New article out by Joan Lappin at Forbes about Groupon’s recent struggles:

Groupon still searching for a viable business plan as stock crashes

Here’s my take.

It’s been years since I started warning restaurant owners against using services like Groupon, Restaurant.com and other parasitic daily deal sites to market their businesses. Restaurant.com was really the first one on the scene in my industry. Groupon however, has been the most “successful” at what they do. I remember years ago when restaurant owners were first investigating these companies and asking opinions about them in some of the restaurant discussion forums I frequent.

The daily deal site promise sounded good at first, “Access to thousands of new potential customers,” they’d say. “Think of all the new loyal customers you could get?”. “We bring them in and your great food and service will bring them back.”

It was a good sales pitch. From the start though, it was obvious to myself and many others that these people coming through the door were never going to become new, loyal customers to the restaurant. Their loyalty was going to lie with the service that was bringing them the discount, namely the daily deal sites like Groupon.

We started warning people from the beginning that these people were going to be loyal to Groupon, not to the restaurant. They were going to follow the next deal right out the door to the next restaurant, and they did. The owners I know who did try these deals learned this the hard way. They would be overwhelmed with business for a short period of time, preventing them from putting their best foot forward. This wave of temporary customers tipped on the discounted check, not the original check, and servers lost tip money. The cost of the campaigns that Groupon projected never included all the costs of doing business, like extra staffing and other overhead. It never included the lost revenue from the Groupon customers filling seats that could have been seated with customers paying full price. Regular customers were put off by the fact that these drive-by customers were paying less for their meals than they were. Staff were inconvenienced, and in the end, restaurant owners were left with no extra customers and a business that felt like it had just been hit by a big storm.

Luckily, after years of horror stories from restaurant owners who had decided to use these daily deal sites, the word got out. While there are a few positive stories out there, there have been so many horror stories, these sites started getting a reputation. Restaurant owners started listening to people like myself who were showing them the real math behind a daily deal.

Now, the inevitable is playing out. Groupon is in trouble. A couple years ago, its founders cashed in by offering an IPO and selling stock. Since then, they’ve been divesting themselves of Groupon stock and cashing out. The unfortunate people who were dumb enough to buy stock in a company who is in the business of killing the very businesses it depends on for revenue are losing their shirts. Groupon’s current stock prices is half of what it was in it’s initial public offering. Groupon’s revenues are faltering and they can’t come up with a viable business model after coming to the realization that theirs is unsustainable.

I, for one, am happy to see them fail. I feel a little bad for people who have lost money on their stock, but they should have known better. Daily deals are great for the people who buy them, great for the daily deal site, and can even work for businesses who don’t carry much overhead, mainly service based businesses without any competitors on the same daily deal sites. For the vast majority of businesses though, the daily deal sites are the beginning of the death march, and I am glad to see Groupon floundering. It’s demise can’t come fast enough for me.

Brandon O’Dell is an independent restaurant consultant and owner of O’Dell Restaurant Consulting and Friend That Cooks Home Chef Service. The O’Dell Restaurant Consulting Blog offers helpful articles and tips for restaurant owners, managers and food service professionals. Downloadable spreadsheets and other tools can be found in the webstore on the main website at www.bodellconsulting.com/webstore.html.