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The deal-of-the-day coupon craze, which has been skyrocketing ever since Groupon sold its first two-for-one pizza deal in 2008, has changed restaurant discounting dramatically.
The success of Groupon, which raised about $700 million in a November initial public offering, has spawned a wide variety of imitators, as well as many fans and detractors within the industry.
While some operators praise its ability to attract customers, others complain that such patrons are fickle and are only chasing discounts.
Despite the controversy, there are many companies seeking to become the next Groupon. Newer companies such as LivingSocial, Google Offers, TangoTab, Scoutmob, Gilt City and others are vying for restaurant business.
Nevertheless, Groupon has a big head start. The firm reported revenue — defined as face value of coupons sold — of $713 million in 2010, up from $30 million in 2009. Before its IPO last fall, Groupon reported $645 million in sales in the first quarter of 2011 alone, and a gross profit of $270 million.
Still, the industry jury remains out on the benefits of such deals.
“We continue to debate the merits of daily-deal sites internally,” said Chris Janush, vice president of marketing for Edgewater, Md.-based The Greene Turtle. “I’m of the opinion that one-off discounting is great for a short-term spike in sales but should not be part of a long-term strategy,” Janush continued. “I tend to side with the articles/opinions that say these coupons are typically redeemed by coupon chasers who will just follow the next coupon offer rather than return to our location again and pay regular price.”
The potential for serious downside became apparent in the fall of 2010 when Posies Bakery & Cafe in Portland, Ore., became an Internet sensation after a blog post that recounted the concept’s experiences with a deal that offered $13 worth of product for $6. More than 1,000 people bought the coupon and swamped the coffee shop for three months, forcing the owner to spend $8,000 in personal savings to pay workers and rent.
“It has been the single worst decision I have ever made as a business owner thus far,” she wrote.
However, some contend that daily deals do have their upside. A report published in 2011 by Chicago-based Technomic found that daily-deal customers are not necessarily fickle.
Of restaurant-goers who had used a group-buying coupon, two-thirds told Technomic they later returned to the same restaurant without being given a discount. Another 83 percent recommended that eatery to a friend or family member.
The coupons also spurred trial. Forty-eight percent of respondents used them at restaurants they had never visited.
Still, operators approach daily-deal coupons with caution.
Brandon Johns, chef-owner of the 90-seat Grange Kitchen & Bar in Ann Arbor, Mich., said he decided against using a daily-deal coupon offer when he opened a little more than a year ago.
“You can get a little publicity, and you might cover your costs,” he said, “but you don’t have most control over the number of people it could bring in. Ten people could take advantage of it, or 1,000 could be using it.”
Some chains, meanwhile, are creating their own versions of the deals.
The 370-unit Dedham, Mass.-based Papa Gino’s Inc., parent to the Papa Gino’s pizza and D’Angelo sandwich chains, built its own offer with a technology vendor and launched it in the first quarter of 2011.
Positioned as a customer appreciation promotion, Papa Gino’s and D’Angelo advertised the one-day 50-percent-off online offer and promo code through opt-in e-mails, social media sites Facebook and Twitter, and a coupon-sharing website.
Papa Gino’s attracted 8,015 new online customers, and 20 percent of those returned to place an order two or more times in the 90 days following the offer. D’Angelo attracted 5,007 new online customers, and 15 percent of those returned to place an order two or more times in the 90 days after the promotion.
The company also found the 50-percent-off promotion yielded an average check, with discount, that was 9.5-percent higher than on a normal business day.
“These results tell us Papa Gino’s and D’Angelo guests are eager for these types of promotions,” said Paul Valle, chief information officer for the chains.
But operators remain cautious.
Janush of The Greene Turtle concluded, “We need to avoid becoming regular players in this field; once you’re in and your customers expect it to the point where they’ll only visit when there’s a coupon, it’s hard to get back out.”