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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.

Small-business consultant, blogger and sometimes-Portlander Rocky Agrawal has examined the daily deals business more closely than almost any other writer. He’s come to a sobering, and unpopular, conclusion: Daily deals tend to promise quick cash to merchants but do so at a great cost.

“Groupon and Google Offers have sold themselves as innovative new marketing companies. They’re not. The reality is, this is their business model: They are essentially loan-sharking companies,” Agrawal says. “People think I’m being hyperbolic, but I’m not. The core product is evil.”

Rice University management professor Utpal M. Dholakia has studied daily deals such as those offered by Groupon. He surveyed 324 businesses that ran daily deals between August 2009 and March 2011. And he found that roughly 56 percent reported making money on the deals—while 27 percent lost money, and 18 percent broke even. 

Dholakia says the companies who use Groupon and similar services are spending significantly less money on ads in the Yellow Pages, on local radio and TV, and in magazines and newspapers (such as WW).

But, he says, daily deals are a poor substitute for more tried-and-true forms of marketing for small businesses. 

“You’re not able to create any kind of relationship at all with your customers if you’re only running a daily deal,” he says. “You’re saying, ‘My product is not good enough. The only way you’re going to buy my product is if it’s half off or more.’ That’s not really sustainable for any business. By and large, that is not good marketing.”

NEIGHBORHOOD ALERT: Sarah Shaoul, owner of Black Wagon, a children’s clothing and toy store, warns nearby businesses about daily deals promotions.
Credits: Darryl James

Sarah Shaoul, who owns Black Wagon, a children’s clothing and toy store, has tried to warn other businesses on North Mississippi Avenue against the daily deals companies. “They hit up all these small businesses, and all these owners are wearing tons of hats, and they don’t have the resources to really vet the offer,” Shaoul says. “All they know is, they see their neighbors jump off the cliff like lemmings, and they’re doing it in droves, because Groupon says this is the best marketing thing you can do.”

But Dholakia adds that, according to his research, more than half the businesses that run daily deals are happy. “That can’t be simply because they got a short-term injection of cash,” he says. “Some are smart enough to turn those customers into loyal buyers.”

Some are even clever enough to game the system, which is why Groupon also faces some little-discussed risks, as one recent case in Portland shows. The company offered a deal through the Everett Street Bistro last year, offering customers $25 worth of food if they bought a voucher for $12. The deal was good through June of this year.

But about seven months ago, Everett Street Bistro—with an unknown number of vouchers still outstanding—abruptly closed its doors, and its owner, Kyle Lynch, left town. His former landlord tells WW that the Internal Revenue Service and creditors are after Lynch, who has since started (and closed) a new bistro in Bellingham, Wash. 

Groupon has told customers it will make good on the vouchers Lynch left unfulfilled.

As soon as this September, Groupon will offer shares to the public in a deal that could raise as much as $750 million for the company. The stock offering is creating plenty of hype at a time when Wall Street could really use a sign of hope. Jim Cramer, the carnival-barker host of CNBC’s Mad Money, in June rated Groupon as “Buy! Buy! Buy!” Last month, Groupon’s baby-faced CEO, Mason, posed for Vanity Fair with a cat on his head. 

But there’s a real question if any of this is sustainable. Groupon reported revenues of $713 million last year. But last week the company acknowledged in Securities and Exchange Commission filings that—after paying retailers and its operating costs—it had a net loss of $413 million. (A previous filing had claimed profitability.) Meanwhile, Groupon’s early investors have already cashed out their stock through insider sales to the tune of $870 million.

The number of competitors is growing—hundreds now offer some kind of coupon or voucher deals for neighborhood or niche businesses. Google Offers’ vouchers have not sold as well as Groupon’s on average, according to WW’s analysis; Agrawal found Google is doing about half as much business in Portland as Groupon. 

But Google appears to have learned from some of Groupon’s early mistakes. “You could say we certainly listened to the small businesses,” Google spokeswoman Jeannie Hornung says. “We’re looking at a long-term partnership with these small businesses—it’s not just a one-time interaction.”

Paul Wagner is founder of Forkfly.com, a Portland-based restaurant-recommendation app that also offers discounts. He says this boom is also good for merchants; the heated competition means Groupon and other companies have to cut back on the amount of money they get out of the deal in order to persuade businesses to sign up with them.

“There are so many, literally in the hundreds of Groupon clones, that are just trying to get a cut of the same space,” Wagner says. “Small businesses are just overwhelmed. There’s a bit of deal fatigue setting in.”

Wagner says he’s seen surveys that show small businesses are getting at least one call a day from these services.

Among those small businesses inundated with sales calls from daily deals companies is Posies Bakery & Cafe.

Jessie Burke says she doesn’t necessarily blame Groupon that her deal was a disaster. She just wants people to know the consequences of the artificially low prices that are part of daily deals. She hopes other small-business owners won’t repeat her mistake.

After Burke blogged about her Groupon experience, she got called from other daily deals companies. She thinks some just wanted to land her business so they could show they were better than Groupon.

But she’s also feeling the crush of all the companies simply trying to make a buck by offering her customers daily deals vouchers.

She says Groupon even called back. It was a new guy. “He was like, ‘Hey, I just wondered if you’ve ever tried out Groupon.’ He was serious.”

Burke told him to go check out her blog and then call her back.

“He emailed me,” she says, “and he was like, ‘I am so sorry. I had no idea.’” 

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