Group coupon deals may not work for buyers, sellers

WASHINGTON -- On a typical Friday night, the bar at Brasserie Beck here is packed with people waiting for a drink — perhaps one of the 90 Belgian beers it sells — and often a table in the bustling dining room.

It's been this way almost since renowned chef and owner Robert Wiedmaier opened the restaurant in 2007.

Since the recession, however, the average check at the restaurant had dropped from about $80 to $55, so Wiedmaier offered a daily deal with Living Social last summer to "get people talking" on social media. It did that, but it also turned into what he calls "a fricking mob scene."

In 24 hours, nearly 10,000 $25 coupons were sold for $50 worth of food. As the deal was about to expire last summer, Living Social warned coupon holders, and they stormed the restaurant. Many found they were unable to get a table. Wiedmaier also agreed to split the cost of the coupon 50-50 with Living Social — a bad idea, he says, given his industry's less than 10% profit margins.

Wiedmaier is lucky: With several restaurants, he's better positioned to absorb the blow of a costly deal. Still, his leap into daily deals illustrates the good and the bad these promotions can hold for both businesses and their customers.

The daily deal business model only rarely makes good economic sense for retailers and restaurateurs, according to an analysis provided to USA TODAY by the retail analytics firm Applied Predictive Technologies (APT).

Reports of companies that claim daily deals put them out of business, or came close, are increasing.

"This is the buzz and the modern way to get people to try a business, but there are other ways to get your name out there that don't carry the risks," says APT Senior Vice President Jonathan Marek, who cites e-mail promotions and Web, print or broadcast advertising.

Companies doing deals "get crushed economically" when existing customers buy deals, says APT Chief Executive Anthony Bruce.

There's also plenty of evidence the daily deal business is still thriving as it adapts to a deal-saturated landscape.

A survey out last week of 10,000 visitors to the top 40 retail websites found daily deal subscribers in that group fell 7.6% between last March and the winter holiday season.

In a more encouraging finding, almost 30% of those who redeemed a deal in the previous 90 days had never done business with the merchant before. The survey, by customer experience analytics firm ForeSee, also found more than 90% of respondents who redeemed a deal said they had already done business with the company again or planned to.

Risky business?

The pressure to constantly come up with new deals — they have to be daily, after all — may be pushing deal sites into dangerous territory.

Some offer discounts on cosmetic procedures, including laser hair removal, laser skin treatments and liposuction, which could lead to safety problems when businesses are struggling to meet demand, say experts such as ConsumerSearch.com editor-in-chief Christine Frietchen.

Stephanie Ahle, 24, is suing a Kansas City, Mo., spa for burns she says she got during laser hair removal amid a Groupon-related rush. Her lawsuit claims the person doing the treatment wasn't adequately trained. In an answer to the lawsuit, the spa denied the allegations.

Trying to keep up with the influx in customers a daily deal brings has proven too much for some to handle. A December post by news site Daily Deal Media listed businesses whose daily deals went awry in 2011, including two that closed after running a deal without honoring coupons.

"Companies are making risky, risky deals they can't make money on, and then they go out of business and everybody suffers," says Boyan Josic, CEO of DailyDealMedia.com.

To keep up with the demand for deals, some deal sites are turning to third-party agents, who take on the job of striking a deal with a merchant, and then sell the offer to deal sites.

Josic says these outside consultants will, for example, purchase millions of dollars worth of gift cards from a merchant, then sell the cards to a daily deal site or multiple sites. The daily dealer and the outside consultant split the commission.

But some third-party marketers have backed out after customers have purchased a coupon. Digital Doorstep did that, Josic says. The company bought deals such as Fandango tickets and Target gift cards and sold them to deal sites including Eversave, KGB and Saveology, which would list the deal, such as $12 for two movie tickets worth $24. Digital Doorstep eventually stopped sending out the various coupons when it saw how many deals had been redeemed and realized it would lose money on the offers, Josic says. Josic says Digital Doorstep was hoping a certain number of customers would never redeem their deals, increasing the company's profit.

Jere Doyle, CEO of Eversave's parent company, Prospectiv, says working with Digital Doorstep "was a bad decision." Eversave listed two deals with Digital Doorstep in November, which Doyle says took weeks to be fulfilled, and many coupon holders asked for their money back rather than wait. His company has since stopped outsourcing deal marketing.

The number listed for Digital Doorstep on its website is out of service. When questioned through the company's lawyer, Digital Doorstep acknowledged working with Eversave, KGB and Saveology but says it didn't stop sending out gift cards and other coupons until filing for bankruptcy in January, citing the Chapter 7 bankruptcy code as preventing them from doing further business. In an e-mail the company sent on Jan. 18 announcing its bankruptcy filing, obtained by DDM, Digital Doorstep denies any attempts to delay customers from redeeming their deals.

Amping up services

Daily deal sites say they're now working more closely with merchants to make sure they can handle traffic when customers start redeeming coupons. Living Social started educating businesses on when they're likely to experience a jump in customer volume and helping service-oriented merchants develop reservation processes to manage customers when there are limited appointment times available, spokesman Andrew Weinstein says.

Groupon also said in an e-mailed response to questions that it helps merchants manage appointments after running a deal.

Living Social is experimenting with how to remind customers to redeem deals before they expire so that there isn't "a last-minute flood to merchants."

It's careful planning by the merchant, though, that will ultimately set them up for a successful deal, Josic says.

"The bottom line is that merchants need to properly plan running a deal and be very confident in their fulfillment capabilities," Josic says. "If they have problems or hiccups when consumers start redeeming, they'll feel the backlash pretty quickly on review sites like Yelp due to the pack-like mentality of the subscribers."

Groupon said in an e-mailed statement that it "has been able to crack the code for businesses looking to successfully market themselves." The site is a "measurable way to guarantee new traffic to a local business" and the only way to do so, Groupon says.

APT's Bruce disagrees. Whether a daily deal actually paid off for a business requires a complicated series of calculations that he says a typical small business is not inclined to do. Most, particularly restaurants, "see empty tables and want to fill them," he says.

And APT, which represents many Fortune 500 retail and restaurant chains including Denny's and Wendy's, says daily deals almost never make sense for major national chains. In a survey, APT's clients ranked daily deals sixth out of seven marketing options they were considering, ahead of only promotions tied to other events.

Even a Rice University study that Living Social's Weinstein cites shows only 44% of restaurants said they earned a profit from a daily deal promotion.

The study also shows, though, that overall, 56% of businesses said they made money on a deal. Because of the complex economics involved, Bruce says he thinks many who think they made money "are losing money, too; they just don't know it."

All of Brasserie Beck's daily deal business would have been more welcome if more people ordered more than $50 worth of food and drink. Wiedmaier can't be certain he made money on the deal, though he says 96% of his deal customers told Living Social they'd come back.

As the first big-name Washington chef to do a Living Social deal, he got a big promotional boost from social media and an ad that Living Social took out in Washingtonian magazine. He acknowledges a small restaurant might not be so fortunate.

"Everybody was talking about Brasserie Beck," he says. "It really did give the restaurant a kick start."