September 26, 2016

The GROUPON Effect

How Group Deals can unknowingly turn nice people into ravenous pack animals.

Group discount websites continue to flood the marketplace with a treasure trove of discounts for bargain hunters. But what is the real cost of the low price for local businesses?

The long recession has been very difficult for the businesses that rely on consumer’s disposable income: restaurants, massage, spas, boutique retail and entertainment (other than movies), have all seen decreased revenue and volume. As the saying goes, “one man’s crisis is another man’s opportunity”. And this is where many of the daily deal discount websites enter the picture.  As small business revenue declines advertising is often the first budget item to cut. I hear it all the time selling Utah Stories advertising. “they” offer “free advertising” and the potential of a check for $3,000 to $7,000, and they do all the work!” Thousands of local businesses have signed up and now the deals found on Groupon, Living Social and Restaurant.com are a frequent topic of conversation.

“They called me and said, ‘we will give you a check for $5,000 today if you sign up with us.’ says Executive Chef and Owner of Vienna Bistro, Frody Volger. Last year was both good and bad for Volger’s business. With the opening of the Beerhive Pub next door on Main Street, Volger saw and 30% increase in business. But eight months ago, Volger was diagnosed with cancer, and the chemotherapy forced him to spend far fewer hours at work and pay others to work more hours. “I needed the money so I agreed, and it was a terrible decision…I got flooded with the coupons and in the end none of the customers who came with the coupons ever came back…They were all just bargain hunters.”

Volger’s restaurant offers handmade, fresh European Alpine cuisine. homemade brats, sausage, schnitzel, spaetzle. Volger says his food costs are around 30% and the labor costs that go into producing his food are also very substantial. Groupon local business to sell their vouchers for 50% off. The local business receives half of the sales revenue. Since Groupon has the power in numbers to make nearly every deal “tip”. Groupon makes a fortune. The local business receives just 25% of total value of goods or services sold. This makes it nearly impossible for a local business without very high markups for their goods or services. It’s the lure of quick and easy money that has made Groupon’s estimated value over $5 billion. Soon Google will be entering the picture because of their failed attempt to buy Groupon. And Restaurant.com, Living Social and all the copy cats from KSL.com to the newspapers are flooding the marketplace with group discount offers. But I have yet to find a great local business that sees this as a sustainable way of doing business.

“I think it has changed the behavior of some consumers and I am not sure if that is a good thing,” says Chris Mautz Co-Owner of The State Room. “Rather than going to a restaurant or a show because it is something they are truly interested in, people are only going when they can find a half-off coupon online. Does this build a loyal customer base?” Mautz tells me he has been approached by some of the organizations that offer these types of deals. “I realize I might be able to get more people in the door who haven’t been here before, but what does it tell my regulars when I’m willing to sell tickets for half off?” says Mautz.

Ken Dinsmore recently reclaimed ownership of Lumpies and opened the Inferno Cantina downtown. Dinsmore believes one of the reasons Lumpies and the Sandbar failed for the former owner  is because of their reliance on Restaurant.com for customers. “There were a group of people who would come in as regulars with their discount vouchers, when I took over I would see them all the time…I tried to cancel with Restaurant.com and they told me, ‘you need to provide us with 90 notice to cancel.’” Despite the change of ownership, Dinsmore honored the vouchers because he didn’t want to risk losing customers. “But as soon as the vouchers ran out, I never saw those customers again.”

Online there are stories of businesses that become basically group discount addicts, who are surviving by selling the discount vouchers. But as they do more deals, they see the discount groupies show up at the expense of fewer full price regular customers.

Because there is no cap on sales or volume one Groupon sale can inundate a small local business with coupons that can squelch profits and dissuade existing customers from returning.

I recently witnessed the effects of a business that is required to rely on the Groupon model. I could see on their menu their prices had recently been changed. My wife and I didn’t have the Groupon vouchers and we ended up paying over $20 for a bowl of soup and some vegetarian noodles. The portions were small and they skimped on the meat. As I was waiting in line to pay, everyone in front of me had a Groupon or Living Social voucher. I felt jipped and I wont return. My wife found their gift vouchers online. A $10 voucher was for sale for $3.00.

Most of the most successful restaurants in Salt Lake City have never done Groupon: Mazza Owner Ali Sabbah says,”While Goupon or other such discount sites are great for getting customers thru the door and filling up unused seats, they tend to work better for places that have higher markups on their products. I prefer to keep my markups low and give everyone- with or without a coupon, a good deal.” The same goes for Crown Burger, there isn’t a better fast-food $6 burger than the Crown Burger.    This doesn’t mean that every business who has tried the group discount is bad or stupid, but I believe it’s time to show Wall Street the best of our local business have no use for their favorite new business model.