Groupon Fires Back at Waffle Business

(Image credit: Craig Nelsen)

Groupon is once again defending its business model after a shuttered waffle vendor blasted the deals service online as "money-hungry" and bad for small businesses.

Three months ago, Craig Nelsen, 52, erstwhile owner of Back Alley Waffles on Blagden Alley in Washington, D.C., opened the business to draw attention to his three-year old art gallery which sells his mosaic artwork.

"We opened [Back Alley Waffles] with no money because the art gallery was struggling financially," Nelsen said.

He said offering a two-for-one waffle deal through Groupon "broke our back," causing the waffle business to close two weeks ago. In particular, Nelsen takes issue with Groupon's practice of distributing revenue to vendors in three payments over a 60-day period.

"It's a bad model. I blame myself for getting into it. It's a warning to any other small business that is trying to start up to stay clear of these guys," he said.

Groupon spokeswoman Julie Mossler said a partnership with Groupon is not intended to give businesses a quick infusion of cash and that Nelsen was made aware that he would receive an initial payment through postal mail, then two payments after 30 and 60 days.

However, Nelsen, who received his second payment after the business closed, claimed the amount of money that would be distributed was not "clear" when he agreed to the contract.

In a statement, Groupon said: "Mr. Nelsen initially approached Groupon and our merchant advisors structured a deal to best encourage overspend and help his business grow. We also required Back Alley to cap the number of Groupons sold to ensure the feature was in the best interest of both consumers and the merchant. We scheduled his feature on his terms, on a date he selected, under a contract he reviewed and signed. According to our records, only 132 Groupons, or 18 percent sold, have been redeemed since Back Alley ran two months ago, and Mr. Nelsen has received 2/3 of his share of the revenue to date.

"We always hate to hear that a local business has decided to close, but the math does not point to Groupon as the cause."

Mossler also pointed out that Nelsen made multiple agreements with LivingSocial and Scoutmob while offering the Groupon deal, which Groupon does not recommend.

"The 18 percent represents $2,600 worth of waffles is not much to $1.6 billion corporation like Groupon, but for someone trying to open a restaurant with no money is a huge overhang up front," Nelsen said.

Nelsen's art gallery is still operating because it does not require additional staff, he said. Though the waffle business failed, it seemed to reach his initial goal of drawing attention to his art.

"I got my first commission in the last week," Nelsen said. "That was really encouraging."

Groupon, for its part, has struggled since going public , with its shares falling 72 percent since its Nov. 7 debut to $7.31 each.