March 4, 2010
5,772 new customers -- how can I not love Groupon?
I read an article yesterday that made my blood boil. It was the blog post Julia Kramer wrote about the Groupon Lawsuit. Personally, I am neither here nor there on the lawsuit. What really rankled me was the Mephistophelean comment from the Groupon Guy about restaurants.
The sales may stop there, the numbers don't.
According to the article, the restaurant pays Groupon for the privilege of participation. So let's just use the numbers that Groupon reported in the article, which the PR Manager said was "about half," so $20. That comes to a $115,440 fee.
So they gross, $253,968 (for those actually crunching these numbers, I am including the 60 percent bump).
Wow, tons o' cash. At this point, I would do a Groupon for RIA if someone facilitated me getting that kind of cash into my flow, which is right now more of a trickle.
But, OH! Craptacular! Everyone forgot the Cost of Goods Sold. Because unlike a tech company that was built to scale monumentally, restaurants have massive COGS to manage.
Let's just back-of-the-envelope this scenario.
Before electric, ice, heat, breakage, everything else. Like, uh, rent.
Which means that, dang it, that restaurant has to do another Groupon because by the time they are done, they need cash and man alive, getting nearly $400,000 would really solve their problems, wouldn't it?
Which is why, Andrew Mason, 98% of the businesses you feature do it again -- they don't really have a choice if they wanna stay in business.
"If Groupon didn't work for restaurants, they wouldn't use us (We're not the cable company)."
Really? Did he say that? I guess it is the naiveté of a young dude who has never managed a business with crazy low margins. After all, tech companies can print money and Groupon is likely printing a great deal, I imagine, or he wouldn't have been handed $30 million to roll out national (international?) growth. Those investors are gonna expect something like six times a return. Quickly. And you can't do those kinds of numbers with the kind of lean margins restaurants live with.
The kind of lean margins that cloud thinking when someone dangles nearly $400,000 cash possibilities in your face in the middle of a recession. Which, Mr. Groupon Guy, is likely why they are doing it.
My argument with the Groupon model as it pertains to fine dining restaurants, aside from the marketing philosophy which I don't believe in but understand others may, is all about the numbers. Because that nearly $400 grand Groupon carrot dangling in your face is a deal with the devil and I will show you why.
So, their top-line net is $369,408. If I were Groupon Guy, that is the number I would use to sell the concept to a restaurant. That's more intoxicating than an Adam Seger drink. The kind of lean margins that cloud thinking when someone dangles nearly $400,000 cash possibilities in your face in the middle of a recession. Which, Mr. Groupon Guy, is likely why they are doing it.
My argument with the Groupon model as it pertains to fine dining restaurants, aside from the marketing philosophy which I don't believe in but understand others may, is all about the numbers. Because that nearly $400 grand Groupon carrot dangling in your face is a deal with the devil and I will show you why.
- Let's say a restaurant participates, 5772 Groupons are sold.
- If they had sold that many dinners full price, $80, they would have raked in $461,760.
- They instead are going to gross $230,880 after the discount.
- The Groupon Guy says on average, guests spend 60% more than the value of the Groupon.
The sales may stop there, the numbers don't.
According to the article, the restaurant pays Groupon for the privilege of participation. So let's just use the numbers that Groupon reported in the article, which the PR Manager said was "about half," so $20. That comes to a $115,440 fee.
So they gross, $253,968 (for those actually crunching these numbers, I am including the 60 percent bump).
Wow, tons o' cash. At this point, I would do a Groupon for RIA if someone facilitated me getting that kind of cash into my flow, which is right now more of a trickle.
But, OH! Craptacular! Everyone forgot the Cost of Goods Sold. Because unlike a tech company that was built to scale monumentally, restaurants have massive COGS to manage.
Let's just back-of-the-envelope this scenario.
- Say their food cost is 30% of the full-price, plus the 24 tacked on (that 60 percent of the value). $180,086
- Labor. I'll toss that in at 25%, so that comes to $150,072.
- Rent -- I don't even wanna guess the rent and heck, don't need to because...
Before electric, ice, heat, breakage, everything else. Like, uh, rent.
Which means that, dang it, that restaurant has to do another Groupon because by the time they are done, they need cash and man alive, getting nearly $400,000 would really solve their problems, wouldn't it?
Which is why, Andrew Mason, 98% of the businesses you feature do it again -- they don't really have a choice if they wanna stay in business.
Just another way to look at the math:
50% Sales / Revenue to the restaurant
-25% Groupon Fee
-30% COGS
= -5% income on EVERY Groupon sale before taking into consideration any additional variable costs, let alone fixed costs.
Yikes!
Just playing "Devils Advocate" but, isn't part of the appeal of Groupon to bring in more diners who may TRY your restaurant who have not been there before, and hopefully will tell all their friends about the fabulous meal and come back for more non-groupon dining later, thus increasing traffic? Its seems that the "deal" is only half the equation... that its more about generating future business? No?
This isn't doing a great service to the wait staff or restaurant image either. I recall issues last year, as Groupon users have to declare their intent before ordering food. Most servers see this as a red flag, and choose to focus on other tables as a result, which ends in poor tips for one reason or another.
Groupon's ultimate value is supposed to be in bringing in new customers. Unfortunately, it mostly attracts people who can't normally afford the restaurant. This demographic is not a retainable customer, so the marketing effort is lost--and if they get poor service (see above), even though they'll never go back anyway, they'll bash the restaurant on Yelp.
I used to be a "restaurant consultant" (uh, Salesperson) for another "gift certificates at a reduced cost" website a few years back. The company armed the sales reps, I mean restaurant consultants, with worksheets that would walk an owner through the avg. guest check minus their food cost minus our gift certificate- which would put the restaurant in the +. We never touched on rent, labor, etc... Why? Because it would have definitely put the restaurant in the -.
We were also told to remind owners that these gift certificates would be bringing in new guests who would most likely become repeat customers. Well, in the past 3 weeks, I've been out to dinner with 3 separate groups of friends and all 3 have showed up to dinner with these gift certificates. 2/3 of the certificates were used at restaurants we all had dined at before and will continue to dine at. My favorite experience was when I joined a 3 friends for dinner... at the restaurant I work at... and my friend showed up with a gift certificate. She was so excited because she got it for a reduced cost (only a few $s). I tried to talk her into not using the gift certificate but she wasn't even convinced after the chef personally visited our table and complimentary desserts were delivered to our table post dinner. Furthermore, my dinner guests began calculating the tip based on the post discount total. Yikes! I reminded them to go above and beyond the pre discount total but not everyone has someone like me at their table so I have a feeling a LOT of servers get a bad tip when these "gift certificates" are used.
Needless to say, I lasted 9 months as a "restaurant consultant". I was tired of convincing restaurant owners- my PEOPLE!- to take part in something I didn't believe in. I have purchased Groupons in the past but I had no idea the restaurants were paying to take part. I think I'm going to think twice in the future before purchasing another!
Thanks for responding, Nancy.
In theory, yes, that is the Valhalla a restaurant is going for. But there are a few important points to remember:
1) is a marketing effort ever good if it cripples your business in the process?
2) you have to then assume that Grouponistas have time to go back, when they are not redeeming Groupons at other restaurants.
3) marketing is about focusing your efforts to reach maximum ROI. Groupon isn't hook-and- line-caught fishing, it's industrial trawlers.
Thanks, Mike. For the record, I have bought Groupon. Because I couldn't afford the event for which I bought the Groupon without it. That said, I refuse to buy restaurant Groupons because it just feels wrong to me, considering my line of work.
Great perspective, Jenny.
Businesses are in the business of making money. I never begrudge that. But for anyone that wasn't previously paying attention, I think Wall Street's current woes has really demonstrated the unsustainable disaster that results in cash at any cost. Having "right intentions" and "right livelihood" is about crafting a full life...which can not be bought for any amount of money. Good for you for recognizing that. Likely, you are a much happier person!
Has anyone looked at how many groupon users return to the est. without a groupon? 5 for 5 at a subway is really no big deal--nothing for them to lose. If nice restaurants get in the deal chasing game they're probabbly going to deal with a lot of headaches. Not to mention, they're going to get a slew of people who are only there for the deal and not coming back after that.
I don't know, Art. I wouldn't necessarily believe the numbers if anyone showed them to me, having spent so many years in restaurants and seeing how much they don't really track customers as much as they think they do. Many, of course, are really now getting into tracking, but it is still pretty Wild West for most.
That said, who cares? This is like the guy who buys a cow for 600 in May, spends $100 a month to feed/care for it until September. Sells it for $800 and thinks he made a profit.
Understanding the actual value/cost of a product/customer is something many, many businesses don't really drill down or even start to understand. It is a big reason so many restaurants fail.
I think they covered the Green City Market BBQ last year, which would follow a different set of rules, as would any other one time event. Those events are more about the food and community, as opposed to dollars. I'm interested to see how Naha Groupon turns out. Unless they did it out of generosity, I don't see it as a good fiscal decision.
I can't speak for NAHA but it is their anniversary year and it really seemed it was about them being generous. Which is how they operate.
How do cost of Groupon compare to other means that restaurants use to market themselves? Say ads in newspapers, Reader, etc.? At least with Groupon, the spend versus income is more easily traceable.
Also, what is the breakage of Groupon? Your math seems to assume 100% redemption, but that's not realistic... some of them get lost, forgotten about, etc. But is that 2%? 10%? 25%? I'm curious...
Funny enough, I was just sent a survey from Groupon re a restaurant I purchased a Groupon from in the past. The survey said that this restaurant was considering doing another Groupon.. one of the questions asked was if I was a repeat customer and the answer for me is yes. Then again, I was going to this restaurant before the Groupon too. Also, if Groupon is surveying people like this maybe they are doing some tracking, even if the restaurant isn't.. or in this case, tracking on behalf of the restaurant.
I think for me, the Groupon allows me to do things I couldn't afford normally. Normally, I can't afford to go to xxx restaurant. But maybe I have friends where money isn't an issue and we talk. Maybe I would be willing to splurge for a special event and I think about how good of an experience I had when I went with the Groupon.
Don't get me wrong, I totally get your side. Just saying, this is how I see it.. just a regular person, not in the industry.
As a perspective from only a consumer sense... I had never heard of Zapatista, went with a Groupon, and love their steak fajitas so much I've been back 4 times with 4 different people (sans Groupon)... I would say the restaurant benefited, wouldn't you?
Ellen, I don't think it would be appropriate to include labor costs in your calculations. Groupon customers don't come all at once, and the restaurant presumably has customers besides those buying the Groupons. If a restaurant operates at a certain level of staff from one day to the next, they likely would not increase staff due to Groupon sales. Therefore, labor costs would be the same as they always are.
If you're running the numbers, you should only be looking at incremental costs -- costs you would not otherwise incur. Yes, the restaurant will be serving additional dishes they would not have otherwise served, but I doubt they're causing any extra labor to be involved -- and they're certainly not causing any extra rent to be paid (unless you opened a restaurant for the sole reason of offering a Groupon deal).
Whether offering a Groupon deal is worth it to a restaurant depends on the restaurant's objectives. If they're looking to raise awareness, Groupon is no doubt a good place to turn; the assumption being that many of the Groupon customers will return again to pay full price -- and also hopefully tell their friends.
To truly figure the worth of each extra customer obtained through Groupon, you would have to calculate an average lifetime value of all purchasers of the Groupon. This would be a far more sophisticated equation than simply looking at one-time margins.
A sampling of chatter reveals a growing group of consumers who eagerly express contempt towards a 15-20% discount; the start of a nice tip or valet parking-plus at some establishments.
Redemption rate is high. About 90% since people pay for the coupons. Typical redemption rate for free coupons (redundant??) is much lower (about 1 to 3 percent) since there is no invesment. The worst part? Most people redeem within the first week it's valid.
I can tell you as a manager of a restaurant that recently sold groupons it is a major loss. We have a clientele here know not willing to spend a penny of the groupon, they don't tip pre discount (it does say on the groupon to tip before discount)and there seems to be a lack of willingness by groupons part to help market post groupon which they promise to do. We have not received any repeat customers.
Needless to say we will not do it again, its great in theory but not a benifit to a higher end restaurant
Hi Ellen,
Andrew from Groupon here, a.k.a. "Groupon Guy." As always, appreciate the perspective.
As a qualifier, I want to point out that we encourage anyone thinking about being featured on Groupon to talk to businesses we've worked with in the past. Their perspectives are more relevant than mine or Ellen's or anyone in the restaurant marketing business.
When we talk to businesses about Groupon, it's not about cash flow - Groupon is definitely a marketing expense. The reason restaurants love it is that they compare our overall cost of customer acquisition to spending $10,000 for a newspaper ad or as a retainer with a PR agency. If the costs of a Groupon seem large, its because the number of new customers we deliver is large. When we run into people that think Groupon is expensive, it's usually because they aren't comparing it against traditional forms of advertising.
Additionally, we're generating a huge amount of exposure and buzz for these businesses - our Chicago mailing list has over 300,000 subscribers. It's like the Sun Times (if the Sun Times was one page and entirely about one business). To put that in perspective, Daily Candy charges $250 per thousand subscribers to market to their list, so that values the exposure we're creating alone at $75,000.
Our demographics, statistical feedback from merchants, and anecdotal evidence (including that in the above comments) points to the fact that Groupon customers are the type of customers that business owners want to reach. I think the quality of our customers is a artifact of the way we envisioned the site; from the beginning, I created Groupon to be a city guide that exposes people to great local experiences and uses the discount as a nudge to get them to try new things instead of just reading about them.
I hate that you feel this way Ellen, because the feedback that we get from businesses we feature is overwhelmingly positive. We really work hard to create an awesome service for local business owners, and if anyone ever does have a bad experience - customer or merchant - we work our butts off to make it right.
I'm happy to discuss this in more depth with anyone - my email is andrew@groupon.com, or if you're in Chicago you can always pop by our office at Chicago and Larabee.
Thanks everyone,
Andrew, Groupon founder/ceo
Wow. Really great read!!
Jamie, do you have any clients Grouponing and if yes, what was the feedback?
Oops, Andrew. By the above calculation, the restaurant in question paid Groupon $115,440 to reach your 300,000 customers. Isn't that $384.80 per thousand.
Seems like Daily Candy and their $250 per thousand is a deal in comparison.
And, just as an aside, what restaurant PR firm makes $10,000? Dang it all, in one shining moment with a restaurant that was on Sex in the City, I made half that. Clearly, I need to get on the stick.
Daniel.
I am fascinated at the idea that labor costs or rent wouldn't be calculated.
i guess I feel like what you are saying is this: if someone runs an add, say, on the Superbowl to promote, say, their beer. Does one not include that $2 million cost of the advertising in the P/L analysis of that beer? Or because there is no beer involved, one doesn't include it?
We did some quick calculations today about how many times a customer would need to return to a chef driven restaurant to become a profitable customer after a Groupon -- six to 8.
And so I have to ask....what fine dining/chef driven restaurants do you go to 6-8 times a year? I mean, I do. There are a bunch. But I assumed I was an edge case and not the norm.
Jason, I can't say I have ever heard of Zapatista either, and I am absolutely sure there are repeat customers for every Groupon. But at what cost? First of all, by our calculation, you are still a loss for them, so please go back about 4 more times to convert to profitability. Don't forget to tip well when you are there.
Think of it this way: if you had a Yacht company, you wouldn't advertise on the Superbowl because, well, it'd be stupid. Sure, people who are in the market for buying yachts watch the Superbowl. But the cost of reaching those few people with a firehose is just ridiculous. What you'd do is host a cocktail reception at a polo match or try and meet Paul Allen. You'd focus your energies, your money, on more likely candidates.
And that is what restaurants, who have less money than Yacht makers, should do. Focus.
So, take a look at your Zapista and wonder to yourself: is there something they could be doing with their marketing that didn't actually hack off such a large hunk of their flesh in the process? Could they, for starters, get a little more focused on their events/promotions — Muchos Tacos Monday and Crios de Susana Balbo wine dinner in the same week? Doesn't that strike you as throwing spaghetti on the wall and hoping something sticks?
See where I'm going?
Benjy
No chef-driven restaurant should be advertising in newspapers.
Breakage I have been told they report is 20%. In these comments, someone says 5%. A lot depends on the value of the Groupon, likely.
My math assumes 100%, but it also doesn't include HVAC, rent, etc. I'll go for a wash there, you?
Dear Ellen and Minions,
Your math and logic is horrendous. In all fairness, I think it's totally irresponsible for anybody to attempt this type of math with its dozens of variables unless they are as qualified as me - Pythagoras. And "no", I won't solve the equations here. It's below me. Either that or it's so complicated I can't even attempt it.
Lots of restaurants benefit from this type of deal so everybody chill. I think it's funny how Andrew's thorough retort was met with 1 comment based on completely inaccurate math and nothing else. Shameful. This is becoming like a conspiracy theory thread where everybody ignores the truth and embellishes fantasy. Grassy knoll!
Yours Truly,
a(2) + b(2) = c(2)
These are standard industry reference points for labor and food costs. You are right that there are very variables for each, though again, we didn't add in any other costs. So, it was a clean, upfront calculation.
Wasn't sure how else to respond to Andrew's post because that number just popped out at me. Seemed the most obvious comment to make and actually allowed me the opportunity to not, well, get into some weird pissing match.
He has his opinions, I have my math. Let the reader decide or weigh in.
I don't see anywhere on this page where "overspend" is included in anyone's math. The last time I used a Groupon I spent well over the value of the voucher - $100 bill to which a $40 voucher was applied. So, assuming that Groupon and the restaurant split the $20 I paid for the voucher, the restaurant was getting $10 for the first $40 of my bill...
... and the whole rest of the $60. If the restaurant keeps $70 of $100 it's going to lead to very different math than the restaurant keeping $10 of $40, I think. I'm not really a "math person", but that seems a lot like "30% discount" vs. "75% discount".
Or, to reframe the math in the first comment above:
80% Sales / Revenue to the restaurant
-10% Groupon Fee
-30% COGS
= 40% income on EVERY Groupon sale
That's a very different picture, IMHO.
Actually, we absolutely did add that extra amount, per the amount quoted by the Groupon Guy. I didn't want to because I don't think it is solid thinking for a restaurant to gloss over the loss by doing a bunch of assumption accounting based on guessing.
The reference to the calculation is here: "The Groupon guy says on average, guests spend 60% more than the value of the Groupon. So, their top-line net is $369,408."
That said, I am curious why everyone wants to apply different math to Groupon discounts? It seems like we can use industry standard calculation for regular diners paying full price but if a Groupon is used we all have to add all these weird guessing gymnastics.
And I am also curious why we would want to fudge up a guess on "overspend" and assume that it happens in order to calculate the numbers. Groupon offers $80 of food for $40 and takes $20 fee for that leaving the restaurant $20. There is no way of getting around that.
Anything extra a customer spends is great, but that also has costs associated with it. They aren't donating a bunch of extra money. They are buying stuff with costs.
If Groupon is as fantastic for restaurants as they claim they are, they should be able to stand up to basic math without fuzzy math.
As a minion who writes the checks to keep the ship afloat, our business plan never included sustained, staggering discounts that association with groupon would aim to cultivate within the restaurant community at large. Groupon asks that participants make a splash with their first offer by being generous with the dollar amount (priority in the queue goes to those with the better offer.) Fair enough. Also you can offer a groupon (at this point) up to three times a year as they have the "side deal" daily. I hope you can rise to the occasion and show us your keen accounting skills; I'm sure there are diminishing returns for any single establishment running multiple offers within a short period of time.
As groupon increases the number of restaurant offerings (their promo lit states only one restaurant per week), and business see the carnage in the financial quarters following their participation, the honeymoon will be over.
Again, I'm not a math guy, but it seems like you've taken 60% of the restaurant's revenue, not 60% of the Groupon's value.
$230,880 * 1.6 = $369,408
but
$461,760 * 1.6 = $738,816
So, if you take "Groupon Guy" at his word, customers are expected to spend $738,816 on $461,760 worth of vouchers. Taking out the $230,880 discount leaves $507,936 top line revenue, not $369,408.
Again, that paints a very different picture. Or have I missed something again?
Thanks, Tak.
Hey, since you are knee deep in actual restaurant books every day, mind responding to Nathan's math here. Maybe a clear head from the trenches is the best to review/respond. We all want the right answer to rise to the top.
I do think you've missed something, yes. Because there are actual hard costs associated with the actual Groupon. I've asked a few people in the math field to respond to you, seems a better way to go than me, I am just an ex-publicist trying to help chefs with their marketing.
Ellen-
Here's the simple math. Let's take Zapatista. Forget the fact that I have now introduced 3 different people to the restaurant. Forget the fact that I'm now spreading the word about my experience. Forget the fact that I will go there repeatedly.
Let's look at the numbers... I paid 20/40, and zapatista I believe got 10. I spent 50, so they got 20 for 50 dollars worth of food and drink. Let's even forget that I got a 9 dollar margarita that probably cost them 50 cents. If their average margin is 60%, then their cost on 50 dollars worth of food is 20 dollars, exactly what they received. Therefore, the waiter earned a nice tip ,the restaurant got a new customer, and they broke even. Now when you look at each subsequent visit it's pure profit, not the needed 8 times you propose.
Ellen, you repeatedly mention overhead... When I walk in on a Saturday, and out of 30 tables only 5 are full and some waiters are standing around, how do I affect their costs? Do they need to turn on more lights? Hire more chefs? Hire more waiters? All of these costs hold steady, other than maybe the 10 cents of gas needed to cooked my meal.
You mention a huge 25% labor cost, but nothing I just did affected the way they paid their labor. Not one more dollar has been spent than if I had never come, and they broke EVEN on my FIRST visit. Don't forget my alcoholic drinks with high margins and the fact that I didn't even spend much above the Groupon, as I normally do spend quite a bit more.
Maybe I'm wrong, but I just dont see where...
Also, don't you think you need to be clear that there might be a conflict of interest between you and your thoughts regarding Groupon? It seems that the both of you are competing for the same "dollars" from the restaurants...
Thanks,
Jason
No, no, I *do* get that there are "hard costs" associated with the Groupon. But I *think* those "hard costs" come out *after* the top-line revenue number (that's why it's called "top line", if I understand correctly - you put it up at the top and start subtracting things from it).
So it's important to start with the right top-line number, *then* take out the hard costs. Hey, tak's math (which I'll be interested to see when he posts it) may still show that Groupon is terrible for businesses. I'm simply pointing out that starting with $507,936 as your top-line revenue number is probably going to lead to some very different results than starting with $369,408.
Jason, thanks for responding.
Your comment about a fifty cent margarita tells me you don't work in the restaurant world, which is OK but also might be why this is hard for you to understand.
You, in that scenario, do not cause them to hire more chefs or what have you. But they do need to pay for that stuff. And they pay for it off the revenue from each customer. Your costs don't get waived because you wouldn't have been there.
But a better way to look at this is: don't you think there is something fundamentally wrong if, on a Saturday only 5 of 30 tables are full at a moderately priced faux Mexican place? I mean that should print money, a la every other faux Mexican place in this city to which people stampede for cheap margaritas.
And if there is something fundamentally wrong, don't you think fixing that is the first order of business? Before throwing out discounts? And I guess further, this Groupon was offered long enough ago that you have gone back repeatedly and I wonder, are there still 25 empty tables on a Saturday?
25% is industry standard for the type of restaurant I work with and thus for whom I write this blog. Zapatista is not the kind of restaurant for whom this blog is written. Not because they are in anyway not a great place, just not my target market. I can't really comment on Groupon as a marketing strategy for them. But again, I can see from afar some real improvements they could make from where I stand. Improvements that may increase their customer counts at full price, not at a discount.
Jason, I will admit I am pretty hard core. But really, it is more because I have been knee deep in restaurants for so long and I see a lot of good people struggling. So, I take a very militant approach to what is best. My style isn't for everyone...but I've done right by the people with whom I work and they seemed to have benefited.
I don't know...Daily Candy is good PR. I usually go to stuff I see on Daily Candy since I trust that site.
Groupon is a discount/coupon - I usually get mixed feelings about the restaurants participating. I think, wow, they must be hurting. Seems desperate to me as a consumer.
I only buy Groupons to places I frequent and not to explore new ones that I haven't tried. Now, I have to rethink buying knowing that they're losing money. Cause technically, I would have gone there anyway without the Groupons...so they're not gaining a new customer.
Let's do this for one. And really, let's just look at the actual cost of doing a Groupon because although I was trying to make the numbers look a little better by adding in this 60% overspend, the fact of the matter is, when you sell your food at a ginormous discount, that food still has to be paid for, cooked, served, cleaned up, etc. It still costs money. And, really, the loss is so great that on the face of it, it reminds me of a legalized form of loan-sharking.
Sp.
One Groupon sold: $40.
Fee to Groupon as I understand it: $20
Restaurant takes in: $20
Food cost at full value: $24
Labor cost at full value: $20
Basic restaurant costs for $80 meal: $44
Bottom line, not including HVAC, breakage, write downs, ice machine, taxes, and on and on:
Loss of $24 per Groupon.
If a restaurant's profit margin is 10 percent, which is really good, then you can see where we got to 6-8 visits to recoop that loss and convert to profitability.
And how many people go visiting restaurants that cost $80 per person every week? So how long will it take for that person to convert? Now if you sell one Groupon per table, every table would have to be a 6-8 top to really be a successful program.
And I just heard tell from a chef yesterday that someone went into their restaurant and didn't even use up the face value of the Groupon. So, there's at least one customer that didn't fit into your overspend theory.
But again, let's let the math whizzes do their analysis.
The sales may stop there, the numbers don't.
According to the article, the restaurant pays Groupon for the privilege of participation. So let's just use the numbers that Groupon reported in the article, which the PR Manager said was "about half," so $20. That comes to a $115,440 fee.
So they gross, $253,968 (for those actually crunching these numbers, I am including the 60 percent bump).
Wow, tons o' cash. At this point, I would do a Groupon for RIA if someone facilitated me getting that kind of cash into my flow, which is right now more of a trickle.
But, OH! Craptacular! Everyone forgot the Cost of Goods Sold. Because unlike a tech company that was built to scale monumentally, restaurants have massive COGS to manage.
Let's just back-of-the-envelope this scenario.
* Say their food cost is 30% of the full-price, plus the 24 tacked on (that 60 percent of the value). $180,086
* Labor. I'll toss that in at 25%, so that comes to $150,072.
* Rent -- I don't even wanna guess the rent and heck, don't need to because...
We are at, um, -$76,190. (Please note, there is a negative there).
Before electric, ice, heat, breakage, everything else. Like, uh, rent.
Which means that, dang it, that restaurant has to do another Groupon because by the time they are done, they need cash and man alive, getting nearly $400,000 would really solve their problems, wouldn't it?
Which is why, Andrew Mason, 98% of the businesses you feature do it again -- they don't really have a choice if they wanna stay in business.
Ellen-
You're right I don't work in the restaurant world, but I understand cost/benefit analysis, and that's what we're doing here.
I understand my costs don't get waived. It feels like you're trying to use industry jargon to overlook the simple costs I outlined... That 9 dollar margarita costs 50 cents. I paid 9 dollars. They paid 50 cents.End of story.
I definitely sense a feeling of entitlement from you. Because this local place doesn't have a michelin star or doesn't charge 50 dollars for a bite of steak doesn't mean it's not quality. And just because at 2 on a Saturday they aren't busy doesn't mean they aren't a successful restaurant. In fact I have driven by there multiple times on a friday/saturday night and they were extremely busy. And saying a fake mexican restaurant with cheap (9 dollars???) margaritas prints money is absurd. Why don't you go open one if it's as simple as semi-mexican food and margaritas? That's insulting to the owners...
This 25% you still have not justified... How did I affect them for their hard costs? Why are you putting my cost at 25% where I did absolutely nothing to add to their costs? Maybe they make an average out per person, but from a business standpoint, which this is, fixed costs hold constant. Rent, employees, chefs, are fixed in this scenario.
And yes, you do take a militant point of view. You act like these people are the devil. They do not put a gun to anyone's head. And they generally don't work with your price-inflated, high-falutin, small bite, snobby restaurants. Maybe that's why these places "need" your help in the first place. They're overpriced and feel DESERVING of customers. Maybe your point of view isn't even valid because when Groupon features places like CBA, zapatista, Hannah's Bretzel, they get a great response and yet you really know very little about these businesses because they aren't in the same stratosphere as your clients. I'm not saying what you do is pointless, but I think as far as restaurants go we're comparing apples to oranges.
Jason
Daily Candy rocks, is apparently a steal compared to Groupon, and the local writer is a sweetheart and amazing hard worker.
Didn't mean to insult the owners but I can see how you would read it that way. Sorry about that.
But yes, I do work in a small sector of the restaurant world. Very small. It is to those people I speak because that is all I know. I don't know much about even Hannah's Breadtzle's economics, though I do love the place because it rocks.
I'm always thrilled that I can see great dance with a Groupon (slightly off topic, I know) and because the tickets are $20 instead of $40 I'm ALWAYS able to convince my non-dancer friends to come (in droves, I might add).
For restaurants, I would love to see the gratuity included. I realize this doesn't solve everyone's issues, but restaurant.com often includes 18% on the coupon. I'm a broke student foodie and I use my Groupons/coupons to make a special night possible, then go pretty much all out for it: wine, 3 courses, coffee.
Groupon is great for customers, that is for certain! And I know where you are going with the tip thing. I am lucky enough to eat for free around town and sometimes don't get to go as much as I would like because I can't afford the proper tip. To tip right is expensive!
Just remember all those restos that your Grouponing now when you are done with college and fantastically wealthy!!! (and good luck with school).
Great customer perspective for Groupon and restaurants from @foodmomiac @http://bit.ly/cbcgpj
Nobody's denying that the food still costs money. That said, your math still isn't working for me, because it's still driven by the notion of people spending exactly the amount of the voucher.
I'll take your word for it that food is 30% of the full price and labor's another 25% of the full price - 55% of the "full price" is consumed by "basic costs". I'll take your word for it because... you have experience with that stuff, presumably.
I'll also take "Groupon Guy's" word for it that, on average, consumers spend 60% more than the value of the voucher. Why? Because... he has experience with that, presumably. I can't verify either of those sets of facts, so I have to take you both at your word.
So:
$80 voucher results in $20 to the restaurant.
Consumer spends $128 (60% over the $80 of the voucher), is discounted $80, so another $48 to the restaurant.
Restaurant has received $68. Cost on $128 worth of food is $70 (55%). Restaurant is down $2 (has *lost* two dollars overall).
To me that seems like pretty close to a wash, but there are certainly going to be varying opinions about that. My point is simply that the math isn't working for me - there's a huge gap between a loss of $24 and a loss of $2. I'm not an industry expert, but it seems to me that the proposition of attracting new customers at a cost of $2 per customer is much more attractive than doing so at $24 per customer...
Jason, you're not doing a "simple cost-benefit analysis" because you're coming at this as if you know what the costs are to run a restaurant on a day-to-day basis, and the numbers you're throwing out there are just plain wrong. The margarita you keep insisting only costs "50 cents" has, with even some generic tequila, a cost of at least $2 for ingredients alone based on a 1 and 1/2 ounce pour, not including the cost of glassware, the ice machine, liquor licensing, insurance, and not even entering the realm of overhead that a bar entails, or labor cost.
You make the insane claim that restaurants have an average margin of 60%. 10% margin in the restaurant world is amazing. Standard food cost target across the industry, fine dining to casual, is 28%. Labor across the industry, 25%. Overhead (operating costs, rent, etc.) 30%+. This is not just fine dining restaurants that have these numbers, although something like Bennigans might shoot for a 24% food cost. The lowest food cost I've ever seen is at a restaurant that purported to be serving organic food, but where the chef bought his food directly from Costco, and that was 18% - and illegal, because by law, restaurants must purchase food, liquor, wine, stock from a licensed distributor. You discuss Hannah's Bretzel as if it is different because it is a sandwich shop, but I guarantee you that Hannah's food cost is similar if not even higher because of their use of premium, organic, natural ingredients and lower price point. Their labor cost is also even higher because they must pay their cooks and counter staff a real wage, as opposed to the sub-minimum wage tipped employees receive. I could go on and on. Restaurants price out every meal with these numbers, and every customer that enters a restaurant affects these costs, including you with a Groupon, despite your protests. I'm not sure how you can exempt yourself from affecting labor costs since a restaurant has to staff appropriately when they participate in Groupon since the entire idea is to boost business, and assuming their business was a bit slow prior to the Groupon, hence the participation, extra labor must be added in anticipation of the extra business.
You attack Ellen on many levels, personal attacks, attacks that Ellen has been gracious enough not to engage, but considering you know absolutely nothing about the restaurant industry and seem to be projecting your own insecurities about using such discounts onto her out of some bizarre defense mechanism, you need to step back and really leave such a discussion to people who actually know something about the numbers involved instead of sticking your uninformed head out spewing made up numbers and looking ignorant.
I have nothing to do with Ellen or RIA, I just follow her on Twitter, but I do work in the industry and I agree 100% that Groupon is a net losing proposition for the restaurants involved, and smacks of desperation, which only backfires on a restaurant's reputation, hastening its decline. Ellen's math is right on and even very conservative. My personal experience with coupons like this and Restaurant.com is that the people who used them who were not already customers of the restaurant did not become repeat customers as a result and we never saw them again. If people did come back, it was only during the next promotion or the next year's Restaurant Week, and yes, we did track that on Open Table. The vast majority of people using these discounts spent little over the cost of the coupon/Groupon, drinking nothing but water or doing BYOB. It was absolutely a net loss proposition, even just on a food cost basis alone. The place we did the most of these kinds of discounts was a place on basically the same level of dining as Zapatista, so not exactly fine dining, servers wearing jeans, similar price point. And the discounts brought in a distinctly different group of people from the regulars who came no matter what, a group of people that were proud to say they were "cheap" and proud to spend as little money as possible, proud to try and get other items for free, proud to try and game Open Table for points on the discounts (although they were not eligible), proud to leave post-discount gratuity, and proud to voice their disappointment on Yelp within days. That's a group of people a restaurant cannot afford to cultivate, and that usually signals the beginning of the end.
That is the bigger point Ellen's been trying to make. If you need to resort to discounting in the restaurant industry, there is something much bigger wrong with your restaurant that discounting won't fix. It's not about entitlement, it's not about "deserving" anything, it's about trying to mask a failure in one part of the business with a desperate business move in another. That doesn't fix the failure. And that eventually leads to closure.
I see where the trip up is. Actually, Nato, we can certainly use your numbers if you are more comfortable.
But you make one small error here. It is not the cost of a customer that is $2. The $2 is an OVERALL LOSS. The cost of that customer, per your calculation above is $70 COGS plus $40 discount plus $20 Groupon Fee. The cost of that customer as detailed above is $130. Without cost, just using the promotion, the cost of the customer is $60. Which would make the marketing to that customer 47%.
Wow.
"actual restaurant person"
You bring up some good points... but the one that bugs me repeatedly is overhead... you mention rent, liquor licensing, insurance...those are HUGE costs, I completely agree, but NONE of which are affected by me, even if you want to price them out per person. No matter what you can say would change the fact that those costs are fixed... end of story...
And you mention how there is no repeat business... I alone went back THREE times with THREE different people, and I know other users who have gone back as well. Chicago Bagel Authority... I have never even heard of them, DIDN'T buy the Groupon, and have now been 4 times...where is that in the calculation? I'm just being an honest consumer here and I don't think it's fair for you and Ellen to trash on Groupon when I have had experiences that directly differ from your "facts" I as the consumer would be more knowledgeable about how people are acting than you as a restaurant owner that probably does not use Groupon and has not worked with Groupon. And I have seen countless people find new favorites and "go-to" spots from Groupon. Obviously not every place was a repeat place due to some experiences that might have been not so perfect, but I can attest that some restaurant blew me away with their quality.
and I said restaurant margins is at least 60% on the FOOD, because those are really the only VARIABLE (business term) costs that are incurred. While you try saying that labor is increased due to Groupon purchasers, that is an ASSUMPTION, not a fact. And overhead is a FIXED cost, so that needs to be taken out of the equation. I don't doubt being a restaurant owners is tough and there are a great deal of costs, but perhaps you're not allocating the numbers correctly to see the real picture. With that line of thinking, you can't see the forest through the trees. Nato has math that looks legitimate to me... Groupon causes the variable costs on the initial visit to about even out, and that's the most important part of all of this to me.
Jason
Sorry if you think I am trashing Groupon. As I even told them this morning, I would LOVE to be wrong. Because it would certainly make my job easier if I could just tell a resto that they should just go do a Groupon and the world would be rainbows and unicorns.
But my experience tells me this is simply don't feel it is a wise choice for chef-driven restaurants. I imagine Chicago Bagel Authority does a bang up job with Groupon. Huzzah for them.
No one is saying labor is increased by Groupon. Or, at least, I don't. But I do feel that to accurately reflect a real cost, you have to actually calculate in all the costs.
Even with Nato's math, the loss to the restaurant is staggering, no?
Ellen-
I didn't mean to offend you, I was just bothered by your the brashness of which you slammed a company. You say it isn't good for chef driven restaurants. What exactly does that mean? And don't you think most Groupons are with other types of restaurants, (excluding NAHA, which I have a feeling was what set this off considering they're on your homepage)?
And Nato's math comes to 2 dollars, I don't see where you keep getting these crazy numbers. And yes labor/overhead are real costs, just not ones you can attribute to Groupon customers as these are FIXED once again, which no one seems to understand. I gave you simple math on my visit to Zapatista and they made a nice 60 dollar profit from my 3 visits. I think food is the only cost to examine because that is the only one that is affected by each additional customer.
Jason