It's difficult to acknowledge anything that is good about a recession, particularly the deep one that enveloped America late in the first decade of the 2000s.
As the economy faltered, millions of people lost their jobs and the housing market collapsed. Folks who still were employed cut back on their discretionary spending, which left many merchants, including restaurants, struggling.
But the economic downturn did provide the impetus for the development and growth of one industry: daily deals.
During the recession, restaurant operators "did a lot to reduce costs, and they took that as far as they could," says James Balda, chief marketing and communications officer for the National Restaurant Association. "Now, they needed to drive traffic to the restaurant."
That helped spur daily deals.
Less than a decade old
The daily deal business is less than a decade old and has become a $1.7 billion industry in the U.S., according to a study this year by IBISWorld, a Los Angeles-based research company. Annual growth the past five years has been more than 300 percent.
Restaurants make up 23 percent of all daily deals, second only to health and beauty products and services, which hold more than half of deals that are offered, the study adds.
Deals at restaurants provide 12 percent of the daily deal industry's revenues, notes Yipit, a deal aggregator that keeps its members apprised of Web-coupon offerings from various sources. Health and beauty is 23 percent, while travel and tourism is 17 percent.
Daily deals had their roots in Web-based merchandise bidding sites during the late 1990s. The current incarnation began when Woot.com started its one-deal-a-day offers in mid-2004 and gained steam when the economy turned south in 2007.
One year later, Chicago-based Groupon exploded on the scene as an easy-to-use Web-couponing service. Its focus on local deals quickly made it the industry leader.
It was also what restaurant owner Jude Das needed. Das and his wife had acquired the Indian Garden Restaurant in Chicago's Little India on the Near North Side in 2007.
"When I took over, it was packed," Das recalls. "Within months it started dying out."
Groupon comes to the rescue
Groupon came to the rescue. "It made a huge difference and saved my business," he says. "The very first one, I sold 2,500 (coupons). Yes, some (diners) just spent the minimum and that hurt, but most spent more. That's why I still use them."
Groupon, which is now a public company, holds 37.3 percent share of the market, according to IBISWorld.
LivingSocial, based in Washington, D.C., began offering daily deals in 2009 and holds 14.2 percent of the market. No other daily deal companies – Yipit says there are now fewer than 900 in North America – has more than 10 percent.
Many sites are run by newspapers, which are looking for extra income and potential new advertisers. Other sites are industry-specific.
"You have restaurant sites, family sites, pet sites, at least three medical marijuana sites," notes Dan Hess, chief executive and co-founder of Chicago-based aggregator Local Offer Network. "It can be as specialized as you like."
The industry's basic model has been fairly simple. Discounts on goods or services are available for a certain time (often 24 or 36 hours), and the completed deal can be either printed out as a voucher or loaded onto a smart phone.
Deal operators make their money by taking a certain agreed-upon percentage – upward of 50 percent, but often less – of the discounted cost of goods or services being offered.
"Discounts are still more of a merchant's incentive to get people in the door," says Nima Samadi, restaurant industry analyst for IBISWorld.
A specialized company like Restaurant.com, which has been around for more than a decade, including nine as a Web-couponing business, has deals that don't expire and can be exchanged for other restaurant deals.
"We view ourselves as a partner with our restaurants because we can provide a steady stream of profitable customers," says Chris Krohn, president and chief marketing officer.
Daily deals are only one part – albeit a considerable one – of a restaurant's online marketing, which is delivered by a website or a smart phone application, or "app."
Groupon – a blend of group and coupon – "popularized these deals by reaching a tipping point, where you had to enlist the support of everyone you knew because you couldn't get the deal unless a minimum number of people committed to pay for it," Hess says.
Deal members notified via email
Deal members are notified about deals by daily email.
Living Social is similar in many ways to Groupon, but may have a slightly more social aspect to it. Members who purchase a deal can link it to their pals, and if three of those buy it, the original purchaser gets the deal for free.
In addition to daily deal companies, there are coupons and offers on individual restaurants' websites and through their social media, including Facebook and Twitter. The social media tools give operators an opportunity to interact with their guests.
Market research company NPD Group reported this summer that online marketing influences 6 percent of all restaurant visits. The largest share of those visits – 37 percent – was for restaurant deals and offers.
Online marketing also includes online menus, general information and recommendations.
Of all online-marketing-influenced restaurant visits, 26 percent were first-time trips –twice the overall new-buyer visits. Casual-dining spots fare particularly well.
The influence of online marketing on restaurant demand continues to grow, says Bonnie Riggs, NPD restaurant industry analyst. “It’s no longer a question if online marketing should be a part of a restaurant operator’s overall marketing plan. It’s a must-have.”
Daily deals should be viewed as part of a restaurant's entire online marketing program.
"They shouldn't be all of the marketing, but should be seen as a possible part of the mix as a way to drive traffic," especially for those restaurants looking to get noticed beyond their regular customers, the NRA's Balda says.
Majority of operators say deals are effective
The restaurant association's recent research into social media found that a majority of operators and consumers believe daily deals were effective in driving traffic.
"I look at social media more as engaging in a two-way conversation," Balda explains. "Daily deals are more of a one-way promotional offer. These are two distinct parts of the marketing mix. Once guests are drawn in through an offer, I can have a conversation."
Getting diners to step into a restaurant is key because that's when the operator can make them regular customers.
"After customers go though the door, it's up to the organization to attract them to come back" and pay the full price, explains Larry Freed, chief executive of Foresee, an Ann Arbor, Michigan, company that measures customers' experiences at a merchant.
A restaurant operator needs to "step back and realize the discount is a cost of marketing," he continues. "It's really about planning and managing it well. Consumers who use deals and are generally satisfied with the experience will come back again."
Deals carry numerous pros and cons. They can bring in more customers and result in new regulars, but they can also be costly and may be purchased by bargain seekers who will never be regulars.
Various studies say anywhere from 35 to 80 percent of Web-coupon purchasers are new customers. One restaurant report by professors Sheryl E. Kimes of Cornell University and Utpal Dholakia of Rice University found most deal users would return and pay full price.
"Restaurants need to be savvy and have a plan to convert (deal buyers) into new, regular customers," says Kimes, who is Singapore Tourism Board distinguished professor in Asian hospitality management at Cornell's School of Hotel Administration.
"Even if operators think these people are disloyal and are cheap, they're not," she adds. "You need to do what you can to get them back. … They can be profitable. They typically spend more than the deal and tip well on the real price of the meal."
Deal firms looking to become more profitable
In the past few years, daily deal companies have been focusing on how to help their customers offer more productive deals. The deal firms are also looking to become more profitable, since the industry is expected to lose $310.7 million in 2012, IBISWorld notes.
Groupon, which has 36 million members worldwide, developed an online merchant center that helps businesses track how deal campaigns perform. This can be used to assist the structure of future offers. Groupon reported it earned money in the second quarter.
"They can look at the metrics to better target their deals, the precise location they want the offer to cover, males or females, and even a certain time of the day," says Nicholas Halliwell, manager of Groupon's merchant public relations.
That way, a restaurant that is looking for more business between 2:30 and 5 p.m. on Wednesdays can structure a deal that would give the buyer $25 in goods or services during that time for every $10 spent, as opposed to $20 for $10 spent at other times.
Groupon's mobile application, now responsible for nearly a third of the company's North American deals, makes it possible for a business to better focus its deal.
"The app tracks (the member's) location and any deal there," Halliwell explains.
Groupon and some other daily deal sites also have rewards programs available, allowing a business to offer benefits to customers who spend more.
Some changes helped Groupon keep Seattle's Flying Fish Restaurant as a client.
"Our first effort was a daily deal after we moved to a new location, and we felt it would be smart to sell 5,500 of them," says chef-owner Christine Keff. "It was a disaster. So much of it was people looking for a cheap meal. It hurt us."
Persuaded to try a more targeted deal, Flying Fish sold $100 set-menu deals – two appetizers, two entrees and a dessert – for $50.
"We offered this throughout the Seattle area, but we structured it to attract the top 5 percent" of restaurant-goers, she explains. "If they have to spend $50 up front, it really draws our kind of customers."
Living Social also has taken some innovative steps with its restaurant merchants.
One is LivingSocial Gourmet, which has invitation-only offers costing $100 and up and is aimed at foodies in 10 cities. One was a $295-per-person traveling dinner party hosted by noted New York chef and restaurateur David Burke and included trips to two of his restaurants.
Living Social also launched a local live-events venue at 918 F St. NW in Washington, where its merchants can offer pop-up restaurants, classes and other experiences. It includes a state-of-the-art culinary kitchen as well as a demonstration kitchen.
"Over the years, we've evolved from daily deals to more of a local commerce company," notes Raj Talwar, LivingSocial's senior manager, restaurant sales and strategy. "We have (developed) interesting platforms to connect customers with merchants."
Founding Farmers, a pair of farmer’s union-owned, farm-to-table restaurants in Washington, D.C., and Potomac, Maryland, set one of the pop-up eateries up.
The restaurant company "has never, and will never, participate in a standard 'deal' in which a consumer gets a dramatically discounted offer," according to Jennifer Motruk Loy, marketing and public relations director. It "isn't part of any good operating model."
But the LivingSocial street space is different because it can be part of a positive strategic marketing and brand awareness effort. The space essentially became a satellite restaurant during Founding Fathers' spring menu preview there in April.
Not only did the sold-out event over three weekends preserve the Founding Farmers brand by allowing the restaurant company to control the space, but it "was an enticing event for many new guests that had never dined" at the restaurants, Loy says.
The daily deal industry continues to grow, according to a separate study by Rice's Dholakia. More than half of the deals are profitable for merchants, and the likelihood of making money on deals grows with operators' experience with them.
Still, IBISWorld believes growth will slow to 12.9 percent annually over the next five years, and most experts believe the industry will continue to consolidate.
The bar to enter the business was fairly low, but companies found the cost of operating is high. And their profit margins are tightening as merchants learn to negotiate better terms.
The industry went through "a sudden rush and infatuation in daily deal sites, with companies jumping in without much thought," says IBISWorld's Samadi. "That's over."
Daily Deal – Yea or Nay
A study by Sheryl E. Kimes and Utpal Dholakia found a series of advantages and disadvantages in restaurant daily deals.
- Incremental customers – Daily deal companies say they will bring in additional customers who will return. Various surveys found a wide range of how many new customers are drawn by deals – from 35 to 80 percent.
- Increased revenue and profit – With an increase in traffic, restaurants may see higher income, as many diners spend more than the deal's value. Between 43.6 percent and 55.5 percent of operators reported making money on a daily deal.
- Exposure – As a marketing tool, daily deals can help restaurants improve customer awareness of their businesses, often lasting well after the promotion ends.
- Cost – This is a big concern of many operators. In addition to the food cost, increased traffic could result in higher personnel costs, plus there are also administrative costs involved in the promotion. Meanwhile, daily deal sites take 30 to 50 percent of the face value of the deal.
- Cannibalization – Frequent customers can be upward of 40 percent of daily deal users. When they take advantage of the daily deal, restaurants are stripping away the profit made from these diners, who would eat at the restaurant anyway.
- Displacement – If a large number of deal buyers use their vouchers during busy periods, regular customers, who pay full price, might not be able to get a table.
- Employee frustration – Servers and other staff may be worried that deal and coupon users are "deal-seekers" who tip only on the discounted check, not the gross amount.
- Brand-equity erosion – Some customers may think less of a restaurant that uses discounts.
- Poor customer match – Deal-seeking diners attracted by daily deals may be sensitive to price and would not appreciate a restaurant's value. These people rarely spend beyond the deal's value and don't typically return without a coupon.
Source: "Restaurant Daily Deals: Customers’ Responses to Social Couponing," by Sheryl E. Kimes and Utpal Dholakia