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, by Vallier Lapierre

2 of 2 Daily deal sites: retailers tell their side of the story

When we stop to think about the basic concept behind daily deal sites, they seem almost too good to be true for at least one of the three parties involved: the deal site, the consumer or the retailer, without whom the service couldn’t exist. At the rate these sites are springing up and given the rising value of the two major players in the field, Groupon, worth approximately US$25 billion, and Living Social, worth US$3 billion, we don’t have to worry about the leaders, at least for the moment.

If we take a closer look, however, we begin to realize that coupon buyers occasionally feel shortchanged, in all sorts of circumstances, yet their fate is far preferable to that of the third party involved, the retailers, who are far from being the winners in this game. There’s no need to dig very deep to find experiences that quickly turned to horror stories.

Poised on the edge of the abyss of too much success

 

The biggest mistake a business can make with sites like Groupon is to fail to set a limit on the number of coupons available to buyers (maximum number adjusted to the business’s ability to serve new clients). The case of Jessie Burke, owner of Posies Bakery and Cafe in Portland, Oregon, was the first story to surface. As she describes on her blog, the nightmare ended up costing her $8,000 to refill the shop’s coffers and pay her staff in order to honour the some 1,000 coupons that were sold. Largely blaming herself for this mistake—the second worst in her life, she says—she points out that she was never told to set a limit on the coupons.

Although similar to Burke’s case, I uncovered an even worse debacle that recently came to light in Belgium. Sylvie Pastur, owner of Escale Design, a designer furniture shop that also offers home decor coaching services, was forced to shut down after posting two promotions with Groupon that attracted a total of 1,000 customers. The case made waves on Twitter and Facebook (from which the tale of Ms. Pastur’s fiasco has since disappeared), before being featured in the pages of France’s L’Expansion magazine. Note that the terms of both promotions were agreed to by Ms. Pastur, who had hoped that the increased patronage would generate additional sales. Unfortunately, this never came to pass.

The L’Expansion article gives Groupon the benefit of the doubt. The company defended itself in the case of Posies Cafe in Portland as it did also in the case of Escale Design in Belgium. This last post came from Groupon France, which, along with Groupon Belgium, bore the brunt of the attacks on their reputations. Curiously, however, the article was illustrated with this photo:

Taken by Dan Miller, an American visiting France, this sign just happened to catch his attention as he was strolling through the streets of Lyon after attending a conference. The magazine no doubt picked it up on this site, which is obviously run by an acquaintance of Mr. Miller. This photo contradicts the tone of the article by suggesting that the Escale Design case is not isolated. In fact, on the same day as the L’Expansion article ran, ITespresso.fr reported the story of a retailer in Nantes who is accusing Groupon France of running a scam.

Recurrence rate: between 58% and 97%

It’s unfortunate that the editorial team at L’Expansion didn’t dig any deeper. Especially since the Escale Design case appeared online shortly after France 2 broadcast a 30-minute report on Envoyé Spécial on March 24. The show’s journalists uncovered a businesswoman highly dissatisfied with her experience with group buying. Margaret Usal, owner of a spa in suburban Lille (whose testimonial appears 20 min. 30 sec. into the report), says she called her service provider at noon to stop the counter, at which point 500 coupons had already been sold. Her request was ignored and the total rose to 1,659 coupons sold by the end of the day. The show’s reporter adds that he met with the owners of two massage therapy clinics who complained of a similar experience.

Groupon has admitted that mistakes were made during posting of the promotion and emphasized that measures were taken to rectify the situation. In a bid to hold onto its golden opportunity, Groupon went into full crisis management mode. Groupon has also pointed out on many occasions that 97% of retailers who have used the service were very happy with the results and would repeat the experience.

However, according to a survey conducted in September by Utpal M. Dholakia, professor at the Jones Graduate School of Management at Rice University in Houston, 42% of businesses would not do another daily deal, as opposed to the 3% reported by Groupon. The results were compiled from a sample of 150 businesses (among the 360 who had done a Groupon promotion) who answered the survey.

Two-thirds of the businesses said they made money from the promotion, while a significant 32% said the experience was not profitable, even given the new clients kept after the promotion, albeit minimal. Only 8% of them would be willing to do another deal. Moreover, one in every five businesses that considered the promotion to be profitable would not run such a promotion again; 42% of restaurants deemed the return to be too low, whereas 82% of spas thought the spinoffs were positive.

Concerned restaurant owners

 

Another survey, conducted by the restaurant supply distributor Tundra Specialties, identified discontent among restaurant owners. This survey showed that 41% of restaurant owners feel that Groupon is the single-most detrimental outside factor to their business. “The major damage comes from the fact that restaurants’ participation in these grouped purchase programs whets the appetites of bargain hunters, who jump from deal to deal. I’ve definitely heard more horror stories than success stories,” states Joel Cohen, employment specialist for RestaurantMarketing.com, in the press release reporting the survey results.

Professor Dholakia’s survey identified employee satisfaction with the promotion as the main factor in its success. If the employees are prepared for the ensuing rush of customers, which will require them to work overtime for fewer tips (because coupon buyers are frugal by nature), they are more likely to serve the new customers courteously, thus ensuring they come back in large numbers.

While admitting that his sample is not necessarily representative of all establishments that have done business with Groupon (he was unable to access the full list), Mr. Dholakia notes that the 41.7% response rate indicates that a large proportion of merchants are concerned about the sustainability of social promotions as they currently exist. “We believe these promotions are structured in such a way that they give too much value to consumers and not enough value to the small businesses than run them,” he writes in conclusion.

Groupon of course rejected these conclusions based on the sample being non-representative.

Regardless, warnings against the dangers of this approach have started to crop up everywhere. The harshest critics of the formula boil it down to a matter of marketing principles or reject it outright based on simple calculations. Incidentally, the need to diligently crunch the numbers is emphasized in all cautionary tales.

More contentment than discontentment on the ground, at least on the surface

What about here, where the trend has already been buoyed by over twenty daily deal sites? After interviewing six or seven retailers, both referred by the major service provider or uncovered on my own, I finally came across a dissatisfied merchant. The case of La Grand-Mère Poule chain of restaurants once again illustrates a situation in which too many coupons (1,755) were sold to consumers.

Sébastien Abrieu, owner of the restaurants in question, estimates that he lost about $20,000 on the promotion. “We would have been happy selling 300 coupons. I fell victim to my own success. The coupon sales barely covered the food costs. The coupons were supposed to have been redeemable at only one of our four restaurants, which the consumer had to choose at the time of purchase. Instead, people showed up at whichever restaurant they chose, and made a scene when they were told that their coupon wasn’t valid there. To prevent things from turning ugly, we ended up giving in to them. There should be a limit of two coupons per client; we had some clients who purchased eight,” states Mr. Abrieu, who is not sure if he’ll ever do another deal.

A spokesperson for the service that ran the promotion—who will remain nameless so as not to single out one party when this situation could just as easily have occurred with any one of them—told us that the case of La Grand-Mère Poule resulted from a technical glitch that prevented the display of the maximum number of coupons available. I was also told that the service’s representatives contacted restaurant management to rectify the situation, which must be true otherwise Mr. Abrieu would have been much more upset.

The other retailers I spoke to were all very pleased with their experience. Their situation explains why this type of promotion can be positive in some cases.

Antoine Desson, owner of the new restaurant La Bulle Au Carré on Saint-Denis Street in Montreal, explains, “You shouldn’t think of group buying as a way to make sales, unless you have an enormous profit margin. In our case, it’s a good way to get our name out there. And it’s always better for a new restaurant to be as full as possible in the beginning.”

Since being one of the first to try Tuango (and selling 147 coupons) last June, when this first local group buying service was introduced, Mr. Desson has since tried two other services, I Love Montreal and AubainesEnVille.com, a new player that escaped my radar the last time.

In the latter case, La Bulle Au Carré benefited from the fact that AubainesEnVille.com, which had to fight more aggressively than the major players to carve out its niche, charged a very low commission for a first promotion. This was confirmed by François Claveau, one of the two promoters for AubainesEnVille.com, who says they offer restaurants an appetizing format in which the restaurant owner pays only a 5% commission to AubainesEnVille.com, on the condition that he/she runs a second promotion, this time with a 40% commission on the coupons.

As you can see, the market is redefining itself as it evolves.

Tuango has the upper hand

Marc Bertrand, Revenue Manager for Hôtels Gouverneur, has used group buying on three occasions to increase patronage at Hôtel Le Chantecler in the Laurentians. With no set maximum, these promotions sold 350, 1,150 and 230 coupons, respectively (the Tuango promotion prevailed). He is very happy with the results, stating that these promotions help to fill the hotel during quiet periods. “Even if we sometimes have to add staff to meet demand, we do it to avoid posting a loss. Given that this is essentially free advertising, we’re very satisfied,” he states.

Roberto Ramos, Marketing Director at Maison du jazz, says he also uses the approach as a publicity strategy. When we spoke, he had just run a new promotion on Tuango the previous day that had sold 844 coupons; his first promotion, six months prior, had sold 460 coupons. “We make sure to cover our costs. We’re very satisfied. We want people to come in and see us. They walk by and see a fancy place and think that it must be expensive. We’re trying to change this perception. And it’s working. Many people are coming back,” he explains.

Lorne Rodin, massage therapist, is also satisfied with the customer retention rate. “Many people have come back more than once at full price.”

Having run a total of five promotions, Marco Simard, president of the O2 Spa Beauté at the Four Points franchise by Sheraton Quebec Resort, in a Quebec City suburb, is very satisfied. He explains that he uses the approach to promote the new spa. “Before, we used the local newspaper. You paid for the ad, but you never knew whether it was having any impact. With this type of promotion, not only is it free to try, but you can see how many new clients it’s bringing you.”

But, the best story I came across purely by chance. While chatting with a competitor of Tuango, I learned that Restaurant L’Académie had sold over 10,000 coupons on Tuango. Sensing disaster, and unaware that the St-Denis Street establishment had opened up a half-dozen other restaurants, including one in Quebec City, I contacted management at Restaurant L’Académie.

Instead of meeting someone who was quaking at the prospect of financial ruin, I encountered Lawrence Auger, a marketing director rather happy with the results and proud to report that he repeated the experience with Groupon, but with only 3,000 coupons sold. Added to those of Hôtel Chanteclerc, these results clearly show the edge that Tuango has over Groupon in Quebec. Mr. Auger pointed out that Tuango’s strength is its presence in Quebec City, which Groupon does not have. A portion of the 10,000 plus coupons sold by L’Académie on Tuango came from Quebec City, where the promotion also applied.

Mr. Auger’s satisfaction becomes clearer when he explains himself in more detail. With its “bring your own wine” format, L’Académie banks on volume since it can’t count on alcohol sales to increase its profit margin. Therefore, it needs a steady stream of new customers. Calculated to avoid a loss, the Tuango promotion was distributed over seven restaurants in the space of a year. It was valid for up to 50 additional seatings in most of the outlets on Mondays, Tuesdays and Wednesdays. In some cases, extra staff had to be called in. According to Mr. Auger, penny-pinching coupon holders are not a problem since the Tuango promotion clearly states that tips are calculated on the price of the meal before the rebate.

No two cases are alike in this game, even though the basic issue is always the same. What it does prove is that, in many individual cases, the exercise can be well worth it. However, merchants need to beware of the pitfalls of the approach, because they do exist. The total impact all of these promotions is another story altogether. However, it is worth considering whether buyers’ acceptance of this format will have the same impact on the service sector as Wal-Mart had on the consumer goods sector.

Local services play the proximity card

Local group buying players are cashing in on their superior knowledge of the sector and, as such, their ability to better serve clients. Aware of foreign critics’ comments about their approach, they point out that their proximity to clients helps to shape the sector, which will surely lose momentum if retailers fail to see the benefits of the approach.

Leading the pack since last June, Tuango is the service present in the most cities in Quebec: Montreal, Quebec City, Gatineau, Sherbrooke, Trois-Rivières and Saguenay. Swann Freslon, Marketing Director, reports that Tuango has sold over 160,000 coupons, helping consumers to save $9 million.

“To date, we haven’t had any negative comments from retailers. If necessary, we help them calculate their maximum capacity. It’s of absolutely no benefit to us if they are overwhelmed by the demand,” explains Ms. Freslon.

Tuango’s leader status allows it to choose the most attractive promotions given that businesses have to line up to run their promotions. “We have to turn them away. The product or service has to correspond to what most of our subscribers are looking for and the rebate has to represent a real savings compared to the regular price,” Ms. Freslon says.

Despite every precaution, at least one case slipped through the safety net. “One of the participating restaurants went bankrupt before being able to honour the coupons. We reimbursed everyone who had bought coupons,” states Ms. Freslon.

Tuango has over 300,000 subscribers, most of whom are women between the ages of 25 and 54. This client profile is similar to that of major U.S. services like Groupon and LivingSocial.

Located only in Montreal for the moment and planning to expand shortly to Quebec City and the Laurentians, GoYub was launched last December. The service already has 10,000 subscribers, with 1,000-2,000 new members joining every month.

“It’s going to run out of steam quickly if retailers don’t get on board. Many feel that it’s the website that comes out the winner. We have to remember that the approach is still trying to find its target. There’s flexibility on our part. We’re willing to negotiate,” says Dominique Vachon, cofounder of GoYub, of the commission charged by the service.

Mr. Vachon also pointed out that the spoils are not as vast as one might think for the promoters of group buying. While the technical component is no problem, countless person-hours are needed to operate the vast machine. A large proportion of transactions are difficult to conduct remotely because merchant recruitment requires onsite representation, if only to realistically monitor the number of coupons sold.

Making its appearance last January, the group buying service Vie Urbaine has taken a more connected approach to stand out from the competition. The site was launched gradually (over 50 promotions in just over two months), at a pace sufficient to whet the appetites of active young people open to new experiences.

In mid-March, Jean-Claude Renaud, President of Vie Urbaine, announced that the site already had over 30,000 subscribers. He says that he became addicted to online marketing while managing the corporate site for an Old Montreal clothing boutique. When he saw the group buying phenomenon take off, he recruited silent financial partners (angels) and jumped headlong into the fray.

“I’d be lying if I said the competition didn’t worry me. But, I still believe that this is a great opportunity for us,” he concluded.

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