I wouldn't blame Groupon if my business was so fragile that a single Groupon campaign (that I setup!) could kill it. Little restaurants like this go out of business every single day. They probably turned to Groupon hoping it would save them and instead it hastened their demise. It feels better to blame someone than take personal responsibility for a failure.
There is this thing that small businesses rely on. It's called "cash flow". You may have read about it. If Groupon waits for several months to issue a cheque (who the hell pays with cheques?) and then you have to wait for 10 days for the cheque to clear, then you have a cash flow problem.
Groupon knows this. Your cash flow problem is their business. Hope this helps clarify the issue somewhat.
Presumably money in the bank = interest. Groupon, it seems, wants to also be a bank. Shouldn't the restaurant owner collect interest as well perhaps. In reality though, can't all this be spelled out in the contract, that would have made it un-ambiguous.
> Our current merchant partner arrangements are structured as either a redemption payment model or a fixed payment model defined as follows:
> Redemption payment model - Under our redemption merchant partner payment model, we collect payments at the time our customers purchase Groupons and make payments to most of our merchant partners at a subsequent date. We utilize this model in most of our international operations as it conforms with the local market practice. Using this payment model, merchant partners are not paid until the customer redeems the Groupon that has been purchased. If a customer does not redeem the Groupon under this payment model, we retain all of the gross billings for the Groupon purchase. The redemption model generally improves our overall cash flow because we do not pay our merchant partners until the customer redeems the Groupon.
> Fixed payment model - Under our fixed merchant partner payment model, we pay our merchant partners in installments over a period of generally sixty days
No one really makes much money on interest anymore. Currently interest rates for short term cash holdings are very, very low everywhere you could park money. It's more about cashflow for Groupon versus actually making money on the float.
"and will arrange for payment of for any Now Aggregate Net Amounts due in such form and on such a schedule as will be communicated at the time the DR is established."
Also, the waffle guy could have easily searched Google to learn what this means for him. But we already know that he wasn't nearly conscientious enough to do that.
If something is truly important to a person, they'll study it. For business people, this means studying business contracts before they agree to them. For scientists, this means paying attention to their experiments, keeping their eyes on their instruments, and keeping up with theoretical advances.
To be successful at anything, you have to sweat the details.
That's my point. It doesn't say how they are going to get paid. While it certainly is an example of caveat emptor (or should that be caveat vendItor? The lines blur...), misleading someone via omission is in my opinion just as bad as not telling the truth, if you have an impression via the sales process that payment would be prompt.
Before you object, consider the reaction of the waffle shop owner if he had been told that it would take 3 months to pay for his services, but he still had to outlay capital to provide that service. Does it seem likely he would have gone ahead with the Groupon campaign? One cannot say with absolutely certainty, but I think it likely he would not have proceeded!
True. And I think the way Groupon handles this is unjustifiable. I still think that you should be able to work "out of pockets" for at least 3 months. If you can't do that, why start a business? Seems very risky...
There's gotta be a business here to lend immediately successful groupon victims money at a high rate before they go bankrupt for cash-flow issues.
I know it often "seems too good to be true" if a business tells you that it just needs a little working capital - but in this case they even have the collateral of the groupon money that will be coming in, which they can send proof of.
cash flow problems are situations where potentially an annual 200% interest rate is something a business would jump on: in two months that's only 33% interest rate with the alternative of losing everything due to their "great" campaign, and in this case they already have the money in accounts receivable from groupon.
a good article push with "how to survive a successful groupon campaign" that promotes the service ought to get some traffic.
on 'our' side, I need to point out that the high interest rate is not fleecing - really - as there is incredibly high immediate risk here, which is why the businesses can't simply get a bank loan. The point is that these are all-or-nothing situations that depend on cash-flow, and businesses have demonstrably nothing they can do. This market is not being served - there are no 200% interest rate loans for businesses that desperately need working capital at pretty much any cost.
so, the niche here is that a bank wouldn't look at the collateral of imminent groupon checks, but we can, since we understand the extent of the problem.
I doubt very much that Groupon has that kind of moolah to be throwing around :) Let's just leave it at that.
(In my original comment, I considered including that the biggest risk to the business plan is Groupon, and that therefore the business plan should include hedging or insuring against non-payment for groupon reasons. But thought that was too mean-spirited and negative; I hope groupon does well sustainably and indefinitely - by helping small businesses, not at their expense.)
As another commenter mentioned, it sounds like the waffle maker is more pissed about the slow payment than anything else.
But yeah, that's the thing. when you are a nobody dealing with a big company? net-30 means they start thinking about paying you in 30 days. This is not at all clear to someone without that experience... and if that one big company is how you pay the rent? well, you have trouble. (that's another thing I love about having a lot of small customers rather than one big one. I can be easy about people being late. When I was a contractor, after the 30 days in the 'net 30' were up, I'd just stay home until they fedex'd me a check. I felt all weird, because the customer was paying the middleman, it was the middleman that was sitting on the money for 45 days.)
Note, I don't think this is because they are trying to save pennies in interest. They sit on the payments because as long as they owe me money, they have vast power in any sort of dispute.
Really, both small companies and big companies need to realize this; Groupon needs to understand that they are dealing with people that haven't had to wait on corporate payment schedules before, people that often don't have access to short-term credit. Groupon needs to understand that these people are used to the situation where 'net 30' means 'you will get your money, at the very latest, in 30 days' - and Groupon needs to act accordingly, if they want to play in that market.
Of course, business owners also need to learn that when you deal with a large corporation, the contracts they write are worth nothing; if standard procedure is to mail 'net 30' checks 45 days after getting the invoice, they are going to mail 'net 30' checks 45 days after getting the invoice, and there is nothing you can do about it. If you deal with large companies, you need to keep more operating expenses as available cash/credit than when you are dealing with small companies, and really, you need to have a lot of patience and toleration.
(Of course, this is part of why you charge large companies more than you charge small companies. At the same price? it's simply not worth it to deal with the bullshit.)
I agree that Groupon's practices here may be beneath contempt, but noone forced this business owner to sell his products via Groupon. A tiny bit of research on the net will tell you what to expect.
Many business owners view these voucher offers as solely a publicity exercise and fully expect to make a loss, with the hope of gaining new customers in the long term (whether it actually works out like that is debatable).
I couldn't tell from this site if the owner is under the impression that he was never informed it would take that long to get the money, or if he signed the contract knowing full well what the reimbursement policy was and just thinks it's unfair now that he's had to live it.
Also, I'm a little confused about the economics involved. Most of the overhead in this kind of restaurant is in the facility and labor. The raw ingredients of even the most gourmet waffle should pale in comparison. And your facility and labor costs should hold about steady unless you're doing an insane amount of additional business from Groupon. And his base price was $8. $8 for a waffle. I'm no cook, but it seems like there should have been a very healthy profit margin in there.
I don't own a restaurant or know much about the economics of keeping one open, but this seems like an odd situation to me.
$8 for two. $4. Groupon takes half. $2. Paid over three months. 66c. More of the money will trickle in later, but 66c (and still a month later) is not a very healthy profit margin.
Closing business for a day: labor cost = 0. That means less burn. He must be bleeding for cash given the timing (3 months). At this point, business owner has to amortize the labor cost across fewer waffles.
Agree 100%. Also, based on his menu, he made another critical error in using promotions like Groupon: no room to upsell. He's charging $8 for waffles (which may not even be that high in his DC neighborhood), but undercharging for coffee and doesn't appear to have any further upsells.
As an example, mimosas go great with waffles and can run up a tab quite quickly. Alcohol is usually excluded from such promotions, so this is an opportunity to reclaim immediate margin.
Edit: Yes, getting a liquor license costs time and money. So does running a successful restaurant. I was pointing out that running such a promotion requires preparation. He could also make his margin selling waffle toppings, sausage, and grits. Any way the merchant can get the average ticket well above the Groupon's cap is a way to stay in the black; liquor is just one way to do that. If a restauranteur isn't ready for scale, Groupon is not going to work.
And a medium drip at Starbucks is over $2 everywhere in Atlanta (where I live). I'd be surprised if prices are lower in higher-priced D.C.
Selling mimosas requires a liquor license, which isn't easy to get. It's unlikely that a hole-in-the wall waffle joint would have one.
Since when is $2 undercharging for a coffee? Even starbuck's doesn't charge that much.
The guy should have made a mistake, but arguably the Groupon model needs to work for little businesses like this if they're going to take over the world.
Maybe, offer a basic cup of joe for $1 and a fancy organic, gourmet, free-trade coffee for $3.50 in a nice coffee press. It really depends on the part of town and the typical type of clients.
I think you're significantly underestimating the price of the ingredients. There are some good sites how to start a restaurant, and what margins to expect, how to calculate cost, etc.
I am with you, but I also know that businesses buy things that they don't need all the time. Things like full page ads in "The Other Yellow Pages you never heard of" and things like that. Perhaps he bought into the dream and didn't consider the consequences, perhaps they lied, perhaps perhaps perhaps. Sad though. Hopefully his story helps prevent another problem.
Full page ads have a limited loss potential though, what you spend on the ad. And you pay up front (I assume), so you probably aren't making an obligation you can't keep. Your groupon "ad" loses more and more money the more successful it is.
It really looks like they sold dreams to the poor business and the business was too busy to really understand the terms and consequences of the deal. May be Groupon took advantage of the gullible business or maybe they were they were too dreamy eyed but ultimately the party that suffered was the small business and I think they should have done the due diligence of validating what the modus operandi was for Groupon.
Response from Groupon:
“Mr. Nels[e]n initially approached Groupon and our merchant advisors structured a deal to best encourage overspend and help his business grow. We also required Back Alley to cap the number of Groupons sold to ensure the feature was in the best interest of both consumers and the merchant. We scheduled his feature on his terms, on a date he selected, under a contract he reviewed and signed. According to our records, only 132 Groupons, or 18% sold, have been redeemed since Back Alley ran two months ago, and Mr. Nels[e]n has received 2/3 of his share of the revenue to date. We always hate to hear that a local business has decided to close, but the math does not point to Groupon as the cause.”
It's 2012, everything is either a commodity made in China or a Veblen good. And not just any Veblen good. Everything that is not a commodity is ... sky diving!
But his customers had no idea that Groupon is slow to reimburse him. I'm surprised he doesn't show a little contrition for screwing them (and himself) by signing up for Groupon.
Customers are not screwed at all, Groupon will give them a full refund.
It's a shame he's putting the entire Blame on groupon and not taking any ownership of the issue. I wonder what he was actually expecting of the campaign.
And this is why Groupon's business model is unsustainable - bad news travels faster and is more vocal than good news. Any business owner on the fence about using Groupon walks away after reading this post.
Does it even matter that it takes three months? Most groupons are valid for more than three months. Even though I assume most are used within the first month, its still not all of them.
groupons not redeemed don't cost the business owner anything. The ones that are redeemed require him to front the cash. This is cash flow management 101 (and one of the things that enrages some people about Apple and Amazon. Apple sells you a new iPad, but buys its suppliers 90 days later. Those suppliers, just like groupon merchants, are making 90 day loans out of pocket).
"Groupon's chairman, Eric Lefkofsky has a history of financial scandal.
One time he sold a startup called Starbelly to a bricks-and-mortar company that later went bankrupt.
In a lawsuit that followed, an email from Lefkofsky surfaced. In it he wrote: "Lets start having fun... lets get funky... let's announce everything... let's be WILDLY positive in our forecasts... lets take this thing to the extreme... if we get wacked [sic] on the ride down-who gives a shit... THE TIME TO GET RADICAL IS NOW... WE HAVE NOTHING TO LOSE..."
Years later, Lefkofsky hired a contract worker named Andrew Mason.
In Mason, he discovered a naive genius and gave him the money start what everyone thought would be a legitimate business.
But then Mason stumbled into a business with an explosively growing top-line (not bottom line or even middle line), and – so believe the conspiracy theorists – Lefkofsky saw another opportunity to be "wildly positive" for profit, even if it meant fudging accounting here and there.
So Groupon called itself profitable when it wasn't. It moved marketing expenses into capital costs. It confused net and gross revenues. And that's just what it got caught doing.
And when it was caught, Groupon's line was: oops, that was a dumb mistake. And while the rest of us rubes believed them, conspiracy theorists say Groupon's people are actually "dumb like a fox."
In this view, the reason Lefkofsky insists that Mason be CEO is that Mason is young, naive, and plausibly prone to innocent mistakes.
These people believe the reason Google exec Margo Georgiadis only spent a few months at the company is that she came in, looked around, freaked out, and got out.
These suspicious folks will say: Lefkofsky and company may have believed they were bending rules in order to get Groupon to a point where it could become a legitimate business with clean accounting, but that's still fraud."
"The history of Groupon’s chairman, Eric Lefkofsky, was also unearthed, showing a lawsuit-prone entrepreneur who flipped a dot-com company in 1999 only to have it lead to bankruptcy a year later for the firm he had sold it to. And Groupon’s filing shows that when the company privately raised $950 million in a pre-I.P.O. round in January, it paid out $810 million of that to its investors and employees, a red flag for any investor. (Mr. Lefkofsky and his wife took home about $319 million of the total.)"
