Stuart Andrews waves his printout in front of the waiter at California Wings at the corner of Manuel Acuna and Aztecas in Guadalajara. The name leaves no doubt as to the American-style sports bar perched over the edge of this trendy shopping plaza.
In the time it takes to tell one faintly amusing work anecdote, three liters of beer thud challengingly on the table shared by Andrews and his two companions.
By 9 p.m. the dinner rush has begun and nary a spare seat manages to stay open for newcomers. The three companions hardly pay any mind. They are already working through wings – 50 of them – followed by french fries, jalapenos, and cheese sticks – all good bar grub, all for 159 pesos.
Andrews is test-driving Groupon, the internet daily deal machine. He called the experience “good value” and praised both the restaurant service and the promotion.
He had found the deal waiting in his inbox ten days earlier. For 159 pesos, he could buy about 600 pesos of food and drink. With only one day to act on the deal, he took the plunge, and joined the scores of people already using the service in Mexico.
Groupon, the Chicago-born internet-age industry-creating phenomenon, has far outgrown its first city – and country. The internet company has laid claims in 47 nations since its 2008 debut. Mexico, no shy darling, joined the venture back in June 2010. Groupon already features daily deals in Mexico City, Monterrey and Guadalajara.
The website uses the social power of the internet to assure companies that when they want to offer a deep promotional discount, they will definitely have enough customers to make it worth their while. How? When Groupon sends out its daily email highlighting a chosen local business, subscribers have 24 hours (in a few cases longer) to decide whether to purchase the deal of that day. Once the minimum threshold of customers has paid for it (the group part of Groupon), the deal activates for everyone. If there’s not enough interest to meet that requirement, the deal is canceled, the business takes no risk and customers don’t have to pay. Everybody wins.
Especially Groupon, which normally splits the money evenly for the purchased deals with the businesses. But they run a large operation, with a lot of costs as the company grows exponentially – from 39 employees in June 2009 to over 10,000 today.
Consulting firm BIA/Kelsey forecasts this newborn industry to reach 3.93 billion dollars in turnover by 2015. As it does so, Groupon may have to start working out better terms than 50 percent for its contract businesses, especially in the wake of the hundreds of copycats springing up all over the web, and the world – although Groupon is still by far the largest slice of that market.How large? In November 2010, tech media exploded with reports that Groupon had rejected a six-billion-dollar purchase offer from Google. Shortly thereafter, the company announced plans to go public.
It was little premature to call it a Cinderella story, though. Groupon experienced its share of pains from its untethered growth spurt. While it had planned an initial public offering valuation of 25 billion dollars, a number of issues revealed upon scrutiny by regulators and analysts caused them to re-file paperwork and to downgrade their valuation to 12.7 billion dollars.
For one thing, they used a non-standard accounting metric called adjusted consolidated segment operating income to calculate profitability, which led to an over-valuation of said profitability – by 480.6 million dollars.
Meanwhile, last fall Groupon ran an operating ratio of debt to capital of 102 percent. According to analysts, this number is very high for a successful startup, with other big names like LinkedIn and Zynga running between 30 and 50 percent.
Despite their success, those companies haven’t grown as fast as Groupon. And Groupon has spent a lot – 345.1 million dollars in the first half of 2011 alone – on online marketing. As they settle into their size, they have been decreasing this number in order to get closer to profitability.
But the fact that they currently charge half of the take on all deals means that, after the already heavy discounts, retailers and services using Groupon are only getting a quarter of normal prices for their promotions. This presents no problem for museums and other exhibits that have an almost unlimited supply of their commodity. But what about restaurants and retailers? Is it worth the exposure and the jolt of extra customers? That, of course, depends.
For places that rely on specific tastes, Groupon may be a mixed bag. In the case of clothing retailers, about 80 percent of the deal-buying customers already like the brand, and about 50 percent would have purchased anyway without the daily deal, according to a study of the industry by Forrester Research.
Existing customers enticed into stores on huge savings might give retailers an opportunity to sell more. Stuart Andrews and his friends at California Wings indulged in an extra three liters of beer. However, a study of the daily deals industry by Utpal Dholakia at Rice University found that only 35.9 percent of customers bought extra things, while only 19.9 percent returned later for a regular purchase.
For some businesses, converting just 20 percent of a massive influx of customers makes the prospect worthwhile.
The plaza housing California Wings is bunched against a Superama and a glorieta on the western side of Manuel Acuña, topped by a chic chain nightclub accessible exclusively by a roped off elevator. Having opened just last August, California Wings was new, full of potential and ripe for a Groupon deal.
So, they teamed up and offered one in December. It worked like gangbusters.
“At the beginning, we weren’t aware that we would have this boom,” explained Omar Cueto, manager of the restaurant. “It gave us a few problems because we were completely full and had people waiting outside and it wasn’t the experience that you want from a restaurant.”
Groupon and California Wings sold a lot of deals. The restaurant was so slammed for 15 days they had trouble keeping up – “with ketchup, with paper, with everything,” said Cueto.
This was in addition to the constant pressure on the staff to keep up with such unusual demand. But, was it worth it?
According to Cueto, yes. He called the promotion a good investment compared to others the fledgling business had tried. When they put out 2,000 fliers offering a free beer, he recalls that brought in maybe 20 people.
“Groupon works for places that are not well-known,” Cueto said, adding in response to criticisms that the bargain hunters will only pick a place clean and move on, “Not everyone, but yes, some people have returned.”
Cueto isn’t ready to do another Groupon deal just yet, but would consider it again down the road.
There are plenty of horror stories floating around the blogosphere of small businesses ruined by their unpreparedness for the daily deal mobbing effect. Those are outliers for the most part. A survey of almost 400 merchants by Yipit and the Susquehanna Financial Group found about 80 percent of them liked working with daily deals sites, and 48 percent were already planning another deal in the next six months.
For these reasons, in its paperwork filed with the Securities and Exchange Commission, Groupon itself recognized its insatiable need for new client business. “We must continue to attract and retain merchants in order to increase revenue and achieve profitability.”
Manolo Atala, country manager for Groupon in Mexico, supported this notion. “We’re not a technology company per se. We’re a sales company, so a huge percentage of our people are sales people.”
While he emphasized that Groupon’s growth has already been impressive in Mexico, he also recognized that their biggest challenge will involve educating people about e-commerce. In Mexico, he said, “a lot of people are afraid to put their credit card in online businesses.”
But he spoke enthusiastically of the potential. “Once we get their trust, we can grow like a monster. Mexico is a huge market.”
In addition to its daily deals in the country’s three biggest cities, Groupon offers local deals two or three times a week in 14 smaller markets, plus the travel and product deals that are available nationwide (some of these have a longer purchasing window).
And they are diving into the entertainment business. Groupon has a deal with Ticketmaster in Mexico, like that of their U.S. counterparts, that allows them to offer deals on event ticketing – a business they hope to grow in the future as well.
Groupon is still the leader in its field, Mexico being no exception, but some pretty big names are getting into or planning to expand their part of this nascent market, including Facebook, Google, Amazon, and LivingSocial.
Groupon plans to hold them off with new ideas such as a promising smartphone app called Groupon Now that presents users with just two buttons: I’m hungry, or I’m bored. It uses the phone’s location and the time of day to display relevant deals for eating or entertainment satisfaction. Restaurants can use the service too, for example, offering a weekly lunch on days they are normally empty to help balance their service load.
Groupon has been at once Dr. Frankenstein and his monster – a self-created behemoth angling dizzily toward a more stable and sustainable model. Only time and the flow of money will tell whether it achieves the next internet mega-success, but the company is certainly in position to do so.