Daily deal or deal with the devil?
It’s been hailed as a savior and slammed as a scourge of the restaurant industry.
It’s become a major force in dining, every month adding tens of millions of new subscribers.
As Groupon prepares to go public —in a hotly anticipated offering that could be the biggest initial tech company valuation ever—we have to ask: is this a good thing?
Here’s the deal:
Each day Groupon sends out an offer to its subscribers. It’s usually a discount of 50% or more off of products or services, heavily skewed toward dining and lifestyle categories. It’s activated only if Groupon delivers a specified number of customers to the vendor, encouraging subscribers to spread the word. Groupon and the seller split the proceeds, so at 50% off, a restaurant ends up with 25% of the offer’s value.
What’s in it for the restaurant?
Restaurant profits typically hover in the range of 5-7%, so it would appear that the owner loses his shirt on each Groupon sale. He’s counting on a few things to save him: the offer will bring in new customers who are converted to regulars; the Groupon customers will pay full price for menu items beyond the scope of the deal; and that a certain number of discount vouchers will be purchased but never redeemed before the expiration date (usually 6 months ahead). Rarely does it go as planned.
Usually the restaurant gets slammed immediately after the Groupon offer is floated, although often it’s just the regular customers coming in at discounted prices—a Wall Street Journal investigation found new customers to comprise as little as 10% of Groupon sales. When it has brought in substantial new business, the seller might struggle to maintain service and quality, alienating an original base of customers in the process. By virtue of their association with Groupon, you can assume that the new business is skewed toward bargain-hunters who are there for the cheap eats and will never return to pay full price for the same meal. The unredeemed coupons are often the only way a restaurateur makes a buck.
This is the restaurant equivalent of a one night stand. There’s a quick thrill from the initial rush of customers, but ultimately the brand is cheapened by the offer. This is not the way for businesses to build sustainable, customer relationships.