Opinion: So is Groupon good for restaurants?

Drinks: Uncategorized
Location: North America, USA

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.

About Author

Having been an accountant and consultant to the restaurant sector for more than 25 years, Howard has just become a director and a shareholder in a new restaurant called Wallace & Co in Putney – the name reflects that of his co-director and shareholder Gregg Wallace of Masterchef fame. Howard’s been a partner at Westbury Chartered Accountants since 1987, where his main area of expertise is financial and business development. He is a member of the Institute of Chartered Accountants Faculty of Information Technology, a Fellow of the Institute of Directors and also holds the Financial Planning Certificate from the Chartered Insurance Institute. He is also Chief Executive of the Made Simple Group, a leading online business services company in the SME sector providing services such as online company formation where his website www.companiesmadesimple.com forms more than 2,500 new companies per month. He is on the BBC’s panel of small business advisers and has regularly appeared on The Midas Touch panel at the Business Start Up Show with Dragons Peter Jones and Rachel Elnaugh. Other business interests include being a director and shareholder of a fruit and vegetable company, Secrets Direct, which supplies some of the top restaurants and hotels in the capital, a leisure goods operation and a property company.

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