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August 17th, 2011 12:01 am COREY PEIN | Cover Story

Cheat Local!

Portland helped make Groupon a giant. Here’s how local businesses get crushed.

lede_cheatlocalIMAGE: Mary Kate McDevitt
Ethan Powell and Tobias Hogan, two typical restaurant workers with more than a decade’s experience between them, wanted more. Two years ago they stepped out and took a gamble that has lured—and then consumed—many other hospitality industry pros: They opened their own place.

EaT: An Oyster Bar has beaten the odds. Powell and Hogan’s midmarket Cajun-style restaurant has won positive reviews and continues to draw customers to its trendy North Williams Avenue neighborhood.

Three months after opening their doors, Powell, 33, and Hogan, 39, took what they thought wasn’t a gamble at all. This one had to do with a new form of online marketing—the latest next big thing. They signed up with Groupon.

You might have heard of this company, Groupon. Rhymes with “coupon.” Groupon sells vouchers for deep discounts at restaurants, stores, spas and countless other businesses. The businesses agree to honor the vouchers—and risk losing money on the deal—hoping to draw new customers.

Groupon sent out tens of thousands of “daily deals” by email offering $25 worth of seafood at EaT for anyone willing to pay Groupon $12 for a voucher. 

Within hours, Groupon had sold 1,544 of the EaT vouchers. And Powell and Hogan were committed to serving that many meals, each at a big discount, in hopes they could attract far more business.

Indeed, they were swamped. “We probably made money,” Powell says. “And we still wouldn’t do it again because it was such a nightmare.”

“It was,” Hogan adds, “absolutely horrible.”

SHELL GAME: Even though the owners of Eat: An Oyster Bar made money with Groupon, they say they’ll never run another daily deal promotion.
Credits: Darryl James

Swarms of first-time customers (most of whom never came back again) crowded out, undercut and alienated their regulars who were paying full price. Servers got stiffed on tips. Powell even had a Groupon thrown in his face by a customer after he declined to let the man redeem the same gift certificate twice.

For everyone else, Groupon worked exactly as planned—the diners got a great deal, and Groupon (which often pockets half of the voucher’s price) walked away with an estimated $9,200 for doing little more than sending out emails. In all, Groupon is on track to collect $2 million from Portland businesses this year, based on WW’s estimate of Groupon’s likely share of its Portland business.

Groupon is truly a phenomenon. Two solid years of friendly buzz from TV news, daily papers and consumer blogs have helped Groupon sell 22 million deals in North America that the company says have saved consumers $980 million.

Late last year, Google tried to buy Groupon for $6 billion, an incredible sum for a three-year-old startup that basically runs a large email list.

Groupon’s 30-year-old founder and chief executive, Andrew Mason, turned Google down. The company is making an initial public stock offering that values it at $30 billion.

Hordes of copycat daily deals sites emerged—from ZapHour.com in Portland to Maryland-based Jewpon.com (think half off kosher meats). In June, the spurned Google launched its own product, Google Offers.

None has come close to matching Groupon’s success.

Portland is an important launching pad for the deals companies. The Portland metro area is reportedly Groupon’s 15th-largest market, an outsized showing given the city’s population. Google Offers decided to test its product here in June ahead of larger tech-savvy markets like San Francisco, New York and Austin. The Oregonian publicized an account of EaT’s early success, and Google Offers’ launch here gained worldwide attention in the media.

Many retailers are happy with their daily deals experience. Jonathan Magnus of PDX Pedicab, for instance, says Groupon deals helped his company fill down time. “It turned out to be successful,” he says.

But consumers—who almost never lose out on these deals—are probably unaware of the consequences they have had on many other businesses. 

Nearly half the businesses using daily deals report they made no money. Customers often get their discounts and run to the next deal, without creating the loyal relationship that Groupon says can follow. Even Powell and Hogan say the fact that they made money doesn’t justify the damage these daily deals can do to businesses and employees.

“You can’t hire people because you’ve discounted your product. Now you’ve got to work more hours to break even, because your margins dropped a couple of percentage points,” Powell says. “It seems regressive more than progressive. The small-business owner gets pushed down and pushed down.”

Groupon CEO Andrew Mason did not return text messages and emails; a company spokesperson did not return messages. Because Groupon is about to sell shares publicly for the first time, federal securities rules limit what the company’s executives can say publicly.

Groupon sets out to be the advertising and marketing department that many small businesses lack. 

WUNDERKIND: Groupon CEO Andrew Mason has overseen the company’s phenomenal growth.
Credits: Max Whittaker

Every morning, Groupon emails some 83 million loyal consumers with pitches for deeply discounted goods and services at restaurants, spas and boutiques around the country. It’s not the place to go if you want to save 50 cents on a jug of milk, but if you’re $40 short of a desperately needed facial, check Groupon. 

If you want to take part in a Groupon deal, the company charges your credit card and you get the voucher on your computer or phone. Groupon then divides the money with the business offering the deal. 

Groupon touts its “collective buying” model as a revolutionary system that creates value for everyone involved—shoppers, sellers and Groupon itself.

“We only win if you win,” says the soothing, unseen narrator in a Groupon sales video. 

That’s not quite right. Groupon gets its money first, whereas every other party to the transaction may or may not realize a gain. 

Let’s say a boutique usually offers a scarf for $20. But with a Groupon deal, customers can get it for $10 by buying the voucher. 

There is no upfront cost to the business running the promotion. Groupon typically keeps half of the discounted price, and reimburses half—so, $5 of the original $20 price of the scarf—to the merchant. But the store doesn’t get its share all at once. Groupon makes a partial payment within a few days of the start of the promotion, paying the remaining balance over a period of months.

It’s not clear how many merchants run more than one deal with Groupon, but the company claims its service is so successful that 97 percent of businesses who used it ask to be featured again.

Elephants Delicatessen, the venerable local caterer and eatery, has run promotions with both Groupon and Google Offers. Elephants CEO Anne Weaver says her experience with both companies was great. 

Weaver says she entered into each promotion knowing that it would be what’s known in business-speak as a “loss leader.”

“We’re not making a dime on these things; it’s just mostly promotional awareness,” Weaver says. “You can pretty much do the math when you’re giving away the store for half price.”

We did the math. Between the two promotions, Elephants committed to serving more than 10,000 customers, according to Groupon and Google Offers. That means that Elephants guaranteed discounts (after being paid by the companies) that cost it as much as $46,000.

Despite the strain the rush of customers put on the business—and even though some customers attempted fraud by using the same voucher multiple times—Weaver is satisfied the online deals exposed her business to a new clientele. 

“It was huge. Talk about getting mobbed,” Weaver says. “Our people were not loving us for doing it.”

Another self-described success story comes from another iconic Portland business: the pedicab. Magnus, of PDX Pedicab, says his company is about to run its third Groupon promotion; he says the first one, a discounted distillery tour, brought in $12,000.

“We didn’t have to put a lot of money out of pocket,” he says. “In fact, we made a little money off of it. It also opens up a demographic that we normally don’t have access to. A lot of people came from Beaverton.”

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