Cheat Local!

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."

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. 

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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But the experience of another pedicab company shows one potential downside of these daily deals: wasted energy.

Portland Rose Pedals Pedicab owner Casey Martell was disappointed with the performance of his recent Google Offer for his brewery tour. 

"They led me to believe I was going to sell, like, hundreds of these things. But they only ran it for a day. I only sold 26 out of the 700," Martell says. “It’s totally not worth our time.” 

There were consequences beyond Martell's bottom line. "I brought on a few more [drivers] because of this, and they're still waiting to get some work, because there isn't any."

Pistils Nursery on North Mississippi Avenue is a popular spot for people seeking to buy seeds, plants and chicken feed. Its Groupon deal last year offered customers a 60 percent discount. 

The deal was limited to one voucher per customer. But it had a loophole: Customers could buy unlimited vouchers if they said they were gifts.

"It was effing ridiculous," says owner Megan Twilegar. "I think we barely broke even on the money side. We were slammed. We were wiped out."

Some lose more than time. One Portland business was among the first to go public with its horror story about losing big money on its Groupon deal.

Jessie Burke, who is the same age as Groupon CEO Andrew Mason, opened Posies Bakery & Cafe in North Portland's Kenton neighborhood at around the same time Mason launched Groupon in 2009.

The cafe is pitched at young mothers who aren't keen on taking the tots to Stumptown. ("Everyone loves you when you're pregnant, but they hate you when you have kids,” Burke says.) 

Burke, who has a graduate degree in public education from Portland State University, got a $107,000 start-up loan from the Portland Development Commission, where she once worked as an intern. Which means that local taxpayers are invested in the success of Posies.

Burke approached Groupon after hearing about the company from a friend. According to Burke, Groupon divisional sales manager John Waller told her that Groupon would keep 100 percent of the sales proceeds because Posies' average sales were under $10. Burke says she declined.

"I was like, 'Who could afford that?'" Burke says. "They said, 'But listen, you'll never have to advertise again.'"

Groupon officials later denied that this was the offer they made Burke. BusinessInsider.com, which wrote about Posies last fall, quoted Groupon CEO Mason as saying this aspect of Burke’s account was “100% false.” 

But an email Burke provided to WW seems to contradict that statement. It shows the company's salesman, Waller, coming back to Burke and offering her company a cut of the money. 

"I gave this some more thought," Waller writes. "Understanding that your business [is] newer, I decided to split the revenue with you. So, you'll be getting $3 of the $6 we charge the customers. Also, we incur a standard credit card processing fee of 2.5%.... This should make this campaign even better for your business!"

The deal offered $13 worth of food and beverages at Posies for just $6. 

Within a day, 890 people bought vouchers. 

"They came out of nowhere," Burke says. "And because they hold a coupon in their hand, they feel like they're entitled to something. It literally felt like I was getting beat up."

Burke says she lost $10,000 on the deal. And it got worse. Groupon customers—after jamming her shop—then went online and trashed her young business.

At the suggestion of a customer, Burke wrote a blog post calling Groupon the single worst business decision she'd ever made. At the time, Groupon was, as Burke put it, "the darling of the social media world," so the sour note got a lot of attention.

Groupon CEO Mason left a conciliatory comment on Burke's blog, and emailed her with both an apology and suggestion that her cafe was an outlier. 

"We've run deals for hundreds of businesses similar to yours and they've had great experiences, so I'm eager to understand what it is about your business that made Groupon such a bust," Mason wrote.

Burke was left cold. 

"It's hard enough to go into business and take a huge risk and put your life on the line," Burke says. "Groupon is going to be like locusts. They're going to go through these businesses, they're going to close all of these businesses, and they're going to make billions of dollars and sell the company and run."

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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."

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.’” 

WWeek 2015