Businesses all over the world are looking for innovative ways to bring people into their humble stores. They offer huge discounts on some items in the hope that people will pay full price for other items once they’re inside. This called the “loss leader” philosophy. In the 60’s the main loss leader was cigarettes. You could get a pack below cost at any gas station because they expected you to buy gas. That changed in the 70’s when no one could get gas due to the embargo. By the 80’s loss leaders had gone the way of the dodo. But, at the end of the 90’s, as the economy was starting to dramatically tank, loss leaders made a come back. After the turn of the century they were becoming part of everyday life again. Just not for cigarettes. Anyway, into this growing trend came Groupon. A Chicago based company that takes 50% of the value of any coupon it issues and then passes those coupons out to thousands upon thousands of people.
At its essence this seems like a good idea. In practice there are a couple of things that need to be considered. First off, Groupon is still operating at a loss and shows no signs of coming out of it. That means that everyone in upper management is getting filthy rich off of their sexy, $700 million, IPO, but that’s about it. Second is the fact that some businesses really don’t need several thousand people marching through their doors.
Let’s take a look at a couple of businesses in Portland, Oregon.
Ethan Powell and Tobias Hogan, two typical restaurant workers with more than a decade’s experience between them, wanted more. Two years ago they stepped out and took a gamble that has lured—and then consumed—many other hospitality industry pros: They opened their own place.
EaT: An Oyster Bar has beaten the odds. Powell and Hogan’s midmarket Cajun-style restaurant has won positive reviews and continues to draw customers to its trendy North Williams Avenue neighborhood.
Three months after opening their doors, Powell, 33, and Hogan, 39, took what they thought wasn’t a gamble at all. This one had to do with a new form of online marketing—the latest next big thing. They signed up with Groupon.
You might have heard of this company, Groupon. Rhymes with “coupon.” Groupon sells vouchers for deep discounts at restaurants, stores, spas and countless other businesses. The businesses agree to honor the vouchers—and risk losing money on the deal—hoping to draw new customers.
Groupon sent out tens of thousands of “daily deals” by email offering $25 worth of seafood at EaT for anyone willing to pay Groupon $12 for a voucher.
Within hours, Groupon had sold 1,544 of the EaT vouchers. And Powell and Hogan were committed to serving that many meals, each at a big discount, in hopes they could attract far more business.
Indeed, they were swamped. “We probably made money,” Powell says. “And we still wouldn’t do it again because it was such a nightmare.”
“It was,” Hogan adds, “absolutely horrible.”
Swarms of first-time customers (most of whom never came back again) crowded out, undercut and alienated their regulars who were paying full price. Servers got stiffed on tips. Powell even had a Groupon thrown in his face by a customer after he declined to let the man redeem the same gift certificate twice.
For everyone else, Groupon worked exactly as planned—the diners got a great deal, and Groupon (which often pockets half of the voucher’s price) walked away with an estimated $9,200 for doing little more than sending out emails. In all, Groupon is on track to collect $2 million from Portland businesses this year, based on WW’s estimate of Groupon’s likely share of its Portland business.
Okay, maybe that was a fluke or the owners are being whiny little children.
Or not. Today will mark the first time I’ve ever been able to use the phrase cupcake horror. Hopefully it will be the last.
A bakery owner was forced to make 102,000 cupcakes after being swamped by customers taking up her cut-price Groupon offer, according to reports Tuesday.
Rachel Brown offered a 75 percent discount on 12 cupcakes, which normally cost $40 (£26), the BBC reported.
However, Brown under-estimated the popularity of the deal and was unable to cope when 8,500 people signed up for the $10 (£6.50) bargain.
Brown’s Need a Cake bakery, which employs eight staff in Reading, U.K., had to bring in temporary workers through an employment agency to fulfil the orders, at a cost of $19,500 (£12,500) — wiping out her profits for the year.
She also lost between $2.90 (£2.50) and $4.70 (£3) on each batch she sold, the BBC reported.
“Without doubt, it was my worst ever business decision,” she told the BBC. “We had thousands of orders pouring in that really we hadn’t expected to have. A much larger company would have difficulty coping.”
Chicago-based Groupon sells Internet coupons for everything from spa treatments to cosmetic surgery.
Actually they were forced to stop selling cosmetic surgery when it turned out that they were, for all intents and purposes, forcing people to have surgery in a limited time frame without outside medical consultation.
Even used car dealers have better morals than that. Not by much, but still ….
But, you wisely ask, what does any of this have to do with making an elf or two cry?
Quite a bit actually.
Groupon offered free train rides at a winter carnival in York, England.
But …. there was no train and things got ugly after that.
It is supposed to be the season of goodwill, but Santa’s elves were verbally abused by parents at a Christmas display after a holiday offer on discount website Groupon ended in disappointment.
Almost 2,000 families turned up to the event in York, England, after receiving an email voucher that promised train rides around a winter wonderland, according to a report in the city’s daily newspaper, The Press.
When they discovered no train, and long lines to get into the area, some parents began shouting and swearing at a female worker who was dressed as a Christmas tree.
The situation, last Saturday, became so hostile that one of the elves resigned, the report said.
Organizer Penny Ward told the newspaper: “It was a complete nightmare. Children were crying and upset. One man even verbally threatened the lady who is dressed as a Christmas tree. One of the elves was so upset that she has resigned.”
She said the event was only able to handle 40 children an hour, but staff had worked beyond their normal hours and without breaks to try to ensure children did not miss out.
Groupon apologized for the error about the train but said the offer voucher was sent out with Ward’s agreement.
Ward was not immediately available for comment on Friday.
I’m not sure how that all played out but I would hope that someone might have noticed something as large as a missing train. Even those Kiddyland trains that I grew up on were pretty large.
Anyway, since you’ve read this far I may as well tell you why Groupon is doomed to failure. Big businesses, the ones that can handle several thousand people showing up unannounced, don’t need Groupon. They have their own advertising and coupons already in place. Small businesses, the ones that only need a few people here and there, can’t handle the traffic and end up shortchanging their regular customers. The few niche businesses that fall somewhere in the middle just can’t generate enough revenue to make it work.
Certainly not $700 million worth.
So, if you’re a consumer, go ahead and grab those coupons while you can because one day, just like that train in York, they ain’t really gonna be there.
Listen to Bill McCormick on WBIG AM 1280, every Thursday morning around 9:10!