The Tasty Bits Blog

Nov 13, 2012

Groupon is in trouble??

General  ·  

So I read recently that Groupon and other “daily deal” companies are struggling. The fact is, even Groupon, the dominant player (50% market share) has seen their market cap drop more than 90% in a year since going public, and other companies are taking massive write-downs and declaring losses. 

I have to admit to a healthy dose of schadenfreude when I read of their struggles. From my first conversation with Groupon, I have had serious concerns about these “deals” and the value it returns to their retail partners.

Aren’t we creating a mindset that nothing should cost full price anymore? Why buy something at full price when eventually, one of the “deal” players will have a coupon for it? How is that sustainable?Where does the money come from? Who has to absorb the discount?

When I was contacted 2 years ago, Groupon wanted to do a “dinner for 2” for half my usual price, with them taking 50% of the coupon price. That works out to a 75% drop in my revenue, plus the opportunity cost of any additional revenue I would forgo if I lost a bigger job because I was servicing the coupon. I have some profit margin, but a 75% reduction means a clear loss for every coupon redeemed.

The sales pitch to offset the revenue hit is “we put your name in front of thousands of potential customers whether they buy or not”. The fact is, there is NO CLEAR EVIDENCE that coupon buying customers or customers who saw your coupon become full paying customers in any relevant numbers.

Again, how is that a sustainable model??

Some businesses are still suited to the coupon model, ideally those with high fixed costs. These places are open anyway, like hotels, motels, chain restaurants, bowling alleys, theatres and zoos. They are open whether they are at 65% or 85% capacity, and for them, discounted admissions, hotel rooms or burger combos cost almost nothing to provide.

Is the coupon model dead? I would say no, but it is truly broken.

I would expect a huge contraction, in both the number of companies that are still in business and the number of their retail partners. The biggest players will make it, as will some niche or local ones, but I would expect it to shrink by half over the next year or two. As for retail partners, I suspect that will shrink even more.

The market is still fairly new, but old enough for past partners to examine their results and see what real value they got. I suspect that a lot of smaller companies, the “moms and pops”, those that are providing personal services (like personal chefs), and those with low fixed costs will find the results disappointing and move on to other marketing options.

Here's a real life example; a fellow chef offered a “dinner for 2” coupon a few years ago. In order to make the deal work for his business, he scaled the dinner down to 3 courses from 5, blacked out holidays and Saturdays and inflated his prices a bit. He also counted on the fact that he still got paid for sold coupons, even if they are not redeemed within the time limit (20% usually expire).

He says he made money, and I have no reason to doubt him, but either way, I know it’s a business model about which I remain highly sceptical…

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