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What’s the Deal with Daily Deals?
Comments () | Published November 28, 2011

Whether acting as therapy for tightfisted dates, helping a newcomer explore the city, or making it possible to dine out on more than just Saturday nights, restaurant deals occupy a large piece of the coupon pie. But if customers can get artisanal pizza for half off, what does the restaurant owner get in return? Businesses can’t afford to offer steep discounts unless there’s something in it for them.

“I didn’t do it to make money. I did it for the PR, the advertising, and the marketing,” says Zena Polin, co-owner of the Daily Dish in Silver Spring. Back in April 2010, she partnered with Groupon to offer $20 worth of food for $10. “We had just opened as the Daily Dish, and I wanted to let our neighbors know about the new restaurant.”

The restaurant sold 258 coupons and redeemed 138. “Immediately, people started coming in,” she recalls. “We had a rash of people in the first week and another in the last week.” Polin says the kitchen wasn’t overwhelmed. “We were more surprised than anything else.”

She pulls out a big purple folder containing all the redeemed coupons, each stapled with a copy of the meal receipt. Flipping through the pile, she notes that “a substantial amount of people came in and just used the amount on the coupon.” But, she adds, “a solid 90 percent tipped on the full value of the meal.”

Her folder system allows for a measure of protection: “One woman tried to reprint her coupon and use it again. So I pulled out my folder and said, ‘Not only did you already use your coupon; I can tell you the date you used it and what you ate.” The diner paid up.

For every good experience, there’s a story about a business that’s been swamped by the response—a San Francisco bakery deluged with 72,000 cupcake orders and employees baking as many as 1,700 cupcakes a day to keep up; a toy company in Kansas City, Missouri, that drew nearly 3,000 takers for its Groupon, 90 percent of whom were existing customers and many of whom spent the minimum amount to redeem their coupon; and locally, a Georgetown medspa whose facialist was so busy with deal takers that her regular clients had to wait months for an appointment.

55% of businesses say they made money on a deal, 27% lost money, and 18% broke even.     

In typical situations, a retailer splits the revenue of a deal with the deal site. So if a store owner allows buyers to pay $10 for $20 worth of goods, half of that $10 goes to the site. For businesses offering services, such as haircuts or massages, this model might make sense, as they’re not laying out any money for products, just time. But for a business that sells hard goods such as toys at a relatively low profit margin, it can be a losing proposition.

Which is why Wendy Gordon—who works with the public-relations firm Eats Good Media in representing restaurants including Grillfish, the Heights, and J. Paul’s—is wary of having her clients partner with any deal sites.

“It cheapens the brand,” she says. “When I see a restaurant on one of those sites, I think, ‘Uh-oh, they’re in trouble.’ ”

Even though she’s bought a coupon or two herself (“I bought one for a shooting range—I was in a bad mood that morning”), she doesn’t believe it makes good business sense for higher-end restaurants to participate: “Food costs are too high, and labor costs are too high. Depending on how many coupons are turned in, a restaurant could lose money and screw up their whole month.”

Amber Pfau, who handles publicity for restaurants including Proof and Bourbon Steak, says that none of her high-end clients have bought into these deal sites: “I have not been able to make the deal work financially because these deal companies take too much off the top. In a low-margin industry like restaurants, there’s not a lot of room to take off the top.”

Pfau cites Bourbon Steak, the luxe restaurant in Georgetown’s Four Seasons Hotel, as an example: “They’re sourcing meat from a local farm in Virginia. That is going to cost more than getting meat from a large farm in St. Louis.” Then, she says, there’s the expense of the waitstaff, a pastry chef, a general manager, an executive chef, and a sommelier. “People are also paying for the opportunity to have an elevated dining experience.”

The problem with coupons, Pfau thinks, is that they’re training people to expect deals: “The price they see is just a launching point for discussion. People might be willing to pay half price for a pizza, but then they say, ‘If I’m paying half price now, why would I come back and pay twice as much later?’ ”

There’s an element to the coupon phenomenon, says Pfau, that’s devaluing to the product and to the business. “I like this, but not enough to pay full price,” she explains, channeling the mind of a consumer. “What these coupon buyers might not understand is that at the end of the day, someone is paying for that free meal.”

Next: Giving customers a reason to stay

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Posted at 01:00 PM/ET, 11/28/2011 RSS | Print | Permalink | Comments () | Washingtonian.com Articles