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Groupon dying a slow, painful, and welcome death | blog.bodellconsulting.com

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.

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Groupon a bad deal for restaurants and everyone else, including Groupon

Groupon logo

Groupon CEO fired | click for Yahoo Finance article

What happens when you sell a product or service that “kills” your customers?

Just ask recently fired Groupon CEO Andrew Mason. I don’t know that he has the answer, but I do.

Groupon was a bad idea from the start. They talk businesses into selling their goods or services for half the cost of their normal price. Of that half price that is collected, Groupon keeps half and the business keeps the last half, minus any charges for processing fees on both their cut and Groupon’s cut, which equals about 7% of the business’ portion.So let’s do the math. Groupon sells a 50% off deal to your restaurant at $20. Groupon keeps $10 for every one sold. You keep $10 minus 7%, leaving you with $9.30.

With that $9.30 collected from the customer, you have to give them $40 worth of goods or services. If you are like most restaurants, just your cost of goods on $40 eats up $10-16 (25-40%), resulting in a loss of anywhere from $.70 to $6.70 for EVERY Groupon deal sold. That’s before you calculate in additional paper products, cleaning supplies, extra staff, and lost revenue from seats that are taken away from full price customers, among other expenses.

All this turns Groupon into the single most expensive tool there is for marketing your restaurant. This a bad, bad business model. A company that promotes itself by claiming they can bring you new business ultimately ends up putting many of it’s own customers out of business, or their customers wisen up and realize Groupon is a horribly expensive way to market and they stop using the service. Either way, Groupon is cannibalizing itself and it’s customers. Groupon claims the payoff is new, regular customers for the business. The reality is that the customers are loyal to Groupon, not the business, and they follow the next deal to the next restaurant.

No business model is going to succeed long term by killing it’s customers unless it has a never ending supply of new customers. For Groupon, that means it’s hey day in the US is over. It has run it’s course here and most businesses are too smart to fall prey to it’s predatory business practices. Groupon will not rebound from it’s current woes in this market. It’s only hope is to expand into untapped markets where business owners are not aware of the dangerous effects of using Groupon. Groupon is the first daily deal model to fall because it was the first in the market. It will not be the last however.

Ultimately, nobody wins with Groupon, except the people who buy the Groupons. Check out the linked article from Yahoo Finance about the firing of Groupon CEO, Andrew Mason. If you own Groupon stock, I’m sorry for your loss, but cut your losses and dump it now. It’s not coming back.

Brandon O’Dell is an independent restaurant consultant and owner of O’Dell Restaurant Consulting, a restaurant consulting company that offers operations and marketing consulting for independent restaurants and small chains. Learn more at their website or visit their webstore to find Excel speadsheets and Word templates to help you build a better restaurant business.

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