Article

Will Google Offers help or hurt restaurant sales?

Some experts are apprehensive about the new program’s fit for restaurants and believe the concept may even lower a brand's value.  

January 31, 2011

By Steve Coomes

Following a failed bid to buy e-couponing standout Groupon last year, Internet search giant Google plans to create an e-couponing arm of its own called Google Offers. Via the combination of Google's cash reserves, marketing muscle and deep data resources, marketing experts believe e-couponing will be changed for the better by the 800-pound e-gorilla's entry into the fray.

"Google, just because of its current resources and the scope of its company, has the potential to become one of the top e-couponing sites the instant it gets in," said Utpal Dholakia, associate professor of management studies at Rice University in Houston. "Because of what it's already done, Google (Offers) will also be received as a high-quality product."

And likely a lower priced product as well, Dholakia said. Because it can afford to take less than the 50 percent share of revenue merchants commonly turn over to current e-couponers, he predicts the expected entry of other large companies such as Microsoft and AOL also will lower percentages forked over by merchants including restaurants.

"Google isn't the only big company getting into this by any means," he said. "There are many more jumping on the bandwagon."

That's good news for restaurateurs who've voiced concerns over deals with e-couponers such as Living Social, BuyWithMe and DealOn. While their bargains reportedly drive transactions, such low-margin deals often equate to a loss on the P&L. And while such low-return transactions are commonly viewed as investments in marketing, their worth is questionable if they attract mostly deal seekers who never return to pay full price.

"Some of my clients … are giving up a huge portion of their margin right out of the chute, and then a 50 percent share of the deal" to the e-couponer, said Jeff Slutsky, a Columbus, Ohio-based marketing consultant with BrandStand Group. "People are coming in and buying only the amount that's on the coupon and nothing else. And they're probably not coming back, which doesn't work."

With the addition of larger players entering e-couponing, Slutsky said better margins for his clients are inevitable. "If you're the only game in town like Groupon or LivingSocial, that's great. But now you've got Google coming in for the business and the others still are working for it. Someone's got to come up with a better deal if they want the business, and that's going to happen."

Michael Atkinson, founder CEO of FohBoh, a restaurant social media site in San Francisco, greeted the news of Google's entry into e-couponing as a mixed blessing. On one hand, he said Google's near-infinite reach will serve larger restaurant companies well, and that capacity will allow both parties to benefit from transaction volumes. Yet while he also believes Google will take a smaller share of the e-coupon sale, he believes such deals will still draw the same bargain-seeking customers.

"What these do is cost a restaurateur an unreasonable amount for marketing to people who would ordinarily not be in their restaurant anyway," said Atkinson, a former restaurant operator and investment banker. He does believe, however, that Google's multiple Internet platforms could make e-couponing much more effective. "Google has so much more to offer (merchants) through Google Analytics, YouTube, its email marketing and more. It's a more robust package overall, a package already much richer and deeper than anything Groupon could offer years from now."

E-couponing still not worth it for restaurants

Google Offers or not, all three experts have reservations about e-couponing for restaurants. Slutsky said while e-couponers smartly insist deals be of a certain cost to cover their margins, such price points do almost nothing for restaurateurs' margins since customers rarely spend beyond the coupon price. Lower-priced deals, on the other hand, would entice customers to respond to a deal and ultimately lead them to buy margin-widening add-ons.

"I wanted to do a $5 deal for a client, but Groupon said it had to be higher," Slutsky said. "I knew that if a customer came in with a $5 coupon and their main item is $6, that at least returns a dollar to the owner, which puts him at breakeven on food cost. That's not happening with most of these offers."

Slutsky said he'd also like to see Google allow restaurateurs to make offers daypart- or season-specific because "some of these deals really cannibalize the dayparts that make them more money. So I'm thinking that with new competition, these companies will be more eager to work with me and follow my rules, which will help my clients."

Dholakia questioned whether any cut-rate deal, be it electronic or print, benefits a business. Citing more than six decades of research on the impact of low-cost bargains, he said slashing customer costs will get them to buy, but won't make them loyal.

"Offers like (e-coupons) lower a brand's value and lead customers to buy on price, not on the features of the product or business," he said. "In the long term, that's never a good strategy for business."