Groupon Facing Peril in British Fair Trade Probe

Social buying site Groupon is on the way to becoming a train wreck.

Social shopping site Groupon violated the British Advertising Standards Agency code and now faces a government probe of its business. At a time when the company’s stock is sliding, it probably doesn’t need any more bad publicity.

About Groupon

Businesses can use Groupon to make special offers that encourage shoppers to get their friends involved. Often, special prices only become available when a minimum number of buyers join forces to buy, so when a shopper really wants to take advantage of an offer, he or she must get friends and family members involved.

Bad Deals

With Groupon, things can go wrong for sellers when they underestimate demand for an offer. A British bakery received more than 8,000 requests for its special offer of 75 percent off 12 cupcakes. The company delivered about 100,000 cupcakes and even had to hire extra staffers. The overwhelming response eradicated the bakery’s profit for the year and became an example of the danger Groupon can represent.

According to the BBC, the bakery manager says that working with Groupon set the standard for a bad business decision.

Meanwhile, a florist was caught selling flowers as part of a Groupon deal that cost more than the same flowers on the company’s website. Another deal, this time from a plastic surgeon gave buyers on a single day to order breast augmentation.

Breaches

Groupon is cited in nearly a dozen official rule violations and another 37 informal violations by the ASA, prompting the agency to forward the matter to the Office of Fair Trade. With so many violations in a span of less than 12 months, Groupon could face increasing scrutiny of its business model.

Already, the social shopping site has faced criticism for its accounting practices, a matter that could mushroom in the months ahead.

Knowing that it stands to lose even more of its stock value if it continues it questionable practices, Groupon has promised its full cooperation with the OFT probe. The company has also promised to change the way cosmetic surgery deals are handled in an effort to accommodate government officials.

Shedding Value

Groupon originally estimated to have an IPO valued at around $20 billion. By the time the company actually went public, its value sagged to less than $13 billion. In recent weeks, Groupon has lost an additional fifth of its stock value, suggesting that the problems it now faces could cripple it for a long time.