Is Groupon Good For Restaurants?

Bob — we’re on the same page here.

I interviewed the Groupon CEO almost a year ago and I never published the interview because I could never get over the uneasy feeling in my stomach that this wasn’t good for restaurants. And this was back before Groupon took off.

Do the math. Typical offers are 50% off or more to “be exciting” enough. So $50 of food costs $25. Restaurant splits the $25 50/50 with Groupon and so restaurant ends up with $12.50 (this is the typical split).

Can your restaurant afford to give away $50 in food and drink for $12.50? If your food/labor/rent/debt/etc. costs happen to be running at 25% food cost this is awesome — otherwise it’s a potential killer.

Hopefully the momentum of Groupon and all the others is not unstoppable. If restaurants and retailers can get the courage to rebel then there won’t be any compelling offers and consumers will lose interest (i.e. paintball promos).

All that being said Groupon will likely go public or get acquired for some huge sum of money because of all the current eyeballs.

But just remember — and this is for the consumers who buy — every transaction you make via Groupon or other is typically actually hurting the retailer and just profiting the tech company. The restaurant/retailer is hoping (praying?) for your repeat business. Think about that loyalty aspect when you shop.

Bottom line–There’s a better way to support your local merchants than this!

P.S. Full Disclosure–I’ve made one Groupon purchase locally here in Miami for a Bed and Breakfast place. I wanted to try the system as a user and it will hopefully make for a nice overnight out on the town at some point. And hopefully that experience will lead to positive word-of-mouth for the hotel…

groupon made $150 million in 1.5 years @_@

I have to say that for the customers I’ve witnessed in possession of the Groupon, probably 60 to 65% of them are spending quite a bit more than the certificate value, adding suc items as bar drinks and desserts where normally I don’t believe they would have. My servers are also getting larger tips from the perceived value. However, since this is still relatively new to us, I’ll have to see (maybe six months from now) what our actual bottom line has been.

You’re better off with Dining Edge. They bring repeat business, and you only have to offer 10%.

My wife buys these all the time. We just picked up a $25 gift card to a local restaurant for $1.50. We may go back or recommend it to others if we like it, but either way we’re basically eating for free.

I too wonder how these places can sustain the hit. However, I also know I bought $200 worth of golf certificates for $100 this summer, and didn’t use any of it. So maybe they also bank on people buying the certificates and not redeeming them.

Groupon and other such sites continue to send the message that restaurants are so profitable that they can give away their food for $.25 on the dollar! These offers are the worst thing for the restaurant business and I won’t participate in them. If your restaurant business can’t attract enough of the full paying customers then there is something inherently worng with your concept - location - menu - need I say anything more. Participating with Groupon or Liveing Social is just a way to make money for the tech companies.

I am a publicist representing restaurants. One of my restaurants is cautiously trying it out. He feels if people
return, it will pay. Past experience tells me they usually
don’t return and when they do visit the restaurant, they spend as little as possible. But with the economy the way it is…..

as a chef/owner of a restaurant that did do groupon I have a little different view.

I do agree that the math on first look does not work, selling something for 25% when margins are generally 5-10% does not make sense nor good business.

BUT, if it get you to your sweet spot when you become very profitable it does help in fact work well. No matter what you will have your fixed costs: lights, labor (salary, which generally is the biggest portion), rent, etc etc so the key is managing your variables: keeping a eye on food costs and your variable labor.

If the sales generated take you way past your break even then you can see increased profit, maybe not at the same percentage but still good. It also brings in new customers which has a value and the waiters do well which is nice.

Lastly, our customers are spending about 25%-50% more than the issued value of the groupon thus increasing revenue and profitability.

-ANDY

I (personally) think the folks utilizing Groupon are of a different breed than those using other deeply discounted coupon sites. I think they tend to be more tech savvy and understand that you’re supposed to tip on the before amount, not the after.

I think if the offer itself is structured in the proper way, it could be a win for an establishment that may not have gotten the traffic that it would see by using Groupon. While I do not believe in giving things away, if it motivates someone to cross your threshold that may not have come in before, how can you not? I have a client who owns a cooking school and catering business. He ran one and sold over 120 classes. That’s huge for him!

As with anything in marketing and promotions, if you don’t have a strategy going in, it doesn’t matter what you do - it’s going to fail at some point.

From my experience of both sides of the equation, as business owner and occasional user (I also have a number of friends who are avid users of Groupons/Living Social), these deals will either be the death knell of the restaurant business or else force a fundamental shift in pricing to the detriment of our guests. The value proposition presented by these couponers is that it will 1) introduce new patrons to your business 2) they will spend more than face value of the coupon and 3) they will come back and become regular patrons at full price. I do find that the coupons do a fairly good job of the first, but do astoundingly poorly on the second and third
Patrons will rarely spend dramatically more than the value of the coupon (let’s say if its a $50 for $25, they’ll spend $60) so you’re still dealing with 60%+ discounts, which are not a tenable way of doing business. Even if you think of this as a straight on marketing expense, because you’ll only be tendering the difference between the coupon and the final tab (in this case $10), and Groupon tranches out their payments to you over the course of several months, this can be a huge hit to your cashflow. Several businesses that I’m aware of have gone under because of the disruption to cashflow.
Secondly, will these patrons become full-price regulars? Probably not. While some folks may certainly become regulars or even evangelists, you’ll discover that your conversion rate of Grouponers is far below that of the rank-and-file guest that just walks-in off the street. Groupon encourages a sort of locust like behavior, where the loyalty is not to the restaurant or service, but to the discount itself. Ultimately, Grouponers are loyal to Groupon, not to your business.

So, net-net, is groupon a bad deal? it certainly is. on the other hand, since everyone is doing it, in these challenging times where it’s hard to sell things at the margins we were enjoying once upon a time, it may be a bullet that a business may have to bite every once in a while to remain relevant on the landscape, sort of like a “security payment” to your local goon-squad.

I’d also point out that Grouponers, for whatever sociological reason I won’t delve into, tend to tip–as a percentage of the total check–than the regular guest. (I admit this data is hardly rigorous, as it was only collected at 6 different restaurants in 2 different cities in the San Francisco bay area, but it does seem to indicate a trend) Unless your service staff is desperate for tables, then I can hardly see how they’d be excited to see a groupon get whipped out.

The problem isn’t necessarily with Groupon - the responsibility for this to payoff is with the business.

This is the newest *hot* thing in marketing, and like everything else, the business needs to do the math to see if it’s going to pay off.

But more importantly, the business must do what it can to help the people come back. For example, I purchased a salon Groupon. 4 service in 4 visits. First visit, hair cut was OK. Second visit, coloring plus the stylist upsold me on highlight (very smart).

BUT when I arrived for the first visit, no one greeted me (this has nothing to do with Groupon, but it is basic business etiquette) and no one asked how my experience was. The salon doesn’t have a Facebook page, and neither did my stylist. AND HUGE - no one made an appointment for me for the 3rd and 4th services.

Businesses are looking for the silver bullet - the one thing that will knock down their store/phone/site with floods of customers. Groupon, like what came before and what will come after, is only a marketing tool for them to generate more leads and ultimately customers. It is up to THEM to convert leads into customers.

They are responsible for their bottom line, not Groupon.

And really, a restaurant should know that a $100 meal at $12.50 will send them in the RED.

Thanks for the posts…

Got this related Groupon link from a reader…

Study: Groupon deals are a gamble for companies

Almost a third of Groupon deals are unprofitable for the companies that offer them, according to a study from Rice University. A survey of 150 companies in 19 cities found that 32% lost money on their deals and 40% had no intention of offering similar deals. One particularly unhappy participant declared that signing his company up for a Groupon offer had been “the single worst decision I have ever made as a business owner thus far.”

Article Link - http://www.clickz.com/clickz/news/1736550/study-groupon-unprofitable-third-businesses

I became a member of restaurant.com as a restaurant owner, thinking free advertising! Yeah, right! I lost 6,000 dollars my first month of doing it and none of my people ever returned! They would tip on the final total and then would get to $34.00, as their total and refuse to spend another dollar saying we owed it to them to let th get $25.00 off! Then they wouldn’t review me fairly! I own a seasonal restaurant and feel this was a huge mistake in marketing!!! The only people who would return are those with another coupon! Now restaurant.com has made it so they no longer expire , so even though I have been off their site for over a year now, people keep coming in with them and I just simply say, we no longer take part in that program! And guess what, they get up and leave!! I’m happy to be done with that program!!

Another article link shared - this one from the folks at Coverboom, who also run SpaBoom (spas are another big Groupon category).

The Real Cost of Doing a Groupon:
http://www.spaboomblog.com/2010/the-real-cost-of-doing-a-groupon

Jaime, good article (SpaBoom). Apart from the raw deal that is Groupon, I think it also highlights the point that not all customers are good customers, and that marketing to the wrong segment can be deleterious to the health of your business. (KFC certainly learned that the hard way in the 90s before changing their marketing focus.) In the restaurant world, sometimes we over-focus on “butts-in-seats” and top-line revenue without sometimes thinking through some other equally important issues.

Yes, I agree, Dining Edge is the way to go!

I participated in one of the 50% coupon deals 2.5 years ago and regretted it. In fact, I flipped out so much at how much food was going to walk out my door, they backed down and only offered 100 coupons instead of 200. My coupon was $25 and most customers spent $20-25 - uggh! I vowed NEVER again to participate in one of these deals and told everyone I knew about it!
This spring, Living Social hit our market and I grilled the rep for 1.5 hours - trying to find the loop hole, but getting 60% (opening customer) seemed like it might be ok, so I signed up. Then I did some research and thought more… and called her back 2 hours later and said cancel that contract - not good for my restaurant. I kept hearing 60%, but wasn’t comprehending it was 60% on what they collected, so it was only 30%….

PERHAPS if you are a new business that needs to get the word out about your business it MIGHT be viable to try, but that’s even risky.

As a previous restaurant owner and as a current Groupon user, I tend to agree with one previous comment that if a customer doesn’t return, it isn’t generally the customer’s fault, but that of the business. Regardless of why I try a new restaurant (or any other business, for that matter), if the visit is not good and my return is not encourage, I am not likely to return. Used wisely, with proper staff training in advance of the release of the groupon (and in general!), it can serve very well as an introduction to a business. Think of it like any promotion or marketing effort - if you’re not prepared to deliver what you’re promoting, you won’t get people in a second time.

I recently purchased one for a pizza restaurant that I knew I’d be near when looking at a vacation home. The pizza and the service were both wonderful, and I will be placing a (minimum) 10 pizza order for one of the days that my large group will be staying at that home. Will I go there every week? No - it’s a 30 mile drive. But I will certainly continue to go there when passing by….as long as the pizza and service continue to shine.

BTW - it states clearly on the groupons for restaurants that the tip should be based on the non-discounted amount of the bill, and asks customers not to give groupon a bad name by being bad tippers.

I am a Groupon user, but I don’t fit your “Stereotype” for the average user. I work in a restuarant and soemtimes a good deal on Groupon is just the push I needed to try a new place out and I usually spend more than the original amount purchased. I use it as a way to find new places without risking my money on a dud. I’m not sure how it will impact restaurants in the long run, just as I’m not sure how all of these promo’s and specials we are using are going to end up affecting our customer’s perceived valuse in the future, but for now, in this eceonomy I am more likely to try something new if I am doing it at a discount price. And I will spread the word and return if the experience is enjoyable!

I agree with Loni 100% and fall in that same category. Discounts get me in the door to try the restaurant and if I enjoy then I will return and spend full price and have done so. I do agree that some restaurants set it up foolishly and don’t understand what they are doing. There are so many other creative ways to get people in the door but this DOES work for some restaurants but not all.

Don’t give away the farm. If you want people to show up, give them great service, affordable fine dining. If you really want to give 50-75% away. Put some tacky guy out in the road and tell the customers with a tacky sign that the meals on you.

Let’s get back to basics folks

We have a recent experiience where one of our local newspapers was offering 50% off and trading the costs for advertising.Very early people started to arrive with bundles of coupons together. It’s great to see someone is finally warning people. In 18 years of business we rarely coupon or offer special dicounts because if you understand business you really only give away your already slim margin.
Great customers are rewarded with great service,special treatment every time they are there and personal care by the owners or managers! You don’t need to lower the price if your price value ratio is exceptional already. Customers are very wise. They see the difference. Thanks for great info!!!

Poopon Groupo!!

has anyone got the stats on how much new customer traffic is generated from a groupon and of that new traffic what percentage becomes full fare “regular customers”, and of those full fare regulars “how long it would take” to make back the money you gave away?? The biggest scam about coupons is that they pay off! It’s a desperate cry for business. Then you end up breeding a “discount mentality” in the market place so that people only shop when they can get 50% or more off the regular price. How can this be good for business? I say businesses should boycott all of them and poopon groupon!

Bob sent me a great NYT post about Groupon — the author does a really nice job walking through the math — here’s the link: http://boss.blogs.nytimes.com/2010/11/23/doing-the-math-on-a-groupon-deal

I used a Groupon coupon once at a restaurant in the Union Square area and was treated so poorly because of it that I never returned. The minute I mentioned I was using Groupon, my friend and I were treated “differently” - we were seated in a separate area of the restaurant and told we could only order from a certain menu. The service throughout the evening was surly and disdainful. The food and ambiance was wonderful and I certainly would have returned had I not been treated so badly. Restaurant owners, please make sure you’re treating ALL your customers with respect, whether they’re paying with coupons or not. If the food and service are great, they will surely return!

Groupoff!

I understand that it might be difficult to believe, but the economy is eventually going to get better, and when it does, the Groupons of the world are going to take a devastating hit. The bottom line is as follows … A business can’t give-away a ridiculous 50 to 90% and still be viable. Restaurants represent the real essence of the Groupon craze and at 50% off (which really amounts to 75% off after they pay Groupon), the numbers simply don’t work. You just can’t continue to give-away money and expect to keep the doors open.

The owner of Groupon recently walked away from some Six Billion dollars from none-other than Google, and this man is out of his mind. It’s going to crash, and it’s only a matter of time.

When you add Groupon and an unending list of copycats (and throw in the ever-present Restaurant Weeks), the entire business has evolved into one gigantic discount. Something has to give, and either the discounting ends (as we see it now), or we are going to be witnessing thousands upon thousands of restaurant closings.

- Bob

Bob - You have very valid points. Groupon takes advantage of the small restaurants leaving them in the dust and helping their own stock prices. I’d like to introduce this unique website http://www.MeetABusiness.com, which has been in the works for about a year with 2 other business partners. We do not charge businesses an arm and a leg to offer group coupons, like all the rest of the group coupon sites do. Ours doesn’t charge them anything except for the $9.95 monthly membership fee and a small extra fee if they want to purchase a deal of the day, week, or month, but the first 6 months are free, plus they get all of the other posting and searching benefits offered by the site, which the other group coupon sites don’t offer, such as business resource posting & searching, jobs posting & searching, events posting & searching, networking, and blog posting.

We have over 300,000 business listings nationwide to date. Again, we are a low-cost alternative (at the moment we’re a “no cost” alternative because we’re free for 6 months) to all of the other group coupon sites that everyone complains are really bad for businesses, because they take so much of the pie from businesses.

If you have any insight would greatly appreciate it!

One of our customers Chefs and I recently had a discussion about Groupon/Living social and he said that if a restaurant is running at ‘normal’ food costs and providing their employees a living wage it should be almost impossible to offer this and stay afloat. Especially since the volume of repeat customers off these ‘offers’ appears to be low. Great for consumers though.