Is the Internet Killing Your Favorite Restaurant?

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Is the Internet Killing Your Favorite Restaurant?October wasn't a good month for the restaurant industry.

Friendly's Ice Cream and Real Mex -- the company behind the El Torito and Chevys chains -- filed for bankruptcy protection from their creditors.

A ho-hum economy and finicky deal-seeking diners are weighing on many dining establishments.

Restaurant failure rates have been historically brutal, though probably not as bad as worrywarts would have you believe. There's an old American Express (AXP) commercial with The Restaurant's Rocco DiSpirito, pointing out that 90% of new eateries fail in their first year. It's a scary number, but it's not true. Studies have shown that closer to 60% of restaurants actually close within their first three years of operations.

Even that number is still a grim statistic. You've probably had many conversations lately where the name of a once popular restaurant is followed by the two words that no restaurateur wants to hear: closed down.

The Groupon Effect

Running a restaurant has never been easy, but it's getting harder to succeed these days if an eatery is too proud to play the social couponing and new media games.

A decade ago, all you needed was a strong concept and healthy execution strategy. If the tables weren't filling quickly enough, running a few ads in the local paper or drumming up some midweek and off-hour specials would do the trick. The Internet has changed the way the marketing game is played.

These days restaurants need to keep Twitter feeds and Facebook fan pages percolating, sprinkling them with the occasional promotion. Owners need to be conscious about what folks are saying on Yelp, even hosting events for the elite reviewers on the site. If the venues are higher-end eateries that rely on reservation requests, embracing OpenTable's (OPEN) electronic reservations book is practically required. Then we get to Groupon, LivingSocial, and the growing number of daily deal upstarts.

Groupon (GRPN) may be generating plenty of IPO buzz at the moment, but it's a mixed blessing for restaurant owners. The model is simple. A restaurateur works with Groupon to offer a discounted dining experience, typically selling a pre-paid voucher for 50% off. The proceeds are routinely split evenly between Groupon and the establishment. In other words, the diner-hungry restaurant owner is willing to sell a dollar in food and drinks for a quarter of their normal price.

It's not an insane proposition.
  • A restaurant will attract attention and traffic through a Groupon promotion, and drawing first-time diners gives them a chance at wooing them for subsequent visits sans discounts.
  • Diners will typically spend more than the voucher's value, so it's really not about trading dollar bills for quarters.
  • Groupon certificates expire within months, and many will go unclaimed.

You'll get both endorsements and horror stories from restaurants that have participated in Groupon promotions. But the problem for restaurants not playing the Internet marketing game is that these promotions, whether successful, are driving real traffic. That means eateries that are doing fine with word-of-mouth traffic are now threatened by rival restaurants that are going the Groupon route. A couple going the Groupon route for a romantic outing may be one less couple at the proud bistro that hung up on the Groupon sales pitch.

As more local newspapers, radio stations, and websites roll out Groupon-like offerings, there's a growing number of consumers that are being spoiled by the discounts, balking at full-priced meals.

Waiter, There's a Fly in the Ointment

OpenTable's model is simple. Restaurants install an electronic reservations book and pay the company a monthly subscription fee of $199. The eatery is then listed on OpenTable.com's popular website and mobile app, where they pay $1 for every diner booked through OpenTable or 25 cents for every reservation that originated on the restaurant's website.

The math works. Restaurants are scalable enterprises with high fixed overhead and low variable costs. Table turnover separates the winners from the losers. OpenTable claims that just a couple incremental reservations a month covers its tab, and restaurants seem to agree. There were 16,237 North American restaurants on OpenTable at the end of September, a 25% increase over the past year.

Again, you will find restaurants that feel too proud to go the OpenTable route. There are cheaper alternatives, too, including IAC's (IACI) Urbanspoon Rezbook that now has 1,000 restaurateurs on its iPad-based platform. The price for missing out on the networking effect, though, is that they don't stand a chance as more people turn to OpenTable.com or fire up the OpenTable app to make a dining reservation.

Web 2.0: A Second Course

There isn't a financial hurdle to be on Facebook, Twitter, or Yelp. Setting up a Twitter microblog feed or a profile page on Facebook is free. Yelp establishment pages are created automatically by its users, populating it with glowing -- and not so glowing -- critiques.

However, this doesn't mean that it's easy. There's some serious credibility to lose if owners take a lax approach in populating their Facebook and Twitter pages with content and status updates. There's even more care needed in responding to negative reviews on Yelp. It's a delicate balance, but one that is again necessary since gourmet food trucks and forward-thinking restaurateurs are stealing traffic away from the eateries that aren't making social media a priority.

You'll never see a "Put Out of Business by the Internet" sandwich board sign on a shuttered concept, but more often than not that's exactly what is happening these days if restaurants miss the online marketing bandwagon.

Longtime Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of OpenTable. Motley Fool newsletter services have recommended buying shares of OpenTable.




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22 Comments

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Bonjovichick

Yikes what a bunch of snobs. I like groupons... gets me to try a place I didn't know about or might not of tried. Or if a place I like offers one sure I pick one up. I generally spend more than the Groupon and if it involves a place where you tip I of course tip on the whole amount. Most of the groupons I see (or Living Social etc) are not big chains but places that are new or not getting enough traffic in. If I use one for one of those places and I like it I continue to go to it. I fail to see how that is the root of all evil. I don't go to some chains because I don't like them and others I do (love me some Red Lobster so sue me). If they have a coupon you betcha... I use it.

November 16 2011 at 9:22 AM Report abuse rate up rate down Reply
publius1

Groupon is a death knell for restaurants. It is trading dollars for quarters despite what this article says. Why should a regular customer ever want to pay full retail when it knows you discount? The same rebate/discount strategy killed GM and Chrysler.

Any restuaranter who uses Groupon is a fool.

November 09 2011 at 2:47 PM Report abuse rate up rate down Reply
l07hye

Best description of most restaurants was placed on a ad. It showed people lined up being sent through a shoot like cows being sent to slaughter. Best food in town generally is found around, home kitchens, where families gather and have meals together. Don't need coupons,maybe just a good cookbook.

November 09 2011 at 2:28 PM Report abuse rate up rate down Reply
chev66427

The internet as wonderful as it is for info and everyday life is the ruination of the world!! Small bussiness is dying, all the vacant offices and rental store fronts are empty because of the internet. Fraud and corruption is onnthe rose because of it. No one understands that SMALL BUSINESS which 10 years ago was thriving along with the country makes it so you cannot compete and make a profit with soneone that takes $100k orders and has it dropped shipped without leaving their house. IF YOU CANT SERVICE IT , you shouldnt sell it is a simple fix!! amazon , ebay craigslist has turned AMERICA into one giant yard sale online.. No econimsts see this.. I've had it with ,COM
The internet should shut down $ commerce and price advertising 100% OTHERWISE we will continue to sink. ITS GREAT BUT EVIL!!

November 09 2011 at 10:12 AM Report abuse rate up rate down Reply
B

Would not even consider restaurant choice based on any internet-based shill. I will hardly trust recommendations of people I actually know. If I am so badly off that I have to have a big dollars off coupon to go, I don't go. I either save my money, or delight in another home-cooked meal.

November 08 2011 at 2:35 PM Report abuse rate up rate down Reply
maa2626

we do not frequent ANYWHERE coupons are accepted to eat. I repeat never. as a family we have never set foot in a Red Robin, Applebys, Cracker Barrel, Sabarro, Sonic and so forth. Family run and hole in the wall bars will get you the best food and service. Groupon and Coupon diners are interested in quantity not quality. It would be interesting to see what kind of "tippers" coupon diners are. Oh why we are on the subject of food, try and steer clear of establishments that serve "Sysco" food.

November 07 2011 at 6:53 PM Report abuse +1 rate up rate down Reply
2 replies to maa2626's comment
Susan

I'm with you. We don't either. Well, we aren't patrons of any of the places that are 'Sysco' restaurants. Ugh. The same disgusting deserts! Brown salads....awful. We only eat at local eateries who buy fresh foods and prepare from scratch.

Another of my pet peeves? Restaurants and businesses who are too cheap to put up a quality web site, and only rely on Facebook. We refuse to be part of the FB trend and there are a TON of us out there. So restaurants who cheap out and ony do FB are losing a lot of valuable customers.

November 07 2011 at 7:57 PM Report abuse +4 rate up rate down Reply
1 reply to Susan's comment
Ray

To Susan and Oregon Traveler,
The coupon business and discounts has dilluted the value of restaurant dinners. A customer is no longer happy with fair pricing for quality products produced by hard working-talented human beings right behind the walls of the area you are seated in. As a restaurantuer for over 40 years and still in business I can say that you are special people to our industry. I have never offered any type of discount to a stranger but always would buy a valued customer a drink when I want to. Servers dislike coupons as the persons who use them always "discoutn the serve" too. Groupon, Value Bucks and others have been the scourge of our industry.

November 09 2011 at 10:56 AM Report abuse rate up rate down
mummymababe

I live in Far East Podunk (coastal Maine) and don't have one of the above-named restaurants within 75 miles of me. When I travel, I am delighted to save some money with restaurant.com certificates, and through those, have experienced culinary excellence and fine dining experiences, thank you very much. Further, I take issue with your insinuation that "coupon diners" are lousy tippers. If you, or someone you know, has ever been a server, you tip generously--on the WHOLE tab--whether you're lucky enough to save a few bucks on a promotion, or not!

November 13 2011 at 8:30 AM Report abuse rate up rate down Reply
KKiegiel

Groupon is the scam for the upcoming year. Less and less people are actually using these sites. They may show numbers of members, but the actual number of users is way down. Any good business does not need groupon or social networking to succeed. The startups that think they can make it use groupon and then the couponers find out eventually that it was a worthless place to go anyway. If you go towards quality, you will not be disappointed. If you go the Wal-Mart way, then you obviously know what happens (discounts with no service or quality).

November 07 2011 at 5:01 PM Report abuse +3 rate up rate down Reply
Glenn Kromminga

You order food over the Internet?

November 07 2011 at 3:52 PM Report abuse -1 rate up rate down Reply
Robert

This is just simply disgusting. Noone cares about quality anymore, it's all just about cheap, cheap, cheap. The world becomes a sadder place every day.

November 07 2011 at 3:50 PM Report abuse +3 rate up rate down Reply
1 reply to Robert's comment
Susan

It really is. And what I find pathetic is that no matter how well priced something is, people still insist on having it cheaper. They don't understand the whole 'get what you pay for' and 'you are what you eat'

November 07 2011 at 8:07 PM Report abuse +1 rate up rate down Reply
Freebookings

Cost isn't the only trouble restaurants have with many online restaurant reservation platforms, it's also that these services use a restaurant's customer's email address to market their own services and other restaurants. So restaurants are paying to build another company's consumer database.

There are other B2B restaurant reservation services, like my company, Freebookings, that restaurants can use to manage their own website reservations for free, while benefiting from (and paying only for) incremental reservations that come in from a partner network, whether through Freebookings or other services like OpenTable Connect.

Restaurants are just beginning to employ yield management strategies like the hotel and airline industries. The space will definitely be changing over the next few months!

November 07 2011 at 2:53 PM Report abuse rate up rate down Reply
1 reply to Freebookings's comment
Loki Smith

I love all the ot wannabe's that talk about "new technologies" they bring to the restaurant industry, and how they are going to reshape the industry, or how restaurants are "beginning" to do this type of stuff. Get in line behind Blue Skies, Eveve, Urbanspoon, and a dozen more.

You are late to the game as ot has been around for awhile, and works with almost 25,000 properties internationally including all the major hotels groups and independent restaurants. This technology and breakthrough you speak of has been around for over a decade.

There doesn’t seem to be anything new about Freebookings. You have proper funding which can be said about a handful of others in this space. It appears that you will try to give the technology away for free as others currently are doing. The only viable competitor that somewhat gets it is Urbanspoon because they at least have a destination website and a nifty app that ties it all together.

November 08 2011 at 8:56 PM Report abuse +1 rate up rate down Reply