Groupon offers restaurants and local businesses an opportunity to reach new markets and seriously increase their traffic, the only catch is that businesses must offer an extremely competitive deal to Groupon in order to be featured, and then must split their profits with Groupon 50/50 and wait three months to receive their earnings, leaving many businesses in the red after a Groupon transaction.
A new restaurant in downtown Washington, D.C. has just shut its doors, claiming that Groupon is the reason why. After only three months in business the restaurant posted a scathing closing remark on its website, saying that Groupon’s practice of holding the vendor’s money for up to three months has prevented it from being able to pay employees a living wage and sell waffles for only $8.00, now charging $450 each for waffles “available by appointment only”.
One could argue that Back Alley Waffles should have read the fine print about when they get their money, or offered a smaller discount than 50% through the Groupon deal. However Groupon is extremely selective with the deals they post, as they only advertise one daily deal in each category, so vendors face heavy competition among the discounts they offer to Groupon subscribers. In fact, 7 of every 8 offers are rejected by Groupon. With a 50% discount customers were paying $4 per waffle, of which Groupon kept 50% of, giving the restaurant a grand total of $2 per waffle, distributed over the course of 3 months.
Back Alley Waffles is not the first restaurant to cite Groupon as a cause of a decline in profits. The owner of Posies Café in Oregon said that Groupon was “the single worst decision I have ever made as a business owner thus far.” Groupon cost this restaurant almost $10,000, caused crowding and in the end produced no regular customers.
A Groupon spokewoman issued a statement in response to the Back Alley Waffles’ allegations, “According to our records, only 132 Groupons, or 18% have been redeemed since Back Alley ran its deal two months ago, and Mr. Nelson has received 2/3 of his share of the revenue to date. We always hate to hear that a local business has decided to close, but the math does not point to Groupon as the cause.”
Rice University released a study this month that only 44% of daily deals for restaurants and bars are actually profitable for the restaurant. However restaurant owners should be aware of what they are signing up for; daily deals sites have been popping up in many different sectors lately and businesses all have different ideas of what to expect. Groupon offers an initial surge in business, useful for a new restaurant or company with a high markup on their products or a sufficient amount of capital to weather through the first few months. However Groupon users do not necessarily turn into regular customers, and many users simply surf Groupon for deals rather than returning to a restaurant they have been to.
According to Back Alley Waffles’ Yelp page, they often ran out of ingredients and made customers wait up to an hour for waffles. Though they may have had a great product, the majority of Yelp users complained about the poor service they experienced at the restaurant. While there is no way for us to determine what exactly caused this restaurant to close, let this be an example to any restaurant signing up with a Daily Deals company. Always read the fine print and take a good look at your costs per product to see just how far in the red you may have to go until your profits start to rise.
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