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Are group discounts eating restaurants' profits?

David Lee, owner and operator of The Flying Tiger in Vancouver, is taking a gamble with an online group discount.

Rafal Gerszak for The Globe and Mail/rafal gerszak The Globe and Mail

Nova Scotia restaurant owner Cathy Levangie has stuck to a few basic principles during her 30 years in the industry: Keep prices fair, offer good food and service, aim for a reasonable profit - and stay away from discounts.

Last week, however, she broke her own rules when her Bedford restaurant, the Cellar Bar & Grill, sold 200 half-price vouchers through Kijiji's Daily Deals website. For as little as $10, customers could redeem the vouchers for $20 worth of food, while her restaurant would eat the difference.

Ms. Levangie says she had been pestered for months by sales representatives from a competing group-deal website before she finally decided to give Kijiji a try.

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"Generally, I dismiss this stuff right off the bat because couponing and discounting is a dangerous thing in my business," she says.

Bargain-priced food doesn't exactly scream "high-quality dining." But after seeing other restaurants jump on the group-deal bandwagon, Ms. Levangie decided to test the claims that the tactic would draw new customers and boost business.

She has good reason to be skeptical. Sites such as Kijiji's Daily Deals, Groupon, Dealicious, WagJag and FabFind have proliferated in Canada over the past year, and many are pitching their schemes to local restaurants. But the discount campaigns they promote aren't always good value, and it remains to be seen whether they're changing the dining scene for the better.

Group-deal operators typically work by negotiating a discount of as much as 50 per cent with a business for a certain number of vouchers. The operator then markets and sells the vouchers online, collecting a percentage of the sales. If the site can't entice enough buyers within a certain time frame, the deal is null. For the restaurants, the vouchers serve as loss-leaders: By luring new customers through the door, it can upsell them or or impress them into becoming repeat visitors.

While group-deal operators say they're offeringa more targeted approach than traditional advertising, it's not clear how effective the strategy is. For restaurants - which generally operate on narrow margins - a group deal can be a big gamble. Meanwhile, horror stories abound on Internet dining forums and review sites from voucher-holders who say they have received subpar food and service.

At the Canadian Restaurant and Foodservices Association, member restaurants have responded to the onslaught of group deals with mixed reviews, says president and chief executive Garth Whyte. Unlike discounts on memberships to a museum or a gym, which probably won't hurt the bottom line, group deals for restaurants can lead to significant losses, he says.

"In our sector, we don't have a lot of room for a lot of deals. There are upward pressures on food prices. There's just the economy," he says. "You've got to be careful."

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Perhaps one of the most high-profile cases of group deals gone wrong is that of Posies Cafe in Portland, Ore. Owner Jessie Burke posted a blog last September, claiming a Groupon campaign left her nearly $8,000 (U.S.) in the red and calling it "the single worst decision I have ever made as a business owner thus far." Her story was shared by other bloggers and major media, including The New York Times, as a cautionary tale.

Mr. Whyte says group deals may be great for helping a restaurant rebrand itself, or to establish a presence on social media. However, they're likely not worthwhile for a restaurant that's already popular. The pitfalls are many, he adds. Avid bargain-hunters and tourists may take advantage of a discount and never return. It can also downgrade the dining experience, as ambience and food quality are eclipsed by the lure of a steal.

David Lee, owner and operator of The Flying Tiger restaurant in Vancouver, says he's all too aware of the risks he's taking by offering $36 worth of food and drinks for $18 on the group-deal site Mr. Lee says he's basically giving food away to access a new customer base in the hope of bringing in more business on slower days. He anticipates he'll barely break even.

As a first-time group-deal user, he says he wants to avoid offering too many vouchers, which can come across as desperate.

"I think it kind of indicates you're really hungry for business. [People wonder] 'Is your place good? If it were good, it wouldn't sell so many coupons to try to get people in,' " he says.

But Mr. Lee has also been overwhelmed by the sheer number of group-deal operators hounding him. Since February, he's been fending off an average of two or three calls a day from sales representatives.

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"It's very tiring to answer all these calls," he says. "You want to be polite, because you don't want to offend anybody, but sometimes 'no' is not enough for these sales guys."Those who've had success with group deals, however, swear by them. In Toronto, Rocco Mastrangelo Jr. of Café Diplomatico says he's attracted a lot of new faces by offering discounts through FabFind and Dealicious. Since his restaurant is known mainly for its large summer patio, the discounts helped expand its customer base during the slower winter months.

These days, he says, diners seem more cautious about how they spend money. "If you do put this out there, they may say, 'Hey, let me try it out,' " he says. "So it gives people the incentive maybe to try a new place and not risk a lot more money."

While he hasn't tracked how many of his voucher-holders have become repeat customers, most came into the café with friends, who spent money. Moreover, he says, many people who buy the vouchers don't use them before they expire. "Statistically, 20 per cent don't use it, so you're sort of in the money in that way."

George Kokolakis, president of Toronto-based Dealicious, says group deals are a "win-win proposition" for restaurants.

"We run the deal, they offer the discount, and all the branding and the exposure that they get is absolutely free," he says. "They're only paying for actual customers."

The idea of paying for customers may sound backward - especially considering the industry standard for group-deal operators is to take a 50-per-cent cut, but Mr. Kokolakis says any advertising requires some outlay of funds. He says the best way for restaurants to capitalize on the increased exposure of a group deal is to treat their customers like gold.

"The worst thing that can happen is a customer comes in with a voucher and for whatever reason they're treated differently," he says.

Back at the Cellar Bar & Grill, Ms. Levangie is waiting to see whether her experiment with Kijiji pays off. At worst, she says, she'll learn from the experience and be better informed when more sales representatives inevitably come calling.

"Sometimes full seats are deceiving if you are not making money on them," she says. "I might have a whole different song to tell you in a month's time."

A diner's view

From unequal treatment to aggressive upselling, holders of group-deal vouchers sometimes end up getting what they paid for.

Toronto resident Andrew Ngui, who has experienced both the good and the bad, says he's learned to read the fine print before buying into a group deal.

"It may be a deal financially, but the experience you may receive at the end of the day may not ... be all that great," he says.

While he doesn't mind begin upsold if he's treated fairly and the food is good, he says, "it's like horrible when the portions are overly small."

Mr. Ngui says he generally sticks to a couple of well-known deal sites he trusts, and usually searches for independent online reviews and testimonials before buying a voucher.

He also steers clear of restaurants that offer a glut of vouchers. "Is it sustainable, first of all? And second of all, what is that going to do to the quality of the food, and in terms of service?"

One detail to notice is whether a voucher includes sales tax, Mr. Ngui advises. He's encountered businesses that aren't clear about the terms of the deal themselves, creating confusion.

Though he's used group deals on several occasions, Mr. Ngui says no restaurant has yet turned him into a repeat customer.

"I think it was great at the price point that you get the deal at, but then subsequently, if we had to pay full price, it wouldn't necessarily be a good value for money."

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About the Author

Wency Leung is a general assignment reporter for the Life section. Before joining The Globe in early 2010, she has worked as a reporter in Vancouver, Prague, and Phnom Penh. More

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