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!"

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.

Of course, these deals are only good for a few hours the day they're posted. But at least our site has deals for restaurants. On the day we chose for our random sample, the Columbia site had discounts for an online shoe store, a subscription to Us Weekly — and no restaurants. The Springfield site was worse. Only slashed prices for tropical getaways could be found there: that is, trips to Hawaii, Florida and the Dominican Republic. Isn't Groupon supposed to be the posting board for local, independent restaurants and bars?

It has been a huge success by some standards. The young dot-com's revenue skyrocketed in 2010, increasing $683 million from its $30 million the year before. No other online company has grown that fast, according to a 2010 Forbes article, and that includes cyber giants such as eBay,, Yahoo, AOL and Google.

But despite the constant stream of incoming revenue and a steady increase in sales, this coupon juggernaut is making zilch in profit.

And you'll hear a hum of discontent spread across the blogosphere as businesses share their Groupon horror stories. The Christian Science Monitor reported on a 2010 study that surveyed 150 businesses in nineteen U.S. cities. The study found that one-third of those businesses earned zero profit from their Groupon promotion. And a study by two professors, one at Harvard and one at Boston University, found that a Groupon deal seems to "have an adverse impact on reputation as measured by Yelp ratings," Technology Review reports.

With stats like that, customers might see even more cut-rate magazine subscriptions and fewer hot new restaurants.

Maddie Earnest, co-owner of Local Harvest, isn't sure whether the café broke even on its Groupon deal. But she does know that compared to the store's normal advertising budget, the amount spent on Groupon was much higher than the restaurant would have normally pushed toward an ad.

Groupon says it has a 96 percent success rate among the businesses it works with. But Earnest's chef and general manager, Clara Moore, wasn't happy, and neither were several of the regulars who suddenly found their quiet neighborhood café infested with bargain-hunters.

For three years, Local Harvest Café & Catering has offered a menu teeming with farm-fresh ingredients. Tucked into the Tower Grove South neighborhood, it caters to customers who live nearby and come to bask in the low-key atmosphere.

That all changed during its six months of Groupon.

"In started to get steadily busier and busier...and busier," Moore says.

The café's deal was $10 for $20 worth of food during lunch and $20 for $30 of food purchased during dinner. Local Harvest had worked with Groupon to cap the number of deals sold at 3,500. They sold every one.

That was a shocker.

"I never thought we would sell that many," Earnest says.

The deal ran for six months with business growing within the first two months then tapering off — and then skyrocketing during the last month.

"That last week we were knock-down, drag-out, insanely busy every minute of the day," Moore says. "I mean every minute of the day."

The 32-person eating area suddenly had a 45-minute wait list. Moore actually had to deploy servers as hosts and hostesses, something that had never happened before.

By the last week, the café ran out of everything except four items on the menu.

After that, Moore started to see negative Yelp reviews pop up, some of which were coming from regular diners she knew. But there was nothing she could do. Local Harvest was running at twice its capacity.

Moore had been advised that this might happen. Groupon sends businesses checklists of things to anticipate and ways to prepare. It also lets businesses know that the last month of every Groupon deal is the one that will knock them out.

"[People] didn't particularly get a true view of what Local Harvest is," Moore says. "We were so overwhelmed."

The new owners of Mangia Italiano on South Grand Boulevard have a similar complaint. Collier Evans and James Bonsanti took over the restaurant in January. Part of the deal was that they took over the Groupon promotion inked by the restaurant's former owners.

As a result, Evans and Bonsanti had no say in how the deal was constructed, nor were they aware that Groupon provided assistance to help prepare for the onslaught of customers.

The staff began to complain about getting stiffed on tips and dealing with the coupon-peddling customers, who were extra demanding even though they were getting a hell of a deal on their food. (Although, to be fair, Evans says, "Servers complain about shit like that all the time.")

Like Local Harvest, Mangia Italiano was swamped during its last month of the deal. And after Groupon ended, their business dropped off.

"The Groupon customers are bargain-hunters," Evans says, admitting that he knows this because he's used Groupon himself. "They follow the deal."