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So is Groupon good for restaurants?

The social shopping phenomenon Groupon hit the UK about a year ago, representing another challenge/ opportunity to the restaurant sector.

Faced with intense high street competitive pressure, and an ailing economy that encourages discounters, the restaurant sector has been struggling to keep its head above water. This is particularly the case at the lower end of the market where operators are competing for scarcer and scarcer customers.

The Groupon model “guarantees” a tsunami like rush of visitors to your establishment, but at a significant cost. Groupon take as much as 50% of the voucher offering which in itself, has to be a deep discount on the normal price. Groupon have been operating in the US and the UK for some time now, and there is a considerable difference of opinion as to whether or not they represent a good deal for restaurants. Much of this anecdotal data is supported by research carried out by a number of academic institutions including the Harvard Business Review. So what are the arguments?

Those in favour of the model cite the following advantages

  1.  In some cases, and this could be as much as 60-65% of the time, customers in possession of a Groupon voucher spend considerably more than the value of the voucher on drinks, deserts etc.
  2. Serving staff are getting larger tips as Groupon actively try and encourage visitors to base their tips on the gross amount of their meal.
  3. Like all vouchers, a proportion of them will never be redeemed so the operator has earned some revenue with no associated costs. 
  4. In the current economic climate, getting “bums on seats” at any cost is essential.
  5. Groupon needs to be seen as a marketing activity to drive customers to your establishment who might otherwise never have found out about it.
  6. Some visitors will come back and become regular patrons at full price.
  7. It can build loyalty if the experience is great.
  8. It takes away some of the “risk” for the consumer in trying new places.

Detractors argue that disadvantages include:

  1.  Many people just think that the maths doesn’t stack up.
  2. Some operators are concerned that participating in Groupon type schemes gives the wrong message about your business.
  3. The customers that these vouchers attract are the wrong type who even if they do return, will spend as little as possible.
  4.  Whilst Groupon state the contrary, many people leave tips based on the net amount.
  5. It can be very disruptive to cash flow as over the period of the offer, the business is potentially full of customers yet generating little in the way of cash revenue.
  6. Many say that these schemes do not generate full price regulars. Research shows that the conversion rate of “Grouponers” is far below that of the rank and file guest that just walks in off the street.
  7. Groupon vouchers encourage a type of behaviour where the loyalty isn’t to the restaurant, but to the voucher.
  8. It’s an impossible way to build brand loyalty but it can create voucher loyalty.   §The business model assumes that all customers are good customers, but marketing to the wrong segment can be as bad for your business as doing the wrong type of marketing.
  9. It creates a discount mentality so that people only go where they can get a hefty discount off the regular price. This can never be good for business.
  10. Some operators are treating their “Grouponers” differently to their normal customers, putting them in a different part of the restaurant, having a special menu and generally giving them bad service.
  11. Groupon encourages trial by those who simply won’t pay your prices.

It may be some time before we can really conclude one way or another as to the success of the Groupon model and by that time, the country’s economic fortunes may well have improved significantly.

It is possible that the Groupon model raises more questions than it answers. Is some marketing better than no marketing? Are we seeing a seismic shift in how people use restaurants or is it just a temporary reaction to the current economic climate? Are there just a group of people in society who just love a good deal?

We can only wait and see how this all develops, but ultimately, all restaurants should focus on doing what they do, as well as they can – nothing changes there.

4 comments

Alison T. 25-03-2011

Good article.
I would argue that industries where margins are already tight and there is a cost associated with an increase in custom, i.e. increase in purchases (here food ingredients), increase in staffing costs, the sums are never going to add up.
The overly large discounts that Groupon seem to encourage cannot be good for business. I would be interested to see some accurate cost analysis from companies that have done this to see the true cost/profit to the company. I am always very wary of encouraging customers to come to you because you are the cheapest, if that is the only way you can attract customers then you may want to look closer at your product and how you add value.

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Tom 28-03-2011

Frustratingly this article fails to answer it's own headline! Is Groupon and its competitors any good for the the restaurant industry? One of the problems is that the coucher companies encourage restaurants to give a big a discount as possible to increase take up of the offer. But in the end this only benefits the Voucher company, who doesn't actually have to deliver the product, and not the restaurant itself.

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Howard G. 29-03-2011

My objective, in writing this blog, was to put both sides of the argument

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Jonty 05-08-2011

“Like all vouchers, a proportion of them will never be redeemed so the operator has earned some revenue with no associated costs. ”

This is incorrect. Each coupon sold has 2 unique codes. The operator receives a list showing only the first part of the code. They must collect the second code from the customer and submit these back to Groupon for verification before they pay you. if a client does not attend you do not get paid and they can get their money back.

From experience they are very expensive to run if not done correctly. They are best suited to where the perceived value is far higher than the normal selling price so you can still make enough to break even. The customer typically expects around 65% discount off normal price, the balance is split 50/50 and Groupon pay the establishment their half of the balance LESS VAT. So for a £55.00 ticket the establishment receives just £8.02!

They do make you focus on quality of service so don't be tempted to cut corners to meet the £8.02 ticket price. If anything goes slightly wrong on the night the social networks will be alive with bile and hatred towards you.

Despite claims by Groupon people rarely trade up on the event – they buy on a budget and stick to it.

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