You remember the story … The Emperors New Clothes a short tale by Hans Christian Andersen about two weavers who promise an Emperor a new suit of clothes that are invisible to those unfit for their positions, stupid, or incompetent. When the Emperor parades before his subjects in his new clothes, a child cries out, “But he isn’t wearing anything at all!” The tale has a modern twist.
Restaurant owners are being told by Groupon that their online couponing model works so well that only the stupid or incompetent would not want to partake of it. Well call me silly, but the math does not work. I’ve tried to make it work, but to no avail for restaurant owners. Granted, it works a little better for service providers like spas and salons … but most restaurants (sit down) have food costs in the 30% range (Jack Stack here in Kansas City is at 29.5% for instance) … so here’s a scenario as it plays out for a restaurant:
The restaurant does a standard 50% off Groupon deal – $30 for $60 worth of dining … Groupon gets $15, the restaurant gets $15 everybody’s happy right? … Wrong.
The restaurant sells 3,000 Groupons (Wow! they think!) … the coupons are good until July 31st 2011 – and contrary to what restaurateurs are being told … if somebody pays $30 for something … 99.9% WILL redeem it. When Groupon collects the $90,000 for selling 3,000 Groupons , they cut a check to the restaurant for $45,000 … (Wow! they think … again).
Groupon then sends out an email to it’s subscriber base and for it’s trouble, also gets $45,000 (this is a great business model, and why Groupon is the fastest growing company in history and is on track to exceed a billion dollars in sales this year) … not a bad payday for a little humorous copy writing and sending out an email!
OK … now the cold hard math.
3,000 Goupons worth $60 = $180,000 of face value goods (food in this case)
Assuming a food cost (CGS) of 30%, it will cost the restaurant $54,000 to honor it … or a $9,000 loss.
But what about all the NEW customers you get? says Groupon. Agreed, you might attract some new customers … customers who will wait until you do another Groupon before they come back, customers who will notoriously tip your waitstaff on $30 for getting $60 worth of food and service, customers who (until July) will take up the space your regular full-paying customers might have filled … or worse yet, ARE your regular full-paying customers, but who now expect you to discount to get them back as often.
The scene plays out over and over … and misery loves company, so restaurant owners, like the weavers in Andersen’s tale, are telling other owners what a great deal it was for them … but the math doesn’t lie … and I’m not afraid to tell clients that “the Emperor is in fact, naked”! The math is the same percentage-wise even at lower (capped) Groupon sales …
1,000 Groupons worth $60 = $60,000 of goods (Groupon and the restaurant get $15,000 cash each)
30% Cost of Goods Sold means the restaurant has to supply $18,000 worth of grub … or a $3,000 loss
You can reduce it all the way down to just 100 coupons, still lose $300 and be attracting “new” customers at a cost per thousand (CPM) of $3,000 per 1,000 … by comparison, for $3,000 one could run a full color 1/4 page ad in the Kansas City Star’s Sunday magazine and potentially reach 400,000 subscribers.
Some high end burger purveyors have done Groupon so many times, people are waiting for the Groupon to go back and they end up selling $10 hamburgers for $2.50 that cost them $3.00 … Stop the Insanity! It’s like the two brothers from Kentucky who drove to Florida and bought Oranges for $20 a bushel, drove them to KC, offered them ON SALE for $18 a bushel and when they figured out they were losing money …. bought a BIGGER TRUCK!
But don’t just take my word for it. A September, 2010 Rice University study of Groupon’s model showed that 32% of businesses using it had similar non-profitable results and fully 40% would not run another one. An alarming fact from those surveyed (that were not profitable) was that only 25% of Groupon users bought something other than that which the Groupon covered and only 13% came back without a Groupon! Restaurants fared the worst (because as I said, they have to honor with tangible, costly goods) and Spa’s and Salons fared better (because they provide services, not goods).
Groupon’s juggernaut-like success came as a result of a fantastic business model (for them), at a time when America was reeling from a slumping economy, in the mood to use coupons and increasingly online and social media savvy. Add to that a restaurant industry in pain due to that same economy and we had a “perfect storm” brewing for Groupon and myriad copy-cat online coupon companies to become very successful, very quickly.
Unfortunately it is at the expense of the hard working restaurateur who in this economy can ill afford to do any marketing at a loss. Restaurant owners, don’t get fooled by the crafty weavers. Throw on a robe, will you? We can see your chicken tenders. Use caution when approaching all marketing and advertising. At the very least, make it completely pay for itself and if you are not sure you can go toe-to-toe with a slick media salesperson, let your fingers do the walking and get somebody to represent you. Make sure that person will also tell you when you’re not wearing anything at all.