Today I received an email from someone who is a reader of this blog.  He wrote this in the subject line:  "One thing killing the industry".  In the spirit of full disclosure, I must reveal that the author of the email is someone who is peripherally involved in our industry from a marketing standpoint.  Since I don't usually receive such provocative and thoughtful emails on the subject in question, I thought I would share it with you.  I refer to the author as "John Doe" in order to respect his privacy and in order to make sure that posting his email here cannot be construed as an advertisement for his business.  My response follows.

Mr. Russo,  
 
I understand restaurants need to do whatever they can to survive.  My question is this.  How can restaurants continue to provide offers through sites like groupon.com and livingsocial.com and expect to survive?  Not only are they hurting themselves, they are hurting the entire industry.
 
If a restaurant gives $50 of food away for $25, these sites take half of that $25.  That leaves the restaurant with $12.50 for giving away $50 worth of food.  That is less than the food costs the restaurant.  Yes, I understand they are expecting people to spend more, but coupons attract coupon users and they rarely spend more.  They also expect "breakage."  Well, breakage happens when people received gift cards as gifts.  When somebody spends money on an offer, the breakage is almost non-existent.
   ("Breakage', in this case, refers to unredeemed gift certificates or vouchers [my notation].)
 
There are so many of these offers each week that there is no reason to spend full price on a meal when you can go to relatively nice restaurants for half price.  Just today al Vento and W.A. Frost have 1/2 price deals.  

Restaurants that do this will not see these customers again.  They are going to wait until Spill the Wine, Solera, Duplex, Porter & Frye, etc., etc., and others put out their deals again.  Why would they pay full price at Fuji-Ya when Giaponese is giving me sushi at half price?  Heck, I'll eat a half price burger at Porter & Frye instead of full price at Hell's Kitchen.
 
So when a restaurant like Solera sells $65 of food for $30 (They sold 3600 of these.), that's potentially taking business away from a $30 restaurant that would have normally received that business.  Many of those 3600 would likely go somewhere else.

 

I knew I had to go to Spill the Wine before a concert so I bought a $65 meal for $30.  After I paid my $10 above and beyond, I got home to find out that I received miles for using my credit card.  I double dipped without knowing it, and they lost loads of money that I would have spent anyway.  I am guilty of buying these, but they are asking me to buy them.  Why???
 
Tens of thousands of these deals have been sold over the past few months.  That took tens of thousands of people away from other restaurants.
 
Again, I don't see how this helps anybody but the site owners.  Can you please enlighten me, and, if you agree, enlighten the community?

John Doe

 

John:

Thanks for the email, and while I cannot speak for my peers since I don't have access to their books, I can speak for our restaurant when I say that you are probably correct in assuming that restaurants are losing money by offering these deals while possibly taking business away from other restaurants that don't.

Discounted meals come in a variety of forms.  Sometimes they are half price wine nights. Sometimes they are "two for ones" also known as "buy one; get one free".  Sometimes they are coupons offering a discount on a particular item or a free glass of wine.  Sometimes they are early bird or happy hour specials.  Sometimes they are senior citizen discounts.  Sometimes they are frequent flier type discounts.  You get the picture.  The extent to which restaurants benefit or are hurt by these offers varies from restaurant to restaurant and from deal to deal.  Giving away a free glass of wine with a meal probably doesn't cost much and can be considered a marketing expense which might already be part of the restaurant's yearly budget.  That's not going to really change things much for the restaurant's bottom line, but it might be enough to get someone to drop by and check out a place.  We regularly give away glasses of sparkling or dessert wines to people celebrating birthdays and anniversaries.  We don't advertise it, nor do we advertise the fact we give out a lot of wine tasting samples in the wine bar.  Those things are not meant to attract new customers but are instead intended as a gesture of appreciation for those who are already dining with us.  To the extent that they foster repeat business, they are a marketing tool.

I gather from your email that you are perplexed by what seem to be ill conceived plans to help spur business and remain profitable in the long term.  Welcome to the club.  While schemes such as those might help with short term cash flow, they generally speaking only succeed in exacerbating the problem in the long term by selling meals for less money than it costs to produce them.

Our philosophy is different.  We establish prices based upon what we consider to be fair trade.  That is, we charge what we need to charge in order to maintain our margins and remain profitable while paying our staff living wages and meeting all of our financial obligations.  So far, that philosophy has served us well.  We have very low debt and are current with all of our suppliers as well as with the tax man.  We aren't getting rich, but neither are we in danger of losing our shirts.

It is not that complicated.  Take half price wine night.  If a restaurant can afford to sell a bottle of wine at half price on Monday or Tuesday, then it should be able to sell that same bottle for the same price on Friday or Saturday.  If it can't, then it is losing money, and it shouldn't do that if, in fact, the restaurant truly plans on being profitable in the long term.  It's like a miniature Ponzi scheme.  A restaurant sells a product for less money than it needs to break even.  The hope is that people will continue to patronize them which allows them to service part of their obligations.  As long as people keep coming through the door, the piper might never have to be paid in full.  Of course, that strategy might also assume that the restaurant will eventually go belly up and file bankruptcy if the customers stop coming which will negate the need to make good on previous debts.  In that case, purveyors, landlords, utilities, wages and taxes go unpaid; but ownership is not held immediately accountable.  If the intention is unscrupulous, then ownership will already have taken the money and run with it.  If the intention isn't unscrupulous, then it's just bad business.

Your observation about so called coupon clippers is relatively astute.  Obviously, not everyone using a coupon is a one time guest.  Some people, like you, might already be repeat customers taking advantage of a deal.  There is nothing wrong with that if it is being offered to you.  In fact, you would be foolish to pass on it.  Others might truly switch loyalties from, for instance, one sushi bar to another if the visit, which was spurred by the discount, offers what is perceived to be better quality at a comparable price.  However, the chances are better that the deal seeker is looking for someplace to get as much as possible for as little as possible.  There is nothing wrong with that either.  It's just that attempting to build a business model on that type of clientèle is not a sustainable proposition.  For most of those folks, their presence in a restaurant will evaporate once the deals have.  They are constantly moving on to the next deal.  Here's an example:  Last Saturday, I received a phone call from a gentleman who said he was seeking someplace to take his wife for dinner. He wanted know if we had any discounts or deals.  When I replied in the negative, he hung up on me.  He wasn't looking for a quality experience to enjoy with his wife.  Instead, his primary motivation was to get in and out of an establishment as cheaply as possible.   That is not the type of clientèle we are trying to cultivate.  Folks like that will not continue to patronize us in the long term so we would prefer not to give those seats to them in the short term.  Here's another example:  Last weekend we had a party of four redeem a $100 charitable donation gift certificate.  They spent $104.  That's about as close to a coupon clipper as we get, and you can plainly see the result of that.  My guess is that we will not see them again.

As for restaurants that offer discounts and coupons taking business away from other restaurants that don't, I don't have any data to back that assertion, but common sense tells me that you are probably right in that assumption.  Here's an example:  Last year, the online reservation service Open Table sponsored a Restaurant Week that was designed to help promote sales at the participating restaurants.  Since Open Table gets paid by the reservation, it was in their interest to send out an email blast to their customer data base identifying those restaurants and seeking reservations through their service.  The dinner portion of the promotion called for each restaurant to offer a three course menu for $35.  Since we have been offering a choice of two 3 course dinners, one for $30 and one for $40 every night since we opened in 2002, we were already doing that.  In order to keep Open Table from driving business away from our restaurant and toward others, we had to agree to take part in the promotion.   Otherwise, we most certainly would have lost business.  Keep in mind that our normal fixed price options, while a great value, remain within our budget as far as our cost of goods are concerned.  Consequently, the Restaurant Week promotion didn't offer anything new to our guests.  It simply made some new folks aware of us.  Was it worth it?  Certainly, since it didn't cost anything.  Was it successful?  That's hard to say.  With a 50 seat dining room, it's hard to measure whether or not any additional sales were driven to us since we are usually booked on the weekends.  Weekday sales are not as strong, and I didn't see any significant increase there that I could attribute to the promotion.  Perhaps we gained some new devotees, but I am hard pressed to claim that.  In fact, our sales for the week prior to the Open Table Restaurant Week were higher than during their promotion.

That last example goes directly to your statement regarding how you can't seem to understand who benefits from the coupon sites besides the site owners and those purchasing the coupons.  I am guessing that you are probably right about that.  That's why we don't have a presence on those sites.

Ultimately, all I can say is that there is no magic bullet that can save a restaurant, or any other business for that matter, from demise that can be substituted for hard work, good quality at a fair price, great service, wise budgeting, good management and living within one's means.  Most businesses, and certainly restaurants, need to be managed daily.  Running a business such as a restaurant is not a part time or even a full time job.  It is an overtime job, and if one isn't willing to make the commitment to put in the time necessary to do so then some half-baked (intentional pun) coupon/discount deal won't be able to save the day.  Instead, it is a recipe (another fully intentional pun) for disaster.

Best regards:

Lenny Russo
Heartland

 

 

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