Has Deal Fatigue Set In?

Wall Street analysts poring over deal giant Groupon’s Initial Public Offering (IPO) documents express worry about merchant and customer fatigue. Wait until they see a new survey showing that only 43 percent of restaurants make a profit on their daily deal promotions, and only 36 percent of restaurants plan on offering more deals.

There’s a certain uneasiness among the financial experts trying to make sense of deal-of-the-day site Groupon’s IPO. When they look at the company’s revenue, they have to acknowledge that Groupon has come out of nowhere to be the fastest-growing company this country has ever seen. When they look at expenses...well, as Minyanville columnist Conor Sen puts it, “How do you value a business that could do $3 billion in revenue this year but might not be able to keep the lights on in 12 months?”

Now Rice University associate professor Utpal Dholakia is giving this gang some sobering news. He’s the author of a new study, “How Businesses Fare with Daily Deals: A Multi-site Analysis of Groupon, Living Social, OpenTable, Travelzoo and BuyWithMe promotions.” It looks at daily deal performance in 23 U.S. markets, surveying 324 businesses that ran offers between August 2009 and March 2011.

The overall findings foretell a troubled future for Groupon, LivingSocial and the rest, and should give pause to the restaurant operators that offer deals through these sites now.

“The major takeaway from the study is that not enough businesses are coming back to daily deals to make the industry sustainable in the long run,” says Dholakia, who has conducted two previous deal-of-the-day studies. “And our results from three studies and close to 500 businesses surveyed show that the deals are nowhere close to the rates of financial success for participating business that some companies claim to be having.”

Some of the key findings for restaurant operators from this new study are:

• 21.7 percent of deal buyers never redeem the vouchers they’ve already paid for.

• 55.5 percent of all businesses reported making money on their promotions, while 26.6 percent lost money and 17.9 percent broke even.

• 80 percent of deal users were new customers, but significantly fewer users spent beyond the deal’s value or returned to purchase at full price.

“The relatively low percentages of deal users spending beyond the deal value (35.9 percent) and returning for a full-price purchase (19.9 percent) are symptomatic of a structural weakness in the daily deal business model,” Dholakia points out.

Dholakia’s numbers present an all-industries look at deal-of-the-day users, but he also breaks out restaurant-specific numbers. They show that restaurants do less well than the average. The study reports that only 43.6 percent of the restaurants surveyed earned a profit from their daily deal promotion, and just 35.9 percent intend to run another daily deal in the future. Salons and spas, another large segment of the daily deal universe, do worse than average, too.

“Since restaurants, bars, salons and spas represent the bread-and-butter for many daily deal sites, these findings raise questions regarding the continued availability of a sufficient pool of viable revenue-generating merchants from these two industries for daily deal sites,” Dholakia concludes.

While this study indicates that merchant fatigue may already be here, a recent study from Technomic indicates that customers fatigue has yet to come into play. They still love deals of the day. Because they do, benefits other than immediate dollars-and-cent returns from deals are thought to accrue to restaurants.

Nevertheless, Dholakia predicts the golden age of sweet deals for consumers may soon come to an end. “Right now the getting is still good for the consumer, but that isn’t going to last much longer as these steep discounts won’t and can’t last very much longer,” he warns.