Cleaned out after gambling on Groupon: Few firms realise the huge risks

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FOR the past six months, Chris Harman’s pub has been packed to the rafters. Almost every night, all 35 seats have been taken, and his chicken liver and Cointreau pate, his marinated lamb kleftiko and his black tiger prawn stir-fry have been flying out of the kitchen, reports the Daily Mail.

Good news, one might have imagined, in such straitened times. But Harman, 53, is not happy. Which is hardly surprising, given that he has pocketed a paltry £5.50 a head for the privilege of serving his award-winning food (glass of wine included) to some 750 of those customers.

‘I am exhausted,’ he explains. ‘Everyone in the trade is struggling as it is, but what has happened to us has ruined our whole year. I wouldn’t wish it on our worst enemy.’

What he is referring to is Groupon — the biggest player in a phenomenon that has turned Britain into a nation of professional bargain hunters.

The system works as follows: subscribers log on to Groupon’s ‘deal-a-day’ website where they can buy a voucher that offers a number of daily discount deals on anything from restaurant meals to spa treatments. The US-based company uses collective buying power to negotiate bargain-bucket prices with retailers, which become available only if a minimum number of people sign up.

Even though Groupon takes up to half the price of the vouchers, the retailers and restaurateurs participate in the belief that it will help them gain new custom, or sell extra goods.

And so it was that Harman found himself signing up earlier this year, after a Groupon representative dropped into his pub, the Six Bells in the Berkshire village of Beenham.

‘She explained how Groupon worked, and I agreed to do an offer for customers at the cost price of the food,’ he said.

This meant a two-course meal for two with a glass of wine each for £22 instead of the normal price of £57 — a discount of more than 60 per cent. Of that £22, the pub would take £11.

‘The idea was that we would attract new custom and provide the opportunity for repeat trade,’ says Harman.

‘We thought a few hundred people would take up the offer and then come back at a later date and pay the full price.’

But within hours of the advert going online, the public’s eye for a bargain became apparent. Harman watched in horror as the numbers  signing up quickly headed past 500.

In panic, he tried to call Groupon to get them to pull the offer but because it was a Sunday he couldn’t get through. By the time he had managed to speak to someone the following day, some 750 people had already paid Groupon for a voucher to have a bargain meal at his pub.

‘The phone started ringing almost immediately with people trying to book and it pretty much hasn’t stopped since,’ he explained.

What’s more, rather than some of these people becoming regulars, as he hoped, the publican says that only one couple who used the Groupon voucher has returned for another meal.

And what about all the hoped-for additional sales of extra drinks and side orders? ‘There were none!’ says Harman.

‘The people just come in, eat the food, have their glass of wine. They won’t even pay for another drink — they’ll ask for a glass of tap water.’

He admits the Groupon voucher system is great value for customers but adds: ‘It’s been terrible and has left a very, very bitter taste in our mouths.’

And it is fair to say that he’s not the only one to be left feeling that way.

Recently, the Mail told the story of businesswoman Rachel Brown, who also signed up to Groupon only to regret it very quickly. The 50-year-old baker from Reading agreed to offer a 75 per cent discount on a dozen cupcakes, selling them for £6.50 instead of the usual £26.

The cupcakes are normally a minor part of her business, Need A Cake, with sales of around 100 a month. But after the deal went on Groupon, Brown found herself with an astonishing 8,500 orders — a total of 102,000 cakes.

And disastrously, because the deal she offered had been so generous and demand so huge, she made a loss on every order, wiping out her profits for the entire year.

‘We only expected to get a few hundred orders but we had thousands and thousands pouring in,’ said Brown.

Her company normally employs eight workers but had to hire 25 agency staff. After spending an extra £12,500 on labour and distribution costs, she lost £2.50 per order.

‘Without doubt, it’s the worst business decision I have ever made,’ she said. ‘It’s been an absolute nightmare. I was very worried about standards dropping and hated the thought of letting anybody down.’

And therein lies the crux of the dilemma for any business signing up with Groupon. The idea is that they take an initial hit but believe they will benefit in the long-term through exposure to new customers who will try their product at a discounted price and then return for more.

And, undoubtedly, for many businesses it can work.

According to Groupon’s website, 91 per cent of businesses who have signed up say they would like to be featured again.

For example, Charlene Wilson and her husband John used Groupon to promote their plumbing business when they moved to Aberdeen and wanted to build a new customer base.

They discounted their boiler service by 61 per cent, offering it at £39, of which they kept £15.60. In all, 300 people took up the offer. ‘We didn’t make very much out of it, but it was very good for the business as it got a lot of new customers in,’ said Wilson.

In other words, it can be an effective marketing or public relations tool.
Another company to benefit is Revolve Studios, a photographic makeover studio with outlets in Cheltenham and Cardiff. It has run three Groupon deals this year and seen business increase by 30 per cent. The firm needed six new staff to cope.

Owner Chris Daganal, who has discounted photo packages from £200 down to £29, says that Groupon customers often pay for additional prints and then go on to promote his services by word of mouth.

‘Our business is growing much faster than it would have done without Groupon,’ says Chris, 38. ‘It has given me the confidence to consider opening up another branch.’

Unfortunately, there are others whose experiences are less positive. Some claim that Groupon failed to make them sufficiently aware of the potentially high number of customers who would take advantage of the bargain deals.

Hannah Jackson-Matombe runs a successful company called Spotless Organic, a green cleaning company that specialises in high-end domestic and commercial properties.

Previously, she had successfully advertised discounted offers with similar ‘group-buying’ companies, such as Keynoir, and thought Groupon (the biggest player in the market) would deliver repeat business and help spread the word about her company.

But she was shocked by its sheer power and has worried about the damage it can do to businesses trapped by over-committing themselves.

She says: ‘We realised to our cost that we became Groupon slaves.’ She feels that people like her do all the hard work while the Groupon bosses sit back and collect an unfair share of the profits.

For example, Jackson-Matombe says she used Groupon to offer an oven-clean service for just £19, of which she would take £9.50. The normal cost was £95.

‘I was very excited when I started to discuss the deal with Groupon,’ she says. The plan was to reduce the ‘oven scrub’ service by £25 to £70 and they hoped that this would lead to 1,000 new sales.

Jackson-Matombe says she was then persuaded to drop the price further to make it more attractive. She says Groupon suggested £19 per ‘oven scrub’. I feared it would be too cheap but they told me that once I had done the oven scrub, I would be able to sell customers another service — a deep clean — for our normal £140 price.

‘On that basis, adding the two deals, I thought it would make good business sense.

‘I was a willing participant. Like so many people, I was just keen for my business to do well.’

Going ahead with the discount offer, Jackson-Matombe says she asked for the deal to be put on Groupon’s website for just 24 hours. But she claims it stayed on for longer — despite her contacting Groupon to complain — by which time 300 of the deals had been sold.

Her staff have now cleaned 200 ovens, and she estimates she has lost £35 on each one, given  that her cleaners are paid £8 an hour, and many customers who took up the offer lived long distances from her North London-based business, adding travelling time and costs.

As for attracting repeat business, she says she has not had any at all. Customers who buy a service through Groupon pay the firm directly — and not the business offering the discount.

The agreed share of the money is handed over once the voucher has been ‘cashed’ in and the service delivered. There have also been claims that it can take weeks for Groupon to release the money.

What stands out from the experiences of the companies swamped with Groupon orders is their dogged determination not to let down those who have purchased the vouchers, whatever the cost to their business. They know that failure to honour the vouchers could actually mean their reputation is damaged rather than enhanced.

But for some, the sheer scale of the take-up means it is impossible to meet demand.

Alan Oxlade and his wife Wendy run a pub, The Shoulder of Mutton, in Playhatch, south Oxfordshire. They recently ran a £21.50 meal-for-two deal on Groupon and ended up with 1,103 people taking up the offer.

The pub has just 15 tables and is open only in the evenings, with Fridays and Saturdays already booked up by paying customers.

The deal was valid for three months — and they believe that many people bought the meal-package as a Christmas present, meaning that there’ll be a mad rush to dine at their pub in January before the vouchers expire.

‘Even if we filled the whole pub every night to capacity with people redeeming vouchers, there would still be hundreds of people — regular punters and those who had bought vouchers — unable to get a table,’ said Oxlade.

Admitting that he had made a mistake, he said he hated the idea of not honouring the deal. ‘We are not prepared to let people down like that,’ he said.

‘It has taken us 12 years to build up our reputation and we do not want it damaged.’

Following discussions with Groupon, the company has now agreed to offer full refunds to anyone who cannot be accommodated.

Even so, Oxlade has already had to field complaints from unhappy voucher-holders.

‘The small businesses involved are the targets of anger for the over-selling capacity, not Groupon,’ he says.

Defending her firm against such criticism, Groupon’s international communications director Heather Dickinson says: ‘We offer local businesses the opportunity to expand their customer base.

‘Partners who choose to run a deal with Groupon are provided with support and advice that help them drive the best return on investment for their businesses — a bespoke process — and our managers provide custom assistance before, during and after the deal to ensure partners achieve their goals.

‘We often make recommendations on capacity, including offering a deal cap.’

While the Groupon phenomenon has revolutionised business for some, those over-run cupcake bakers and pub cooks have found they have got their fingers horribly burnt.