Live by the Groupon, Die by the Groupon

Three years ago, I had a reasonably good dinner on Capitol Hill at a little spot called Thomas Street Bistro. I'd met up with a friend, and a couple of his friends showed up in the course of the evening, and a music student from Cornish dropped by to play a few tunes. It wasn't great, but it wasn't expensive, and I wrote a post that was mildly encouraging. But this quirky neighborhood spot, all of 20 seats, with a French owner-chef, Adam Freeman, who did everything himself (cook, wait tables, wash dishes) fell victim to the crack-cocaine of so-called "social media" coupons (Groupon, Living Social, Tippr, Amazon Daily Deal, and many more).

It's easy to see why a restaurant owner would become addicted to Groupons: the deal goes live, promising bargain-hunters a half price dinner (or massage, or vacation, or lasik eye surgery). Click! Within a short period (a day, three days), hundreds of people sign up. Groupon, having collected tens of thousands of dollars, sends the merchant somewhere between half and two thirds of the take. Great news for the merchant: depending on the deal, he's suddenly holding a four-to-five-figure check. It's as if Mr. Belvedere stopped in for dinner and left a million-dollar tip!

Except not.

Groupons may bring 500 or 1,000 people into your restaurant, but now you've got to feed them. Feed them for free. It's break-even at best if your food costs are 25 percent of what your menu price, assuming that you've carefully put aside your Groupon check to cover the cost of feeding the hordes of new customers. Trouble is, that money's long gone. Bills, payroll, back rent, taxes, special projects.

The math is simple: a single Groupon "bump" of $15,000 costs the user up to $35,000 in foregone revenue. (Briefly: 1,000 x 50%-off Groupons @ $25 each = $15,000 cash to restaurant requiring $50,000 worth of food at full price, they'd have $50,000. Instead, they've "borrowed" $15,000 against future free dinners. That's outrageously expensive advertising, or else an extortionist loan rate.) If you told a restaurant owner he'd have to pay $70 cash to bring in a four-top, he'd call you crazy, but that's what Groupons cost. I used to say it would be cheaper to corral people with a $20 bill; with Groupons, it's cheaper to give them $20 to stay away.

And once you get a Groupon "bump," you can't stop. Every social media sales rep in Seattle will call you day and night, will stop in, will send email, will not leave you alone. Eventually, most restaurant owners give in and try again. Our friend Adam Freeman--whose restaurant was so small, and overhead so low, that he really, truly did not need a full house to break even--nonetheless continued to offer online discount deals. To get bigger payments from the daily-deal pushers, he had to inflate the price of his dinners to unrealistic levels; meantime, more customers meant higher expenses, so he had to cut corners. His regulars were crowded out by coupon-wielding newcomers whose negative reaction to the food, service and ambience was voiced with increasing frequency on Yelp: "Yuk!"

Finally, Groupon couldn't take it any more. As complaints rolled in and Freeman's Yelp rating fell to two and a half stars, out of five, they pulled their current deal.

Now let me say with absolute confidence, from the vantage point of a longtime industry observer and occasional paid consultant to Seattle restaurants, that users of Groupons and their siblings hardly ever return for a full-price meal. No, make that never. Never ever. Did I say never? I meant never. You've trained them that your food is worth half of what your menu says it costs, you've trained them that you undervalue your own product. There's no incentive for restaurants to provide anything like the full-price experience in terms of carefully prepared food; and, since coupon-users almost never tip on the actual menu price, there's no incentive for waitstaff to provide anything but perfunctory service.

I should add that bargain-hunting cheapskate diners--the embodiment of today's Entitlement Culture--are the worst, pickiest customers imaginable. They complain, incessantly, about everything, right or wrong, texting from the table about their waiters, the food on their plates, the decor, the music.

Even with the brutal reviews on Yelp, though, Freeman tells the Capitol Hill Seattle blog, "I think we achieved what we wanted. We achieved enough return business from those daily deals." Assuming he's sophisticated enough to have tracked repeat customers, he's looking to the future: "We think what is best now is to go back to being a small neighborhood business."

And yet: the user is on his way to becoming a pusher himself. Freeman is the founder of a new venture called Pricemobster, which he describes as a merchant-owned publisher of daily deals. In a rare admission that maybe, just maybe, restaurants that use coupons to drive traffic are making a big mistake, the Pricemobster site quotes Freeman: "he realized that while the business owners received a large influx of cash all at once, many were actually losing money and not gaining either customer loyalty or appreciation."

Thomas St. Bistro, 421 E Thomas St, Seattle, (206) 307-9131