Groupon the Restaurant Killer

My original Groupon post was written when Groupon turned down billions from Google, and I wrote they would fail or have to adjust their deals. Fail is a strong word and the headline ‘Why Groupon Will Fail’ has served me well in getting people to read then stop and think about the fact that Groupon is bad for small business, especially restaurants. When the horror stories come out in the press the Groupon defender’s response is ‘the business is responsible for doing the numbers and making sure the deal they offer makes sense for them.’ So I decided to look at the numbers and do a comparison.

There is value in being able to reach a large group of people and entice them to buy with a discount. That value has been demonstrated for decades with direct mail companies and it is very well defined.

Here is that value structure: Mail an advertisement in a community direct mail coupon book to 10,000 homes for a fee of $650/dollars, offer $10 off a food purchase around a minimum of $40 (two entrees) and expect two hundred or so coupons to return for an additional cost of goods of approximately $600 ($2000 discount times 30% food cost) this results in a total cost of $1250. That $1250 brings in a minimum of $6000 (200*30) in food plus $2000 in beverage sales (conservative numbers: half the industry average of 40% of sales) for a minimum total of $8000. Bottom Line: Spend $1250 and get back a minimum of $8000. Largest possible loss: $650 if no coupons come in.

Now compare that to Groupon:
Two hundred Groupons that saved a customer $20 ($40 Groupon sold for $20) would bring in $2000 to the restaurant. But with no minimum sale required the restaurant will be liable for providing $8000 worth of food/drink for a mere $2000 in revenue. That $2000 of revenue will cost at least $2400 to produce. Remember a $400 loss requires $2000-$2500 in sales from regularly prices items to break even. Some Groupon bearers will spend little over the value of the offer, but many will spend more.

In this case the total group must spend as much as 31% more than their Groupon value to break even, unlikely that as a whole this happens. So you lose money on 200 Groupons.

Where does it get really bad? They sell thousands.

You could feasibly serve 200 more people over the next two weeks and not have to hire more staff or schedule more hours, but having 2000 Groupons out there you are going to make sure you have plenty of people working. You payroll goes up. You were losing money before, now you are really losing money.

Add that to disgruntled service staff, regular customers that get worse service or displaced, and you have the recipe for a bad year or worse. I believe that competition will likely lead to a better split of the coupon sale price which will help make the equation work better. To some extent this is happening already as the Groupons of the world compete, and take less. Some big questions remain: Are the deals going to get skimpier and cause lower interest among consumers? Are the consumers going to get fed up with the email overload (I know I barely look at them all anymore)? Are the restaurants going to grow tired of the hordes who do not tip well, spend well, and displace full price customers and as a result cheapen their offers and restrict them so much that the customers lose their zeal for them? Will they be worth all the added effort if they result in a small profit? If something is too good to be true like a customer regularly getting 50% off prices meant to be competitive already, a company selling a restaurant’s products for 50% off and only passing on 50% of that, or a company being able to sell its products for 50% off and make money, it is too good to be true and the equation has to adjust.

At GuestFeed we do marketing for restaurants that makes them money, and we consult with them about decisions like whether or not to use Groupon with reasoning like what you just read. Our clients love that kind of straight talk, and we deliver. Can we help you?

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