I have been telling you for a long time that Groupon will fail, and that Groupon is Bad for Restaurants.I have taken the time to trace Groupon’s business plans, and to remind you that Groupon’s business plan is not sustainable long term. Yet what we most often hear about is how big their IPO is going to be, and how the primary stockholders have already cashed in via the rounds of funding they have received. This, I believe is the endgame, they have managed to pimp out thousands of hard working small business owners with their huge email list. Convincing them that they should sell their products and services for 25% of normal retail price. In the articles I have written previously I shared media reports of merchants and restaurants who regret their decision to run a Groupon, way back in my original post on Groupon I shared the story of Posie’s Cafe in Portland and TechCrunch has recently revisited it to give you more in depth analysis of why it was a bad Deal:
TechCrunch seems to be honing in on the story as they have also recently published this:
I am sure you have heard the rhetoric about why it COULD be a good idea. Here are people who listened and wish they had not. My advice: Do Not Do Groupon, and for gods sake do not buy the IPO. They can not sustain this.
Here are some techcrunch highlight:
Groupon is not an Internet marketing business so much as it is the equivalent of a loan sharking business. The $21,000 that the business in this example gets for running a Groupon is essentially a very, very expensive loan. They get the cash up front, but pay for it with deep discounts over time. (This post applies to Groupon operations in the United States and Canada; it’s different in other parts of the world.)
Now here’s the crazy part. Not only is Groupon effectively giving loans to merchants, but it also works the other way around. The merchant is on the hook for the entire value of those deals until Groupon pays the merchant back its portion. Unlike other loan providers, the merchant is making a short-term loan to Groupon. (Not technically, but effectively.) They buy inventory in advance of the Groupon run. They also serve the initial rush of customers. The business is in a hole before they get their 30- and 60-day Groupon payouts.
While the chances might be small, Groupon merchants should know that they’re taking on the risk of Groupon’s collapse. If Groupon collapses, a lot of small merchants could be left holding the bag.
Businesses are being sold incredibly expensive advertising campaigns that are disguised as “no risk” ways to acquire new customers. In reality, there’s a lot of risk. With a newspaper ad, the maximum you can lose is the amount you paid for the ad. With Groupon, your potential losses can increase with every Groupon customer who walks through the door and put the existence of your business at risk.
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Let me know if you have heard stories about Groupon you would like to share, here in the comments or on twitter @spirocks