Groupon Fail: St. Louis business owners are souring on the once-mighty coupon startup

After accepting Groupon coupons for nearly six months, Clara Moore, the general manager and chef at Local Harvest Café & Catering, had almost forgotten about the 3,500 customers who'd jumped on the deal.

Until the last few weeks, that is, when hundreds of those people came rushing in.

After running the staff ragged, pissing off the regulars, cleaning the restaurant out of all but four items on the menu and posting several negative Yelp reviews about their experiences, the Groupon masses left Local Harvest stunned and exhausted. Moore could only say, or rather Tweet, one thing: "Sorry, we won't be doing Groupon again, guaranteed!"

Clara Moore of of Local Harvest regrets signing up for Groupon.
Jennifer Silverberg
Clara Moore of of Local Harvest regrets signing up for Groupon.

For its first few years of rapid growth, Groupon seemed like a win-win-win: Customers got a great deal, such as a coupon for $40 worth of hamburgers for just $20. Businesses got new customers. And Groupon got roughly half the money exchanged in the transaction — enough to notch the Chicago-based company $713 million in revenue last year.

But the bloom is off the rose. Despite all that revenue, it turns out, Groupon isn't actually making a profit. The company actually had a net loss of $420 million in 2010 and $117 million within the first three months of this year, according to a prospectus it filed with the Securities and Exchange Commission. On September 6, the company postponed its once-ballyhooed initial public offering, making its decision to turn down a $6 billion offer from Google last December look pretty foolhardy.

And it's not just Wall Street souring on Groupon. It's businesses — the very businesses that Groupon's growth has depended on.

The problem goes back to that supposed win-win-win. Turns out it was mainly the customers winning; for many restaurants and shops, the details were a big problem.

Let's go back to that hamburger Groupon. If a customer pays $20 for food that would normally cost $40, half of the Groupon's cost — $10 — goes back to Groupon, leaving just $10 for a restaurant that's sold $40 worth of food. That's a pretty slim profit margin.

As a reaction, business owners are wising up and lowering the amount of the Groupon deals they sign on for. Instead of offering a $40 Groupon, restaurants and businesses now offer smaller deals, like a $15 Groupon. As Phil Ingram, owner of Delmar Restaurant & Lounge, explains, that encourages people to buy more than what's on the Groupon, which means more moolah for the restaurant.

But while that's good for businesses, for the customer, it seems to be contributing to a decline in Groupon awesomeness. The deals that everyone got used to buying, such as $15 for $30 worth of food, have shriveled up into remnants of their former selves. Deals now offering $10 for $15 worth of food or $6 for $12 are the mainstay.

Ingram agreed to run a deal this summer after declining several offers from Groupon. Groupon had approached him several times trying run a deal that discounted the alcohol. Ingram said no — that's his major cash cow. But in July, Groupon and Ingram worked out a deal that only discounts food.

Ingram says he's not even looking to come out ahead after his six-month deal is done. He just hopes to break even. All he wants to do is spread the word that the lounge is more than just a boozy hot spot.

"My food sales are so small that I'm looking for any way to grow them," he says.

There might be good reason that Delmar Restaurant & Lounge was able to get a leg up on the once-powerful Groupon: Groupon is facing a flood of imitators, all of them offering businesses a chance to shop around (and play hardball if need be).

Competitors including Facebook, LivingSocial and Eversave are copying the Groupon model. The parent company of Riverfront Times, Village Voice Media, along with Patch .com, St. Louis Magazine and the St. Louis Post-Dispatch now offer similar daily deals. There's even a site called, yep, Jewpon, which offers a "Jewish daily deal." The discounts are everywhere.

As a result, businesses now have more options when setting up massive coupon promotions. And consumers are taking their attention and their dollars to wherever they can find what they're looking for.

But when asked what it's doing to separate itself from these competitors, Groupon says nothing. Its focus, it says, is on offering the best deals with local shops.

Indeed, in light of a flood of bad publicity focused on overwhelmed business owners and muddy financial statements, Groupon isn't saying much of anything. When we tried to get specific numbers from Groupon spokesmen about what deals sell best in St. Louis, and whether Groupon deals have dropped off with the rise of competition, Groupon couldn't give us anything specific. All they said was this: The most popular Groupon category is a three-way tie between restaurant/culinary, health/spa/salon and activities like Spanish classes.

That information tells us zip.

So we did a little perusing of the Groupon website. We looked at deals in St. Louis, Columbia, Springfield and Kansas City.

Here's what we found — our deals might look like they're petering out, especially when one recent day featured a discount on gutter cleaning. But we shouldn't complain. The St. Louis Groupon site is one of only a few cities to use the Now! Deals on Groupon. Just enter your ZIP code, and all the restaurant deals near you pop up.

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