Why Is Everybody Hopping Off the Groupon Bandwagon?

×
Why Is Everybody Hopping Off the Groupon Bandwagon?Groupon's (GRPN) IPO was a rousing success, but its business model still may be an endangered species.

Facebook, restaurant reviews website Yelp, and dining reservations leader OpenTable (OPEN) have all bowed out of selling prepaid vouchers for area merchants at steep discounts in recent weeks.

Google (GOOG) isn't abandoning its efforts to reach out directly to local establishments, but it has recently decided to also aggregate offerings from more than a dozen flash sale specialists. The search engine leader probably wouldn't be going this route if things were going well on its own.

The model that seemed so perfect is apparently also pretty flawed.

Selling Dollars for Quarters

The daily deals phenomenon struck quickly. Groupon was born three years ago this month. LivingSocial didn't roll out its first deal until the summer of 2009. However, both sites quickly expanded their rolls to tens of millions of bargain seekers on the lookout for cheap eats, mani-pedis, and green fees.

The model makes sense in theory. Let's say that Groupon approaches a pet grooming salon. Groupon wants to offer a $40 pooch cut and bath to its users for $20. The site offers to split the proceeds evenly with the merchant. Selling a $40 treatment for $10 sounds like a sorry business proposition for the salon owner, but let's consider a few things.
  • If a business owner has excess capacity -- and that's usually the case -- taking on a client during a lull only entails the variable costs related to what's being offered.
  • Groupon reaches a wide audience, so someone bringing in a Labradoodle for the first time may wind up coming back as a full-paying customer.
  • Some clients will spend more than the Groupon amount. This may not apply in the case of a particular service, but a restaurant offering $50 worth of food and drinks for $25 may find a couple splurging past $100 because of the perceived value.
  • These vouchers do have expiration dates, though some regulations indicate that just the promotional value expires. Either way, many of these Groupon deals do go unexercised.
You'll find a great mix of glowing testimonials and horror stories from merchants that have gone the Groupon route, but clearly business itself is growing. It's working for many merchants. It's clearly working for cash-strapped consumers trying to get more bang for their buck in this dicey economic climate.

Why isn't it working for the providers?

Different strokes

Hopping on the Groupon bandwagon was the fiscally fashionable thing to do last year. Shares of OpenTable and travel deals publisher Travelzoo (TZOO) spiked after introducing Groupon-esque initiatives.

The model seems to be working well for Travelzoo, but OpenTable conceded that Spotlight -- the name of its flash sale product -- was accounting for just 2% of revenue in its latest quarter.

OpenTable claims that it's nixing Spotlight because the deals aren't resonating with diners, but the bigger culprit is that it likely wasn't resonating with its restaurant partners. OpenTable collects an average of hundreds of dollars from each of the 16,237 North American restaurants on its platform. These are high-end foodie haunts that require reservations, unlike the typical casual dining eateries that one finds on Groupon and LivingSocial. Offering half-priced fois gras and pork belly watermelon salads was never going to fly with its high-brow restaurateurs.

OpenTable isn't killing discounts entirely. It's still honoring its partnership with Savored, a service that sells discreetly billed dining experiences at 30% off in exchange for $10 upfront. OpenTable is also rededicating its sales team to push its 1,000-point tables, a service where OpenTable users get more points from featured restaurants that can be exchanged for gift certificates. Participating establishments pay OpenTable $7.50 per seated diner booked through that promotion, a lot more than the traditional rate, which ranges from $0.25 to $1.00 per patron.

The moral of the story is that daily deals aren't for everybody.

Appealing to the Thrifty Doesn't Come Cheap

There's also the sobering reality that the Groupon model isn't as lucrative as everyone thinks it should be for the deal website. Groupon had to scale back last week's IPO, and one of the reasons was its uninspiring financials. Groupon may be growing its top line like crazy, but losses continue to mount.

This should be a scalable model, but Groupon's investing in expanding at breakneck speeds. Whether it's tacking on new countries or diving deeper domestically into smaller cities, Groupon wants to make sure that it doesn't get passed up by an even faster daily deals purveyor.

Expansion means hiring local sales teams that leave no spa operator or Korean barbecue joint unturned.

Clever copy doesn't write itself for free, either.

The shakeout will continue. Niche specialists will thrive only if offering markdowns on their sites makes sense. The networking effect will continue to attract merchants and deal seekers to the more established sites.

It would be great to see Groupon or LivingSocial post profitable financials to lay the cynicism to rest, but until then the endangered species posters will just have to stay up.

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

Increase your money and finance knowledge from home

Reading a Stock Quote

Learn to read the ingredients of a stock.

View Course »

Income Investing

Grow your nest-egg.

View Course »

Add a Comment

*0 / 3000 Character Maximum

16 Comments

Filter by:
pnut166

Groupon was a great idea poorly executed. The whole daily discount thing only works in a very specific market under very specific economic conditions. Add that to the fact that Groupon has gone the traditional face-to-face recruitment road with reps, rather than via internet, creating massive overhead - and continues to do so. As well, if Google decides they want to crush Groupon, they can on a whim. Groupon will be bankrupt within a year - short as much stock as you can.

November 11 2011 at 2:57 AM Report abuse rate up rate down Reply
mytzylplic

In answer to the headline question: Because it's ******* dumb. 'nuff said.

November 11 2011 at 12:22 AM Report abuse rate up rate down Reply
Seamentor

This idea does not work in our area, as the business' go out, holding you with a coupon worth zip.

November 10 2011 at 9:37 PM Report abuse rate up rate down Reply
lppnctt

There is a unique coupon deal that lets both merchant and buyer sign up people under them, and participate moneywise, in the purchases those folks make, up to 5 levels down. They're new enough that only a few cities are opened up at this time. It's free to sign up - go to thecustomeradvantage.com and type in csstreetcar in the site ID box. There are sign-up instructions and tutorials on the site. You'll help our non-profit foundation in doing so.

November 10 2011 at 7:30 PM Report abuse rate up rate down Reply
nlhorton

I bought a coupon for $10 giving me a $25 gift certificate to a local restaurant..BUT you must order $35 worth of food to cash it in.It must be eat in, no take out. This is a truck stop, good food, nothing fancy. No fancy prices either It is rare for us to spend much over $25, generally the bill is less than $20, so Ive been carrying the giftcertificate around for 6 mo.

November 10 2011 at 7:24 PM Report abuse rate up rate down Reply
ctheleroys

Let me tell you a little about Groupon from the business side of it. Groupon wanted me to list my spa with them, take 50% of a service, pay Groupon 35%, and then the therapist performing the spa service would get paid 50% commision on the same service. That would mean the business goes in the RED by 35% for each Groupon coupon. Groupon told me that I should look at it like I would gain new clients with this offer, but we the business do not gain any new clients because what happens is the Groupon coupon shopper just follows the Groupon coupon from spa to spa each month. Spa's have been losing their butts with Groupon problem. Not to mention that Groupon has forced a VERY deep deflation into our industry as well, and many of us are having a hard time keeping all our staff working because they can not afford to live on what they now make because Groupon.

November 10 2011 at 1:00 PM Report abuse +4 rate up rate down Reply
2 replies to ctheleroys's comment
Seamentor

As a business owner, we have encountered the same. Shame on Groupon.

November 10 2011 at 9:39 PM Report abuse rate up rate down Reply
1 reply to Seamentor's comment
ctheleroys

YES! Very shameful indeed. At a time that small business can least afford to be treated like this, Groupon made their money and screwed small business in the prosess.

November 11 2011 at 12:15 PM Report abuse rate up rate down
pnut166

I`m no business owner, but it doesn`t take an accounting wizard to look at their model and see that it severely screws the retailers under most circumstances. Therefore, Groupon is building repeat buyers, but not repeat clients. There`s only so many spas, oil change shops, and restaurants in a given area. Once everybody gets shafted by Groupon = no more Groupon.

November 11 2011 at 3:01 AM Report abuse rate up rate down Reply
Judith

To me, Groupon is like those Entertainment Books -- only the basically not-too-popular places had coupons. Turns out I was right in many instances. Just like the companies who put their coupons in the Entertainment Books, the Groupon members found they were losing money. Groupon buyers are usually a one-shot user and don't go back after they've used their Groupon "discount," just as the Entertainment Book buyers use up their coupons and don't bother going back until they get their books the next year, if at all. I stopped buying those books five years ago because of my experiences with the companies in them (mostly the restaurants but also car rentals, etc.). That's why I didn't bother with Groupon -- I had the strong feeling it would be the same, and it is!

November 10 2011 at 12:50 PM Report abuse +2 rate up rate down Reply
1 reply to Judith's comment
warrenbent

If you "didn't bother with Groupon" then obviously you don't have any idea about their product.

November 10 2011 at 3:06 PM Report abuse -2 rate up rate down Reply
djaneey110

I have purchased many groupons and have great success with each and every one of them. Will continue to buy them.

November 10 2011 at 12:04 PM Report abuse rate up rate down Reply
3 replies to djaneey110's comment
composerr

Attention: AOL members
GROUPON IS NOT WHAT IT IS CRACKED UP TO BE!!!!!!!!!!!!!!!!!

Sure you will probably get that Cheesburger or Ice Cream cone for what you paid for it.

BUT IMAGINE THIS RIP OFF THAT I HAVE ENDURED AND I AM STILL WITHOUT THE SERVICES!

Don't ever buy a Groupon that is for Services. Why? You never know exactly the value of a coupone unless
it specified the amount of time involved to do these services or exactly what the job entails. I purchased a $125
Groupon for House cleaning at a discount. I found out after the socalled contractor(They call merchant) never
returned calls to set up an appointment, and once he promised that they could not be depended on to show up.

Groupon confirmed that they never select their merchants in the towns, but all is done by phone, so they have no
clue what kind of jerks they are signing up.

On the Service promised. How do you know what the contractor will charge you for cleaning your house one time?
A normal $200 charge might suddenly be priced at $500 before you use your $125 coupon. So Coupons might
be OK for buying 2 gallon of Ice cream as you would know what you were getting, but a so called discount for
service might be completely worthless.

And what recourse do you have when the contractor(merchant)never gets back to do your work. I found out that
that in this case, they had an incorrecrt address, and refused to answer about 10 or more voice mails requesting
a call. GROUPON says that they will give your money back after 6 months. So what that means is that I did
not get the service requested, and they got a 6 month interest free loan from me. I wonder how many million that
Groupon is holding of peoples money under these circumstances. It might take a good lawyer filing a class action
suit against GROUPON.

I contended that my purchasing a Groupon was a contract, An offer, acceptance, for remumeration for a
legal act and I wanted performance, BUT I DID NOT GET IT.

At first, GROUPON ACTED SYMPATHETICALLY AND THEN SAID THEY COULD NOT GET THE CONTRACTOR
TO DO IT, AND THEN VERY HARSHLY STATED THAT A REFUND WAS MY ONLY RECOURSE.

So, AOL members, you have been duly warned about Groupon and their so called merchants.

An army combat veteran

November 10 2011 at 11:42 AM Report abuse +2 rate up rate down Reply