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Are Deals-of-the-Day Good for Local Business?

You might be getting a great deal through Groupon or LivingSocial on that fancy meal or delicious take-out, but is your bargain hurting the restaurant's bottom line and reputation?

We’ve all seen the proliferation of fabulous-sounding discounts at deal-of-the-day sites such as Groupon and LivingSocial Deals: $15 for $30 worth of food – limit of two per customer. $20 for $40 worth of food and non-alcoholic beverages.

These are good deals for us as customers. But are they good for the restaurants that offer them? Do Newton restaurateurs actually benefit from contracting with these sites?

When l owner Frank Santo ran a Groupon in September for his other restaurant,  in Dedham, he had a very specific purpose in mind and a clear goal for his contract with Groupon.

“You do it for the right reasons and look at it the right way,” explains Santo. “I did it because I needed the money for the renovation. We sold I think over 3,000 deals. I looked at it as a loan. Groupon kind of loaned me the money, and I paid them back in food, credit for the diners.”

According to an Oct. 1 article in the New York Times, Groupon is the “biggest deal maker” and has been preparing to put forth an initial public offering (IPO) for several months with a valuation “as high as $30 billion.”  However, that changed today as the Gropuon stock (GRPN) opened up on Nasdaq at $28/share (up from the $20 it proposed yesterday), bringing the value to about $13 billion, according to the Wall Street Journal. 

Groupon was launched in November 2008 in Chicago, and offered their deals-of-the-day in cities such as Toronto, New York and Boston shortly thereafter.

But this has brought on its own set of issues here in Massachusetts. In February, 2011, the Alcoholic Beverages Control Commission (ABCC) notified Groupon that its offers for food and liquor were in violation of Massachusetts state law, according to a March 15 Boston Globe article.  

The suspension was initially publicized as being temporary, and Groupon customers unhappy with the modifications to their pre-purchased deals were offered refunds for coupons not yet redeemed, said Groupon spokeswoman Julie Mossler in the Globe article.

But this adjustment, which now appears to be permanent, did nothing to help the restaurant owners who had already contracted with Groupon with an expectation of the higher revenues of a tab that included alcohol. Consumers may be less likely to purchase a deal-of-the-day which doesn't include alcohol as a part of their overall dining experience, or may not be willing to spend the extra money to add an adult beverage onto their discounted bill.

In a Sept. 27 email to Newton Patch, owner Kathleen Malloy bemoaned the shift in conditions. “The first time (December 2009, at their restaurant Ariadne) we did $40 for $20 and two [coupons] per table of four or more. We also allowed people to use them for alcohol, which is illegal in Massachusetts, but when I asked Groupon about this they told me they had cleared this with the ABCC, and now of course the ABCC has cracked down on them for this. This time [July 2011] we did $30 for $15 one per table and no alcohol. The restaurant is actually losing money in that situation,” she wrote.

for good in August, citing in Malloy’s email the high rent and cost of utilities and a shift away from dining out as entertainment, in addition to the Groupon deal not being as profitable as hoped.

owner Geoff Janowski has also signed on with deal programs. In an Oct. 18 interview on WBUR’s "Radio Boston," Janowski spoke enthusiastically about his relationship with Groupon. Blue Ribbon’s October 2010 deal-of-the-day set a nationwide record with 17,000 Groupons sold.

It is notable that Janowski also mentions in this interview that he was able to negotiate a more favorable split with Groupon than the baseline parameters of 50 percent for the restaurant and 50 percent for Groupon (as detailed in a December 2010 Wall Street Journal article on Groupon CEO Andrew Mason).  

The Local's Frank Santo also discussed negotiating costs with Groupon.

“Restaurant people need to wake up,” Santo tells Patch. “We went back and forth, back and forth and finally ended up with a 70/30 [Santo/Groupon] split for me."

When asked about how flexible the split is when working with their site, Jody Gavin of LivingSocial Deals said in an Oct. 24 email to Newton Patch that, “As a company policy, LivingSocial doesn’t discuss margins on any specific offer, but with every deal we put together, we work directly with the restaurant to ensure the promotion is helping to drive that business forward."

Clearly Janowski liked what LivingSocial had to offer, as Blue Ribbon BBQ recently ran a new online promotion, this time with LivingSocial. But even with the success of the Groupon deal, Janowski wasn’t initially sure if it was worth doing again. , "The jury remains out on whether we do this again. We won't have all the data for one year until the offer expires.”

Chad Nason, a Groupon spokesman, explains that while deals are "typically half and half, there is no set deal out there. We look at each business individually; there are so many factors. We basically handcraft each deal to suit the business that is running it."

One might ask why a restaurant would contract with a deal-of-the-day site in the first place. Spokeswoman Gavin explained, “Fifty percent of the people LivingSocial brings to a restaurant have never been there before and nearly 90 percent of them plan to return. What’s more, LivingSocial members spend an average of $34 more than their voucher value.”

Nason concurs, and cites in Medfield as having “tracked that most customers spent 200 percent more than their actual check, and [the bistro] showed a marked increase in revenue after their Groupon deal.”

But with this increased patronage comes a potential negative.

In the WBUR interview, BU professor John Byers speaks about the “Yelp effect.”

“One interesting finding was you could see the Yelp reviews surging in the months following the Groupon offer. But the more interesting thing was that after the Groupon offer ran, the rating — as perceived by Yelp reviewers — went down a little bit, and particularly those reviewers who mentioned Groupon had lower ratings.”

When Newton Patch covered , even with the deal’s success, Newton Patch reporter Megan McGrory-Massaro noted that Yelp reviewers and regular customers said, "The servers are not overly friendly, and can make you feel like they're doing you a favor by taking your order."

Nason has a remedy for this, or rather a way of avoiding such pitfalls in the first place. “We provide tons of preparation tools. How-to videos, suggestions, things to help the merchants be well-prepared for the rush of new customers they’re going to get. It’s a marketing tool, and running a Groupon deal takes a lot of resources. You have to make sure your staff is providing the same level of service and that you can handle the increased volume.”

But whether the deal-of-the-day sites will stick around remains to be seen, as consumers become more discriminating about how they spend their dining-out dollars and more restaurants consider entering into a relationship with deal-of-the-day sites like Groupon, LivingSocial, Patch Deals, BuyWithMe and more recently, Mom.com.

Harvard Business School professor Ben Edelman said in the WBUR interview that the current trend is toward “bouncing back and forth between whichever merchants are offering discounts.” 

If customers keep bouncing from deal to deal, will the goal of of driving in both new and repeating business be realized? The consumer public -- and frugal foodies -- will have to wait and see.

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