These last few days have been very interesting for me. I have learned more about a company named Groupon than I care to know. I have had my initial blog about the Groupon New Year's fiasco written about in news sites all over the world.
And, for that, and what I wrote, I have been lambasted and praised at the same time. I don't care about Groupon lover's blasting me... It's when the people who are ambivalent who take me to task that make me take notice.
Getting criticized is the part that hurts the most, but it is also the part that benefits me the most, so thanks (seriously) to those folks who criticize and do so fairly. I take my lumps. I know make mistakes far too often and trust that I am trying to do better.
I am not a shopper at all. In fact, I hate shopping. I don't really enjoy going out so much anymore either. I like staying at home. I am a lazy sod.
I worked in the music business for decades, yet, over this last 10 ~ 15 years, I rarely even go to concerts even though, when I do, I am always treated like a VIP and have never paid to go to a concert since I've been in Japan.
Free drinks and hanging out backstage and acting like a real rock & roller was fun... But I am not 25-years-old anymore....
In my old age, I have become interested in just a few things; my children, making money, business news, Internet and reading books. Nope. It's not much of a swinger lifestyle for this old boy.
I am typical of the Japanese style of husband; like over 80% of all Japanese households, my wife handles all the money in my house. I get an allowance. My wife controls all the money here. All of it. I rarely carry a credit card and, if I need cash, I ask my wife for it. Since I am not usually interested in buying anything, even if I do carry cash, I rarely carry cash over a few dollars in my wallet at a time.
Because of this, I don't shop. Because I don't shop, I am not the least bit interested in something like Groupon or prices. On the other hand, since I am interested in the Internet, I had a surface understanding of Groupon...
I was so jealous of things like Groupon... Even though I couldn't understand it, I was jealous that someone else was making all this money on something and I wasn't.
The story of my life.
In these last few days, though, I have had a crash course in Groupon. The more I know about it, the less I like it. The best information came from my friend Mish Shedlock and one of my other best friends who I am sure would want to remain nameless (as he has friends doing Groupon in Japan and I'm sure he doesn't want to offend them).
Until a few days ago, I thought I couldn't understand well what the big commotion was about Groupon. Now, I am 100% sure that I can't.
Groupon today in Japan reminds me of how Amway was in Japan in the mid-1980's: many people were doing it and it was all the rage. Today you never hear about Amway at all...
I am beginning to suspect that this will be the case with Groupon within the next few years. Actually, this is not my original notion. I have come to this conclusion from talking to my friend who is an extremely successful entrepreneur in Japan and from reading what Mish Shedlock wrote about Groupon.
Here's what Mish Shedlock wrote:
My wealthy entrepreneur friend basically said the same thing, "Groupon's business model is not sustainable. Their business will always be a 'one-off.'" He mentioned that his company did one sale with a Groupon copy company and added, "These sorts of deals are good for dead stock... But if we sold things for 50% off, we don't need their help at all. At half-price, we could sell out very well by ourselves."
Another good friend of mine that runs a restaurant and take-out in Futagotamagawa told me that he was approached by Groupon but said that he declined. He mentioned that his reasons were that another shop owner friend had related to him about his Groupon experiences and said that he wouldn't do it again. He also said that he couldn't work under the margins that Groupon demanded.
(Uh, oh, here I go translating people again! Yikes!) He said, "I am barely making it right now as it is. Sure I need customers, but if I am selling food or drink for 90% off, I am going to lose even more money. I mean, if I sold glasses of draft beer for ¥50 (about $.60 US) then I would have absolutely no problem packing my place without the help of Groupon.... Why should I sell beer for that price and have to pay Groupon a 25% margin when, at those massive discounts, I can pack my place every night without their help?"
I think he has a good point and I wouldn't argue with him at all. Absolutely. If he sold draft beers for ¥50 a glass - even four or five times that price - he'd probably have a packed house every night of the week with people lining up just to get in....
He'd also probably be bankrupt with a short time.
Groupon advertises sushi at 97% off.
Let's calculate this together. At a cheap sushi-ya,
this would cost about ¥300 (about $3.60 US).
At 97% off, the price would be ¥9.
Think about that folks. There's no restaurant
in the world who could survive operating off that margin.
Sure, the idea is to be a loss-leader, but to recover that loss,
the restaurant must raise prices on the other sushi.
Buyers for this would be better off, then, to go to a good cheap
sushi-ya (like Matsu Sushi)
that offers great food and no frills from the beginning.
Sushi is supposed to be gourmet food... ¥9 for this?
The photo might look good, but this sounds really bad.
This all leads me to think that Groupon's business model is not sustainable. Massive discounting is not a long-term successful strategy unless you are Walmart... But Groupon is trying to tie up lots of small businesses. The small businesses cannot survive making these sorts of deep discounts.
Sure, Groupon makes money and the customers are happy. But this has to be a win-win-win situation all around. How are the clients winning here? I don't see it. Businesses need good repeat customers with disposable income... Coupon clippers that only visit your shop because they got 80% off your sandwich do not strike me as the kind of people who will repeat when the price is back to regular. I mean, why would they go out of their way to buy from your place at regular price unless what you had was great? And, if it was so great, then you wouldn't have needed Groupon to discount the crap out of your product or service as word of mouth will do the job in this day and age.
This leads me to believe that most Groupon clients will be "one offs" - twice at the most. In November, 2010, the NY Times cited a study done that claims close to 50% of former proprietors said they will not participate again and that almost 30% lost money on the deal.
So the problem with Groupon is that their business model seems flawed. A good business model would be a win-win for Groupon and the client. But, now, as it stands, only Groupon seems to win with these margins as the client cannot stay in business at those rates.... Also, Groupon's business model is not so unique and copy-cats are already popping up all over the place... What's going to happen when, say, Facebook or Google starts their own version? Probably Groupon will go the way of Netscape Navigator. Remember them?
And that's why I believe Groupon's business model is not sustainable.
Here's a good article by another writer about the non-sustainability of Groupon.
Read more from Mish Shedlock.