HI,

Ellen Malloy commented a restaurant owner contacted her to advise groupon caused him to close his restaurant. Someone pointed out his business was likely in a poor condition before groupon entered the picture.

Regards,

Do you have the link? If that is true, based on what I know of Ellen Malloy and her responses, she would have probably advised them against the group on to actually fix the issue at hand.

Hi,

I saw it on facebook. She is encouraging journalists to write about this restaurant whose name has not been mentioned. It is not a client, but someone who stumpled upon her recent comments on groupon coupons.

It isn't (yet) a blog post on restaurantintelligenceagency.com.

Regards,

Anyone think Va P was the restaurant Ellen Malloy suggested was close to going out of business thanks to bad Groupon math?

In the closing of Va Pensiero thread, a poster implied that Groupon math might have done them in (the restaurant was featured in February). Then I clicked on this link and saw that 2800 or so people have already purchased this Groupon. Surely many of those who purchased would have dined there anyway, but knowing nothing about average covers for a night or restaurant economics, this seems like almost too much of a good thing for a restaurant like Mado. You can only use one coupon per table and the coupons expire in a year. Am I wrong? I really want to try Mado, but am hesitating to buy the Groupon because of the sheer numbers..

AlexG wrote:In the closing of Va Pensiero thread, a poster implied that Groupon math might have done them in (the restaurant was featured in February). Then I clicked on this link and saw that 2800 or so people have already purchased this Groupon. Surely many of those who purchased would have dined there anyway, but knowing nothing about average covers for a night or restaurant economics, this seems like almost too much of a good thing for a restaurant like Mado. You can only use one coupon per table and the coupons expire in a year. Am I wrong? I really want to try Mado, but am hesitating to buy the Groupon because of the sheer numbers..

Apparently Friendship Chinese sold over 3,500 of them. The lines have not been forming around the block.

Anyone think Va P was the restaurant Ellen Malloy suggested was close to going out of business thanks to bad Groupon math?

Truly unlikely.

You can still purchase Va P gift certificates at Restaurant.com - give them to someone you love

Quote:
Anyone think Va P was the restaurant Ellen Malloy suggested was close to going out of business thanks to bad Groupon math?

Truly unlikely.

I agree. She's not his publicist, for one thing, and I can't imagine why Muldrow would be discussing something like that with Malloy - he's chatty, but he's not stupid. Besides, I don't think that VaP's April closure could possibly be closed by a Groupon offering scarcely 60 days earlier.

Groupon costs restaurants only when groupons are redeemed. Scarcely 2 months have passed since Va Pensiero's groupon was offered and at this point in time, it's very unlikely that more than a small percentage of those groupons have been redeemed.

For Groupon participation to create financial stress on a restaurant, a large percentage of redemptions must be made within a relatively short time period and the redemption rate must be high. This creates a situation where a large volume of business is done at a less-than-favorable profit margin (which can also severely crimp cash flow). I don't believe this was the case at Va Pensiero.

=R=

sundevilpeg wrote:

Quote:
Anyone think Va P was the restaurant Ellen Malloy suggested was close to going out of business thanks to bad Groupon math?

Truly unlikely.

I agree. She's not his publicist, for one thing, and I can't imagine why Muldrow would be discussing something like that with Malloy - he's chatty, but he's not stupid. Besides, I don't think that VaP's April closure could possibly be closed by a Groupon offering scarcely 60 days earlier.

Well, I've since come to understand that it probably wasn't Va P, but Malloy mentioned in a subsequent tweet that the restaurant in trouble was not one of her clients.

Anyone think Va P was the restaurant Ellen Malloy suggested was close to going out of business thanks to bad Groupon math?

To echo Ronnie above, it would be very very hard for a program like Groupon by itself to knock someone out. Groupon is basically one of many cash advance programs (the first were LeCard and Transmedia that started in the early 90's). They're advancing restaurants up-front cash for future earnings at a discount. Besides the cash, the restaurant receives marketing and exposure to hopefully a new batch of customers.

The split on Groupon is 25/75, the restaurant receives only 25% on SOME of their future earnings. Next, we add in breakage, I'd expect 20% of the coupons purchased are never redeemed. Let's assume with the breakage the cost of the program is now 33%. A normal restaurant runs around a 30-33% food cost. Essentially that means you break even on the program. This is because fixed costs don't factor in - you're already paying your rent, heat, insurance, etc. You're staffing doesn't need to change because your main core of people are already there. At most, one more server the first week that the program hits.

Besides creating new customers, people always spend more then the value of the gift cert. Especially at a place on the higher end as VaP. Personally, give me a $50 gift certificate and I spend more (especially on booze) then I would of before. Hence it's a great deal for everyone involved, right?

The problem is that many times restaurants will run four of these programs at once. Airline magazines, Groupon, Restaurant.com, and others. At that point almost everyone that comes in has a gift certificate. Not only do all the new customers but your regulars are also trained now to find gift certificates for half off. At that point your cash flow is shot and you're definitely not covering your fixed expenses. In conclusion Groupon might put you over the edge but it isn't the only factor.

Where did you get your information that Groupon gets 75%? From my understanding their take is 50%.

All in all, it's a great program for the restaurant. Lot's of new customers. People will always spend more than the coupon value. Also, many people give these Groupon deals as gifts and over 5% all gift cards are never redeemed.

Where did you get your information that Groupon gets 75%? From my understanding their take is 50%.

Sorry, should of clarified better, Groupon isn't making 75% on each gift certificate.

Example: Groupon is selling $100 gift certs for $50. My understanding is of that $50 the consumer pays, the restaurant gets $25 and Groupon gets $25. The restaurant is providing $100 worth of services for $25. Groupon receives $25 for running the program. $50 is given to the customer gratis for buying the gift certificate. Groupon doesn't receive 75%, 75% is the cost to the restaurant when all said and done (minus breakage on unredeemed certs).

We have been mulling over the groupon thing for awhile. To my knowledge, if a customer buys a $40 gift certificate to my store, Groupon gets $10 and we get $10. So our profit margin would have to be over 25% to break even. The shop only gets the $10, when the coupon is redeemed. Yet groupon is already in possession of their $10. So when the coupons are not redeemed, groupon still gets a little something, but we do not. So lost coupons make are of no benefit to the participating companies, except in the fact that you did not have to give up $40 worth of merchandise. Is this worth it to bring in new business? Still on the fence. If anyone knows of someone who thinks this turned out well for their company, I would love to know about it.

One of my friends used to own the Margarita Inn, a very nice lady. The story of the restaurant takeover was not a pretty one, but perhaps that is not unusual.

Cinnamon Girl wrote:We have been mulling over the groupon thing for awhile. To my knowledge, if a customer buys a $40 gift certificate to my store, Groupon gets $10 and we get $10. So our profit margin would have to be over 25% to break even. The shop only gets the $10, when the coupon is redeemed. Yet groupon is already in possession of their $10. So when the coupons are not redeemed, groupon still gets a little something, but we do not. So lost coupons make are of no benefit to the participating companies, except in the fact that you did not have to give up $40 worth of merchandise. Is this worth it to bring in new business? Still on the fence. If anyone knows of someone who thinks this turned out well for their company, I would love to know about it.

One of my friends used to own the Margarita Inn, a very nice lady. The story of the restaurant takeover was not a pretty one, but perhaps that is not unusual.

I have no first hand knowledge of the economics from the retailer/restauranteur perspective but I have purchased a number of Groupons and I would echo that except for spa services, I've NEVER only spent the face amount of the Groupon. I would imagine that in your case, given the "candystore" opportunity you present, you would similarly benefit, as long as you restricted the number of Groupons the individual could use and came up with an amount that was enough of an incentive to purchase but not so much that they could buy out the store without kicking in extra ...and I've definitely used Groupons to try out retailers/restaurants that I hadn't before. Not sure if this helps but I'm guessing I'm more the rule than the exception.

Cinnamon Girl wrote:The shop only gets the $10, when the coupon is redeemed. Yet groupon is already in possession of their $10.

If the coupon isn't redeemed, Groupon is getting the whole $20, right (they already have the users' money and aren't paying you since it wasn't redeemed)? The moral of this story seems to be: buy Groupon stock when they IPO.

-Dan

pizano345 wrote:

Where did you get your information that Groupon gets 75%? From my understanding their take is 50%.

Sorry, should of clarified better, Groupon isn't making 75% on each gift certificate.

Example: Groupon is selling $100 gift certs for $50. My understanding is of that $50 the consumer pays, the restaurant gets $25 and Groupon gets $25. The restaurant is providing $100 worth of services for $25. Groupon receives $25 for running the program. $50 is given to the customer gratis for buying the gift certificate. Groupon doesn't receive 75%, 75% is the cost to the restaurant when all said and done (minus breakage on unredeemed certs).

I think this is really interesting. Any restaurant or store can sell gift certificates themselves and discount them any way they want. That is, a restaurant could just sell a $100 gift certificate for $50 and bypass Groupon altogether, keeping the extra $25 for themselves that would have been paid to Groupon. Many restaurants do this and they generally say that you cannot use the certificate on the same day you buy it (though I haven't seen any that discount them quite that much - but they could).

The value-added of Groupon is that they reach a wider audience. That's what the restaurant is paying for when they give Groupon the 50 percent cut of the cost of the certificate. So to ask whether Groupon is a good deal for the restaurant, you have to compare the cost of using Groupon to the cost you'd pay to advertise through other means and get those new customers in another way.

It isn't quite right to simply look at the profit you make from a Groupon customer. You need to compare that to the profit you'd make by getting that customer in the restaurant through another form of advertising.

The "fun" daily blast format, easy to purchase mechanism and general high quality/value of what's being offered are the features I think set them apart--I've never been very motivated to do any of the other programs (transmedia, etc.) but this has been very incentivizing in getting me out to places I otherwise might not have (or revisiting places I hadn't been back to, even though I enjoyed them--it just brought them up in front of a crowded field of options.) For what it's worth

Darren72 wrote:It isn't quite right to simply look at the profit you make from a Groupon customer. You need to compare that to the profit you'd make by getting that customer in the restaurant through another form of advertising.

That sounds right. Plus, also, you have to compare it to the profit you'd make from an empty restaurant, while you pay your fixed costs every week or month.

I think Groupon particularly makes sense for a restaurateur who says, "I have a terrific product, but nobody knows about it. I need to stimulate trial. If I could just get people in here, I'd gladly break even or even lose money on all of them, because I know that once they taste my amazing food, they're going to come back, along with all their friends and all the people they told about it on LTH." For a restaurateur for whom trial is not the problem, but rather a soft economy or boredom (i.e., everyone already knows about the place and has told his friends about it, but people aren't going out to eat as often, or there's some new flavor-of-the-month they're going instead), I can see how it would be tempting, but dangerous.

The shop only gets the $10, when the coupon is redeemed. Yet groupon is already in possession of their $10. So when the coupons are not redeemed, groupon still gets a little something, but we do not.

are you sure about this? I was under the impression that Groupon pays once the gift certs are sold, not once they're redeemed. So I think that if you offer a $50 GC on Groupon for $25, and they sell 1000 of them, they send you a check for $12,500.

I've always thought that the non-redeemed certs are a big selling point....you get the money but they never come in and claim the deal.

I could be mistaken; I have no personal experience dealing with Groupon, although I've spoken with reps from other similar companies.

(mods--perhaps this thread might be better located elsewhere?)

It's my understanding that the participants get the money up front too, one of the chief selling points of the program. Now, I used to work for several years for a very large accounting firm, but I'm no CPA. Still, I think we are tending to look at the Groupon math a bit askew.

We tend to focus strictly on the margin involved, and that when a customer redeems their coupon, the restaurant is getting a much smaller cut for that meal. On that meal, that's true, but that's not the totality of the restaurant's inputs/outputs for the month. Generally, the two highest costs a business has are employment and occupancy. Except for certain situations, like in malls, these costs are fixed, large and, well is ominous the right word. In vernacular, they are the restaurant's "nut". No matter how much profit you make on an item, you have to make enough cash (or borrow the cash) to cover your fixed expenses each month. The huge come-on for restaurants, I believe is that ability to know this month you are in the black a lot sooner.

Put differently, your fixed costs are always a fraction of your sales. The percentage of your fixed cost to your sales depends on the size of your fixed costs and the size of your sales. Your profit does not effect this except for in the amount of money generated when you charge more. If you generate more sales that month, your fixed costs will be much lower even if your other areas are less profitable. Low margin businesses can be very successful such as supermarkets. The ultimate low margin business is a casino. Remember, the laws of chance control their hold, and it's way less than 10%. You subtract all those pit bosses and free booze, the electric bills and the junk bond financing, and many (not all) do just fine. On the other hand, take a local coffee shop. There can be a huge profit on a cup of coffee or tea, yet the total sales are so small, the place can have a hard time meeting its fixed costs.

The primary problem with a program like Groupon is that it's a one time thing. So, for one month you get this big boost in cash (and we have not even talked about the costs of money), and they cover their nut. What happens the next month? You are banking on the fact that you got the people in your door, converting them to good, returning customers, but if that does not happen...

The premise that a Groupon promotion could drive anyone out of business is nonsensical and pretty much just a red herring for mismanagement. We've used it a couple of times, once at the Counter - where we otherwise would likely have never eaten. I believe we had a $30 voucher for which we paid $15 and we ended up dropping about $65 (including drinks, sides and a salad). $50 at Va P would get you maybe a couple of appetizers and a pasta. Now maybe some people would use it that way (not getting anything above the $50 tab) but not many, and even if they did, as pointed out many times above, that's not exactly a "loss" and would not lead to financial ruin.

The people who would most likely suffer are waitstaff, because anyone who is dining that way would likely keep tipping in check as well, so 10 tables a night at $7.50 vs. 2-3 times as much is a big hit.

I have a niece in Wisconsin who waits tables at a local place that does nightly specials. They have a 15-cent wing night and local high-school kids come in, order a drink and a dozen wings (or stick with just water) and leave a 30-cent or 50-cent tip.

Article in the Sun Times that has some information on Groupon's financials:

To date, more than 4 million Groupons -- coupons that are activated when a certain number of people commit to buying them -- have been sold. The company will comfortably surpass nine digits in revenue this year.

I was talking to someone this weekend with some knowledge of Groupon's inner workings. They told me that the valuation used for their most recent round of financing was over $1 billion.

Yes, they raised $135 million at a $1.35bn valuation recently:

It's Official: Groupon Announces That $1.35 Billion Valuation Round

gleam wrote:Yes, they raised $135 million at a $1.35bn valuation recently:

It's Official: Groupon Announces That $1.35 Billion Valuation Round

There you go, didn't realize that was public. Amazing.

Interesting blurb about a SF cupcake shop that got hit with 3000 Groupon redemptions in one day. Be careful what you wish for.

(I especially like the part about how the "Internets is reeking havoc.") Nice touch.

edit: Stupid NBC Bay Area affiliate! Here's the source article, which is much more thorough, and makes clear that although the cupcake shop was overwhelmed at first with Groupon redemptions, not all 3000 Groupons were redeemed in a single day. In fact, it seems the owner of the shop is actually pleased with his Groupon experience.

--Rich

Another "Groupon is Killing Businesses" headline:

Group-deal customer bonanza can overwhelm small businesses as coupons runneth over

But when you read the story (bold emphasis mine):

For Crystal Nail Salon in Chicago, ratings at web sites like Yelp.com tumbled as owner Phu Bui struggled to serve up the 5,100 manicure-pedicure combinations he sold in June for 65 percent off.
......
Bui — who bypassed Groupon's recommendation to limit the number of $28 coupons — says he'll consider offering an online deal again

The gist of this story to me is that retailers just don't get the concept. Groupon is recommending limits, staff increases, etc. to these businesses to help support the influx and even saying "don't expect to turn a profit". Groupon is effectively saying, "we could possibly be turning on a fire-hose of customers right at your door" and the retailers who are overwhelmed always seem to be the ones who said "go right ahead".

At Bikram Yoga Milwaukee, owner Bron Gacki had a very un-yoga reaction last month after selling nearly 2,500 Groupon coupons, when he expected to sell 1,000. He almost panicked.

If you're setting up a system that could possibly result in a "panic" scenario and you have the ability to limit that risk with the push of a button, then why wouldn't you? Do the math and set the limits. Why didn't this guy just set the limit at 1,000?

You can call it hubris or stupidity. I'll just call it bad business. I guess there are just some retailers who believe that any number of customers, no matter how closely spaced together, is a good thing.

Maybe Groupon needs to do a better job of warning business owners of their risks, but at some point I put the blame squarely on the shoulders of the business owner. They know exactly what they're walking into. You own a business. Know your limits and manage your risks, especially when they're spelled out for you.

I'm a fan of Twitter, but I've noticed a growing pattern of food blogs using tweets to substitute for actual "journalism". Yeah, I know blog does not equal journalism, but stay with me on these.

Exhibit 1

While watching the premiere of Masterchef last week I posted to Twitter wondering what happened to Graham Elliot Bowles' last name. Time Out Chicago reported on the dropped last name, including citing Graham Elliot's response to my tweet. Now, Elliot was kind to respond to my tweet, but his answer surely was open to a follow up question or two.

Exhibit 2

Alinea has recently shifted from serving two menus to just one. Obviously this shift will require some tweaking on the part of the restaurant to get it right, and Achatz has been tweeting on that process. Grub Street just posted an item on this that was basically just reprinting Achatz's tweets. Again, why not pick up the phone or email him to get more context than what's in a 140 character tweet.

Twitter certainly has it's uses, but the local "food media" seems to be using it right now as a crutch.

Today's Trib article was just bad. It gave no indication whether these two examples were typical or fairly uncommon. Do most businesses put limits on the number of coupons? If so, how many actually sell up to that limit? Can you find any evidence for a business that seriously regrets using Groupon, as the article seems to imply may have happened?