident was a fictional “monstrous manchild” named Michael who was said to be a descendant of Aaron Montgomery Ward.
Over breakfast at Yolk, a café about half a mile from Groupon’s offices, Mason, 31, is looking a lot less scruffy these days. His hair is neatly parted to the right, and he’s wearing tortoise-shell glasses and a crisp light-blue dress shirt with a pen in the pocket. “We’ve clearly had some rockiness surrounding being a public company,” he says, carefully rolling up his sleeves as he tucks into his eggs and toast. “But we’ve learned our lesson, and we’re moving on.”
As Mason never tires of reminding people, local commerce is huge: Americans spend hundreds of billions a year in restaurants and stores, according to the U.S. Department of Commerce. He sees Main Street as one of the last remaining areas of the economy not yet consumed by the Internet. As they have for decades, customers walk in, shop, and pay with cash or credit card. The tools at a merchant’s disposal are mostly limited to a handwritten or computer booking system, a credit-card processing machine, and a cash register, all of which tend to work independently. “They have a point-of-sale system that doesn’t talk to their reservation system that doesn’t talk to their online ordering system,” Mason says. “Each one of the solutions provided to them they loathe so deeply that they don’t even get around to wishing that they were all integrated.”
It’s easy to forget how ingenious Mason’s business model was in 2008. Consumers couldn’t get enough of Groupon’s daily deals. Initially, “there was an interest in trying to create everything in Chicago,” says Rob Solomon, the company’s former chief operating officer. He says that around two years ago, Mason made a trip to the West Coast. After Solomon squired Mason around to meet with industry luminaries such as Mike Schroepfer, Facebook’s (FB) head of engineering, it became apparent to Mason that Groupon “would have to have a base in Silicon Valley to recruit the best and the brightest,” Solomon says.
Mason’s interest in Valley companies was reciprocated—especially by Google, which offered to buy Groupon for about $6 billion in November 2010. After weeks of negotiating, Mason walked away, and he’s still trying to live down the decision. People thought he was crazy. “Just about every person on the planet … really did think you lost it,” 60 Minutes correspondent Lesley Stahl told him on air. During a segment on National Public Radio, Dartmouth College professor Sydney Finkelstein ranked Mason one of the “worst CEOs of 2010”—along with former BP (BP) CEO Tony Hayward—for leaving so much cash on the table. “Life is not about money,” Mason says. “The reason that we made a decision to be an independent company is we quite simply wanted control of our destiny. We wanted the ability to make big bets and take smart risks and go after what we saw as a big opportunity.”
Saying no to billions of dollars meant that Groupon had to prove to investors that its calculation, while risky, was right. The surest way to do that was to take the company public. In June 2011, Groupon filed for an IPO. It would go on to raise $700 million at a valuation of $12.7 billion.
The company immediately came under intense pressure. Back when it was a startup, the incessant jokiness seemed like a useful marketing gimmick. Antics like Michael’s Room came off as charming or, at worst, harmlessly daft. As Groupon prepared to go public, though, potential investors—and government regulators—weren’t laughing.
Groupon’s filings with the Securities and Exchange Commission showed that the company was losing a lot of money. “I can’t recall ever seeing such negative investor sentiment about a company,” says Mark May, director of equity research at Barclays Capital (BCS), who has covered the Internet since the 1990s. “It was very hard to find investors that were positive.”
Mason’s college-kid demeanor probably didn’t help during the road show for investors. Between meetings with bankers, Mason, a self-professed video game junkie, played a game called Whale Trail on his iPhone. In the game, the player navigates a cheerful flying whale named Willow through a psychedelic sky while trying to gobble rainbow-colored bubbles and avoid black clouds that do the bidding of the evil Baron Von Barry. “It’s a good game for just tuning out,” Mason says. Laughing, he adds, “It was just featured on iTunes as one of the best games for four- to six-year-olds.”
Things didn’t improve much for Groupon after its IPO. On Feb. 8, the company posted its first public earnings, showing a net loss of $42.7 million. The following month it had to revise its earnings, saying that the number of refunds for coupons was higher than previously estimated. The revision lowered fourth-quarter 2011 revenue by $14.3 million, while net income was lower by $22.7 million. Groupon’s shares slid lower in the following weeks and was trading at around $8.30 on July 10. The company’s market value is about $5.4 billion, or $600 million less than Google’s offer in 2010.
Peter Barris, a Groupon board member and investor in the company through venture capital firm New Enterprise Associates, says the board stands by Mason. “No question about it,” he says. “Andrew has developed into an excellent CEO. Has he had some stumbles? He has admitted ‘yes.’ Does he have lessons to learn? Yes.”
Mason held a companywide town hall meeting in April. With a bottle of beer in hand, he casually told his daily-deal foot soldiers that Groupon was getting a reputation for “how bad we are at being a public company,” according to an account in the Wall Street Journal. Mason declared it was time for the company, which he called a “toddler in a grown man’s body,” to grow up.
“We have to get good at this,” he said.
He choked up a little, and apologized: “Sorry, too much beer.”
The mood at Groupon is more subdued now. “You’ve seen the seriousness level notch up, across the board,” says Rich Williams, Groupon’s senior vice president of global marketing. “We have a lot more accountants and lawyers.” The light was turned off in Michael’s Room during a recent visit, and people who know Mason say he makes fewer jokes.
The CEO’s focus now is on building what Mason calls the “operating system for local commerce”—a suite of software and technology services that would embed Groupon into every facet of every transaction on Main Street. Mason envisions consumers using Groupon as a kind of Yellow Pages to search for new ideas on where to dine or where to find the lowest prices offered by thousands of local businesses. Merchants would use the system not only as a form of advertising but also as a touch point for every sale they ring up and a hook for bringing customers back.
The daily deal has enabled Groupon to build a network of relationships with millions of customers and hundreds of thousands of merchants. But the appeal has started to fade. Consumers don’t always have the time or wherewithal to plan ahead, buy a deal, print it out, and redeem it a few days later. And if a deal is a hit with subscribers, the ensuing wave of customers has been known to overwhelm merchants. That’s why Mason’s thinking about the value of the daily deal is evolving. “Right now, we’re just this advertising solution,” Mason says. “If we can come up with an ecosystem that local merchants use to run their business and it’s connected to consumers, then I think that’s a pretty sizable business.”
Mason’s plan is taking shape inside a large warehouse in Palo Alto, Calif. There, more than 300 programmers and designers work on software products including Groupon Scheduler, an online appointment-booking system; Groupon Now!, a mobile app for posting and perusing deals on the go; and Groupon Rewards, a loyalty program that uses customers’ credit-card numbers to track and reward purchases.
The effort is being led by Jeff Holden, a former Amazon executive who started a company Groupon bought last year called Pelago—it made a mobile check-in service that let smartphone users broadcast their location and activities to friends. Holden is based in Chicago but makes frequent trips to California to interview potential hires and hold tech-focused meetings. “Over time, our relationship with merchants will shift from being episodic in nature to a completely perpetual relationship where they’ll plug in their business into the Groupon operating system and the right thing will happen,” he says.
His team’s first attempts at this model are on display in hundreds of restaurants and boutiques around the country, where merchants are trying out Groupon’s tech products and giving the company feedback. At Cowabunga Creamery, a surfing-themed ice cream parlor in the sleepy suburb of San Carlos, Calif., customers have their credit cards swiped through a plastic scanner attached to an iPad. Groupon developed the device with hardware maker Infinite Peripherals and built a cash register app for the iPad. “This becomes your business computer,” says Bill Cotter, Cowabunga’s owner. With his previous credit-card processor, Cotter says he would have to keep track of receipts and manually add up his daily income to calculate tax at the end of the month. “This does all that,” says Cotter, who has never run a daily deal on Groupon’s site. There are about 500 merchants in the San Francisco Bay area testing the payment system, according to a partner involved in the trial run who asked not to be named because the details aren’t public.
This year, Groupon plans to add hundreds of workers to its Palo Alto operation. Much of the office is stocked with entrepreneurs and small tech teams from the 30-plus startups Groupon acquired, such as mobile app developer Mob.ly and social networking service Campfire Labs. Among its new products, the furthest along is Groupon Now, a mobile app that offers spur-of-the-moment deals on shops and restaurants close to the user. It was introduced last year, though it still represents only a “small part of” Groupon’s overall business, Mason said on his latest earnings call.
Groupon Now has been a tough sell. That’s partly because there was a separate sales staff for Groupon Now and the daily deals. Merchants reported being overwhelmed by the duplicate calls they were getting from Groupon staff. Now the company primarily uses the same salesperson to sell both products. Another challenge has been shopper apathy. There just aren’t enough deals available in some places. If you’re a pedestrian in midtown Manhattan, no problem. If you’re in some distant suburb, the pickings are probably slimmer.
Some business owners aren’t sold on Groupon’s new services. Earlier this year, Carlos Kainz signed up for Groupon Rewards, which promised to turn casual patrons of his Seattle restaurant, Dulces Bistro & Wine, into loyal customers. On Groupon’s website, diners supplied their credit-card numbers; those who spent more than $375 on meals at Dulces would get a $50 voucher. “They said it was going to make people return, kind of like a mileage plan,” Kainz, owner of the eatery, says of a Groupon salesperson’s pitch. Six months into the program, Kainz counts the number of customers who unlocked the reward: “Zero.”
Still others don’t trust Groupon to add value to a business that it has little experience in. “I don’t think they’re quite well versed in how a restaurant runs,” says Sarah Shirley, manager of the San Francisco café Back Yard Kitchen. Shirley sells Groupon coupons to get customers in the door, but has no interest in trying out the company’s other services. “It would be too soon to jump on that bandwagon.”
Rick Summer, senior equity analyst at Morningstar (MORN), says it may be a while before Groupon becomes a kind of Microsoft (MSFT) Windows for local commerce. “I think it’s absolutely the right vision, but I would equate it to somebody who’s a great tire manufacturer announcing that they are really building an automobile manufacturing plant. There are a lot of things that they are doing that have nothing to do with becoming the operating system for local commerce,” he says, pointing to Groupon’s recent foray into discount travel and live events. “These are things that Groupon clearly has no domain expertise in. Some of this business that they’ve been pursuing is really a high-calorie, high-fructose-corn-syrup way of pursuing business—it’s a diet of easy revenue to show growth.”
Over breakfast at Yolk, Mason concedes that he’ll face formidable competition as he pushes Groupon past daily deals. OpenTable (OPEN) is dominant in online reservations. It also has a customer loyalty program, as do American Express (AXP), Visa (V), Citibank (C), Amazon.com, and countless other institutions. Google and PayPal (EBAY) have recently upped their offerings for local merchants; Square, the San Francisco startup founded by Twitter creator Jack Dorsey, has armed retailers with a suite of software that works with the popular Square plastic card swipers for smartphones and tablets.
As for “domain expertise,” that’s what Mason’s restaurant job is about. Besides hosting, he wants to untangle these separate systems and integrate them better. “It’s really firmed up my understanding and cleared my thinking on what a pain point it is that we’re solving,” he says.
At the end of the meal, Mason politely excuses himself to head back to Groupon. With the dress shirt and neat haircut, he even looks like the centi-millionaire CEO that he is. Then he heads out the door, and the impression dissipates. There’s no car and driver waiting for him, just his sage green Vespa. He hops on and rides off into Chicago traffic, without a helmet.