Groupon is not to blame

Last week another restaurant-Groupon faceoff went public, featuring Back Alley Waffles in Washington, DC. Back Alley claimed Groupon’s slow payment cycle was to blame for a business-killing cash crunch. Groupon fired back saying they were paying on the agreed-upon schedule, and that only 18% of the daily deals sold had been redeemed.

It is easy to blame others when business goes south. Ruby Tuesday once blamed “winter weather” for missing sales targets. Groupon makes a tempting target. But the facts are on Groupon’s side and provide an unfortunate but helpful lesson to other operators.

Let’s run the numbers:

  • Customers bought a $16 coupon for $8.
  • 733 deals were sold, generating $5,864 in sales.
  • Back Alley earned half ($2,932) payable in 3 monthly installments
  • 132 deals were redeemed.

Note: the restaurant is publishing somewhat different numbers but the difference is  not material.

My gut (and I’d love some operators to weigh in) is that the gross margin on an artisinal waffle is at least 60%. That means for every Groupon redeemed, Back Alley Waffle incurred tops $6.40 in direct cost. Cost = $6.40 x 132 = $844.80.

Let’s play that back: Back Alley Waffle earned $2,932 at a cost of $844.80. 

Even with a slow payment cycle, Back Alley was out $844.80 while waiting for their first $977 installment.

There are two big lessons here. The first is to make sure you have enough cash on hand to invest in your business post-opening. If you get to opening day with nothing but loose change, you’re probably toast. As a new restaurant Back Alley was just figuring out their operations and doing so with what they describe as “no money”. Sudden success, even before the Groupon, made the learning curve doubly hard. So why then spend money you don’t have to get customers you don’t need? Operators should to align their marketing investment with their business goals.

Second, know your operating metrics. The cost of the campaign is not forgone revenue ($16 X 733 = $11,728) and should not include indirect costs. Did Back Alley add staff specifically to serve 132 Groupon customers over a month? Did they pay more rent or need a new licence? The only costs are the direct costs of cooking and serving waffles for the customers who redeemed. 

I don’t think daily deals are for everyone. I think a daily deal can be dangerous if not done right. But this deal looks like like it accomplished what was intended- customers acquired profitably.