The Groupon Paradox. Economic Impact for Restaurants

By Thierry Poupard
Same article in French on this bog

I recently had the opportunity to read an article by a consultant – trainer in marketing which encouraged restaurants to help « new users discover the eatery » through a deal with Groupon. And he concludes on the need to properly calculate the « posted price (not paid by the customer) and the rebate » so that the operation would be profitable for everyone. Um, not clear and a little short as a recommendation…

On several occasions, I asked myself the question of what could expect the restaurateur and what to think of mega deals, one day deals and other promotions up to -50% minimum (in French on this blog). Today I wish to go further and look at the limits of such operations. The chart below shows the curves of fixed and variable costs, the turnover, the income and losses of a restaurant in the two extreme cases where 1 / all customers pay the regular price and the 2 / where all of them take advantage of a 50% promotion with Groupon. Of course, the truth is in between but we already see that the loss of the restaurateur with the promotion is way greater than his income without it.

Consider the simple example of a restaurant with a capacity of 40 seats which simplified operating statement would show these figures, considering a € 35 average sales or ticket:
– Fixed Charges: 25%, € 8.75
– Staff costs: 30%, or € 10.50
– F & B costs: 30%, or € 10.50
– Gross operating income: 15%, or € 5.25.
It is obvious that these percentages may vary from one eatery to another depending on the type of cuisine, the kind of service, the wages, the rent … but they reflect a certain reality. Moreover, we do not bother with VAT calculations for simplicity purposes.

Whereas the regular client brings in € 5.25 on the average, the promotion from Groupon is such that the restaurant sells to the customer a meal at half price and that Groupon take half of this price as a commission, on the ground that this additional € 8.75 ticket is due to the company’s advertising. Here is the first paradox: the restaurateur must think in terms of income and not of sales, while for Groupon, it’s the opposite that prevails.

Customers with coupons have the following effect on the GOP:
€ 17.50 (promo sale price) – € 8.75 – € 10,50 – € 10,50 (charges) – € 8.75 (Groupon’s fee) = € -21. A negative income. This is not would-have-been-profit but pure loss. Let’s go on with this:
1 regular customer + 1 -50% customer result in a loss of € 15.75
2 regular customers + 1 -50% customer result in a loss of € 10.50
3 regular customers + 1 -50% customer lead to a loss of € 5.25
4 regular customers + 1 -50% result in no loss and no gain. Balance = € 0.
In other words, the breakeven point for this restaurant is reached whith 25% of coupons customers and 75% of customers paying the regular price, but this proportion may well vary between 20 and 30% depending on the characteristics of the restaurant. When we applied these figures to the room capacity of 40 seats, the balance is covered here with 32 regular customers and 8 at discount prices.

In this case, the operation is feasible: all charges are paid, the owner may accept the idea of making no profit, we assume there is no new investment to achieve in the place. But the reality is quite different. First, the idea is not to gain uniformly 8 covers per shift, but to fill a room that has its ups and downs of attendance and is often empty. However, one has to be cautious that just a few « too many » -50% customers can just swell the losses.

If the promotion is a success, a flood of bookings will reach the restaurant. The owner and the personnel will have to manage the phone, to deny admittance to many, to hear the discontent, to spread the length of the operation in order to avoid canceling it… All this is likely to penalize the quality of service and is against the very principles of a mega promotion. And therein lies the second paradox: Groupon makes mega deals, bulk purchases on a single day with the aim to collect hundreds or thousands of buyers and the hope that the validity period is short in order to get his fees as soon as possible whereas the restaurateur must seek the threshold beyond which profits become negative, thus has to be very cautious.

The conclusion is that the -50% minimum promotions, as Groupon’s been spreading for three years as the world’s leader, are economically feasible assuming the restaurateur drastically limits the proportion of customers carrying the famous coupon at each service. Failing to achieve this flexibility the operation is extremely risky. And bids will generalize with their introduction in the major operators of the Internet and social networks such as Facebook Deal, Google Offers, Special Offers on Foursquare, and, of course, LivingSocial. For the record, there are in France a minimum of 56 sites grouped promotions, 30 sites grouped aggregators and even sites when one can sell unused coupons.

New: Under the block below for comments, the « +1 » Google button has been placed next to the other butons dedicated to sharing. So, please, feel free to use them. You are also encouraged to like the Service Attitude page on Facebook