Targeting Groupon Diners

If I had been the founder of Groupon when Google offered up $6 billion for it, the door wouldn’t have hit me on the back-side as I rushed to the bank to cash the cheque! While I think Groupon is an interesting concept, they are really greedy, and ultimately, it will be their downfall. Let me explain.

Groupon seeks out businesses that are willing to offer deep discounts for their goods and services. Usually, the discounts are around 50%. Groupon takes another 25% or so for publicizing the offer and collecting the funds from the bargain-hunters. That leaves the business with only 25% of what it would normally take in on a sale.

Groupon talks businesses into signing up by claiming that they may lose a bit on the first sale, but they will make it up on subsequent sales. Nonsense. Alternatively, if businesses have excess capacity, they can accommodate lower-paying customers, because they only have to cover the incremental (or marginal) cost of servicing the customer. This works for spas and other similar businesses. There aren’t too many businesses that have a marginal cost less than 25%.

What about restaurants? They are probably the most popular Groupon category, based on demand. Is it worth it for a restaurant to sign up for Groupon?

This will be the last in my series of articles on Groupon certificates (I hope)!  Previously, I’ve written about the accounting for Groupon certificates, setting up a Point of Sale system to accept Groupon certificates, using QuickBooks to account for Groupon, and the tax implications of doing a Groupon promotion.  This article looks at whether you should consider using Groupon to promote your business.  Since this is a site dedicated to restaurants and their owners, I’ll focus on them.  However, most of the concepts apply to any business.

 

How Groupon Sells to Businesses

Groupon claims businesses will get a fair amount of repeat business (1 – 2 subsequent visits), at full retail. Many restaurateurs think that, if they could only get people in the door, they would experience how great their restaurant is and return again and again. In some cases this will be true, but for most it will not. You can’t take anyone off the street and get them to like your restaurant. They have to be the type of people who would value the dining experience you are providing and would be willing to pay the price you need to charge to maintain that level of quality, service and ambiance.  In other words, if you can get potential customers in your target market to try your restaurant, you have a chance at winning them over.

Now, if a Groupon bargain-hunter finds your restaurant to be a good value, with the deep discount, is it likely he’ll feel the same way when he has to pay full menu prices? No. No.  No! The value proposition, that was there with the heavily discounted price, disappears when the regular menu prices are in effect.

Having experience with deep discount programs, like Toronto’s Summerlicious and Winterlicious, where restaurants provide three-course lunches and dinners for a set price, I can tell you that very few of these diners ever return to your restaurant. I estimate that perhaps 1% do return when regular menu prices are in effect. The conclusion is that these discount diners are not your target market.  They simply do not recognize the value of your offerings, at regular menu prices.

 

Where Groupon Works

I know of one restaurant that uses Groupon (and other similar programs) quite a bit. It is a large establishment that is rarely filled to capacity. The Groupon coupons cost $30 and are redeemable at $75. This allows the individual to buy two main courses and they have to buy everything else at full menu prices. The only way this works for the restaurant is when the Groupon diners buy appetizers or desserts and wine or other alcoholic beverages. It’s better than getting nothing for an empty table. If they were busier, it would make no sense at all for them to use Groupon.

It helps that this restaurant has relatively high prices.  A couple, using a certificate, has to purchase more items to complete a normal dining experience.  The high prices for all items ensures that there is some marginal profit for the restaurant, even if they aren’t covering all costs.  Servers need to be especially adept at up-selling and cross-selling to make this model work for the restaurant.

It works for this restaurant, because the total revenue from the diners is greater than the variable cost of providing the food and beverages (plus linens, credit card discounts and any other variable costs).  They don’t care whether the coupon diners ever return to pay full menu prices, because they will not.  These customers will only return when the next coupon batch is issued.

 

Where It Doesn’t

 

Another restaurant has offered Groupon discounts at various times. It is a popular restaurant that is difficult to get into without a reservation. I suspect they will discontinue all Groupon discounts in the near future, because they aren’t adding to their loyal customer base, and most likely, they are risking their existing customers by making it harder for them to get reservations and by making them pay full price when transient customers are getting deep discounts. They are damaging their profitable customer base, to go after fickle, extremely price-conscious customers who don’t value their dining experience nearly as much. That’s just bad marketing.

 

What Are The Risks?

A lot of restaurateurs know that these types of promotions are not good deals.  Still, quite a few say, “let’s give it a try”, “what’s the risk?”  You’d be surprised.  Let’s take a look at those risks.

Have you considered your restaurant’s brand image?  Accepting Groupon changes your image from “quality” and “successful” to “cheap” and “desperate”.  Is that what you want?  The internet, Facebook and Twitter all ensure that your acceptance of Groupon, even once, is etched in digital stone for all to see, from now until the end of time (or your restaurant).  All of a sudden, that simple promotion has become extremely expensive.

Are you still clinging to the belief that some of these coupon clippers will become regulars at your restaurant?  Even if you provide exemplary service, impeccably prepared and presented mains, appetizers and desserts, they’re not going to be overly impressed with your efforts.  True, they will tell their friends about their good experience at your establishment – one or two of them, according to research.  Undoubtedly, these two people will be similar-minded consumers.  They won’t be coming to your restaurant, unless they have a coupon.

What if the service isn’t so great, the dishes are not so perfectly plated and tasty?  What if your expert service staff really were able to up-sell and cross-sell.  These coupon diners are not going to be pleased.  They’re going to think they were “ripped off”.  Well, now, you will have unleashed a torrent of critical word-of-mouth.  The internet, Facebook, Twitter, Yelp and many more sites will ensure that everyone knows what you did to this poor, unfortunate couple (who probably came in on their anniversary or birthday for a very special evening).  Word-of-Mouth advertising cuts both ways.

What about your “regulars”?  How do you think they will feel, paying full menu prices, when you’re giving the food away to people who will never return?  I know how I’d feel, and I’m sure you do too.  So, do you make sure your regulars can get in on the deal too?  Why in the world would you do that?  They already appreciate the value proposition you have developed for your successful restaurant.  You don’t need to convince them with a lower price.

If your restaurant gets inundated by coupon shoppers, how will you make sure that your regulars get a seat when they want one?  The good customer who can’t get a reservation at your place today is going to go somewhere else.  Somewhere that cares about their customers and may be on the way to earning a new “regular”.

This begs the question.  Why are you investing so much time and effort trying to market to non-target customers?  Wouldn’t those resources be better used making sure your regular customers are properly looked after and trying to win over more similar minded people?

 

The Bottom Line

If you really are intent on giving away money, why not give it to potential target customers?  Most restaurants rely on neighbourhood residents (or businesses) for the majority of their clientele.  You may think that everyone knows about your restaurant, but they don’t.  Instead of giving away money to people outside of your target market and target area, why not provide a reasonable trial discount to people (or businesses) in your area?  The added benefit is that you don’t have to pay Groupon or anyone else for the right to give away money!

 

 

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QuickBooks Accounting for Groupon

I’m almost finished with Groupon articles!  I’ve got two more, then, I think we’re done.  I’ve been writing these articles, because there is a lot of confusion surrounding the accounting for Groupon certificates and how to enter them in QuickBooks.  The resources for learning about these areas are poor (and often contradictory), but that’s nothing compared with the confusing, and often downright incorrect, information that has been written about the tax implications of using Groupon!  I hope these articles will help accountants, bookkeepers and restaurant owners set up their books and account for these transactions properly.

Today’s article explains how to account for a restaurant’s Groupon transactions in QuickBooks.  Previous articles have covered the POS system set up for Groupon transactions, accounting for Groupon transactions (in general), and the very important tax implications of using Groupon in a restaurant.

As we know, from the accounting article, there are three types of Groupon transactions that need to be entered into QuickBooks:

• Initial setup and distribution of the Groupon certificates
• Daily redemptions of certificates
• Expiry of unused certificates

New Accounts

Before we get started with the entries, you’ll need to set up three new accounts.  An expense account (Promotional Expense – Groupon) to report the cost of the Groupon certificate promotion.  Alternatively, this may be set up as a sales discount.  We’ll also need a current liability account to keep track of the liability the restaurant owes for outstanding gift certificates (Liability for Groupon Coupons).  Finally, we need a current asset account (Deferred Promotional Expenses) to keep track of the discounts that will be recorded when the certificates are redeemed.

Initial Setup

The easiest way to record the issuance of certificates is with a journal entry.  In this example, 100 certificates were issued with a face value of $100 each.  The customer paid $55 to Groupon (to get a $45 discount at the restaurant).  Groupon takes 50% of the $55/certificate, and charges HST on their fee.  Groupon cuts a cheque to the restaurant for the remaining proceeds from the sale of the certificates.  Here’s the entry to set everything up:

 

If you don’t understand the accounting entry, please refer to the article about how to account for Groupon.  This entry sets up the liability for Groupon certificates, the deferred promotional expense (or deferred sales discounts, if you like), the promotional expense (Groupon fee), records the HST (sales tax) on the Groupon fee, and deposits the cheque from Groupon.  One simple entry does it all!

 

Redemptions

I hope you’re already using a sales receipt for entering the daily restaurant sales.  While you could use a journal entry, I find the sales receipt method to be the easiest, and most logical, way to enter daily sales summaries.  Here’s a sample redemption:

 

You need to create three new items.  The GrouponDiscount (discount type) item posts to the Promotional Expense – Groupon account.  In this example, it is the difference between the face value and the promotional value (paid to Groupon by the customer) – $100 less $55 equals $45.  In Canada (and California), this discount is coded as taxable (the “H” code), so that the discount amount will be deducted from the other taxable items before calculating the tax.

The GrouponDeferred item is an other charge item that posts to the Deferred Promotional Expenses account.  As each certificate is redeemed, a portion of the deferred expense is transferred to the actual expense account.  Note that this line is coded as exempt from tax (“E”).

Finally, a GrouponPayment item is used to post to the Liability for Groupon Coupons account.  This line entry reduces the liability for outstanding certificates by the face amount of each certificate redeemed.  Note that this, too, is not taxable (it’s like cash).  Note also, the net of the GrouponPayment and the GrouponDeferred items is equal to the amount that the customer paid for the certificate.

In Canada there is a 13% HST tax on the promotional value of the certificate.  In this case, the promotional value is $55.  Here, I’m assuming the customer paid the tax with cash (which could be posted to the account of your liking).

 

Expiry Entry

Many Groupon certificates expire after a certain date.  In our example, I’m assuming that was six months after the date of issue.  At that point, the restaurant ceases to have any liability to the certificate holders (though Groupon may refund a portion).  Let’s assume that 10 certificates were never used.  We need an entry to clean up the accounts.  The easiest way to do this is to make a journal entry, as follows:

At the expiry date, the liability for outstanding certificates is $1,000.  The balance in the Deferred Promotional Expense account is $450.  We have to eliminate the balances in these two accounts.  The balancing item in the journal entry is to the Promotional Expense – Groupon account.  Note that it is a credit to an expense account, which represents a recovery of the promotional expense related to this batch of Groupon certificates.

The elimination of the Deferred Promotional Expenses represents the $45 portion of each certificate, and the recovery of promotional expenses represents the $55 portion.    Neither of these amounts will have to be “paid” by the restaurant with food and drink.

 

That’s all there is to it.  My final article on Groupon will examine whether it is a worthwhile promotion for restaurants, and if so, under which conditions.

 

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Groupon POS Implications

This is the second article in a series about Groupon coupons for restaurants.  The first article covered accounting for Groupon transactions.  This piece covers how to set up your Point of Sale (POS) system to record redemptions of coupons.  Failing to do so properly could result in the restaurant being on the hook for a lot of sales tax, penalties and interest!

In the first article, we learned that HST applies to the “promotional value” of the Groupon coupon.  In our example, the coupon was worth $100 of meals, and the customer purchased it for $50, which was paid directly to Groupon.  The promotional value of the coupon is the $50, even though the restaurant does not receive this amount from Groupon.  So, when the customer orders $100 worth of meals and drinks at a restaurant, she will have to pay tax on $50, but she will receive a credit for $100 (face value of the coupon).

Restaurants that use Groupon (or other similar programs) may need to update their POS systems to properly account for these transactions.  Many POS systems can be easily modified by the user to make these changes, but some require programming by the developer (which can take time).  Here are the changes you will need.

Groupon Discount

In our example, we will need a discount key to deduct $50 from the customer’s bill, before tax.  This reduces the bill from $100 to $50.  Note that this reduces the customer’s bill to the amount that he or she paid for the coupon.  Now, the POS system will calculate sales tax(es) in the usual manner.  In Ontario’s case, the POS system will add $6.50 (13% HST) to the bill, leaving a balance of $56.50.  You may need to have another key that allows a dollar amount discount, determined at the time of sale, too.  This is because some customers won’t spend the full amount they are entitled to on the coupon.  For example, if a customer spent only $80 and redeemed the coupon, the discount to be applied would only be $30.

Groupon Coupon Payment

Now, we need to account for the other $50 that the coupon holder is owed.  The easiest way to do this is to create a Groupon (or Coupon) payment type.  Again, this may require programming, but many systems allow to you easily create this within the software.  Using a payment type, the customer’s bill will reflect a $50 reduction of the balance due.  Note that there is no tax reduction, just like there is no tax reduction when restaurants receive cash, Visa, MC, etc…

POS Reporting

You may need to update your day end summary reports to ensure that they pick up these new types of transactions (discount and payment type).  Also, you should make sure that you have the ability to create a report that shows Groupon discounts apart from other discounts.

It is useful to have the ability to print a report showing all Groupon redemptions (payment type), so that you can check it to the certificates that were initially issued.

Other Controls

The POS system only gets you part of the way to controlling and properly reporting your Groupon transactions.   You will also need to adjust your internal controls.  Specifically, you will need to create a policy about expired coupons.  Many restaurants simply refuse to accept any coupons that have expired.  In the case of Groupon coupons that is probably the best policy, because there is very little chance that these customers will ever return without a coupon.  Many restaurants will honour coupons and certificates that they have given to VIP customers or those that received the certificates at charity auctions, because these truly are good customers or potentially good customers.

Servers need to check for expired Groupon coupons every time they are redeemed.  You need to ensure that duplicated coupons are not accepted.  Servers need to be properly trained on how to enter discounts and Groupon payment types.

As we will see in a forthcoming article about tax implications of Groupon certificates, it is imperative that the restaurant keep all guest checks paid with Groupon certificates.

You need to make sure that your Groupon transactions are recorded in the accounts accurately, based on the concepts outlined in the first article.  I’ll be showing you how to do this in QuickBooks in a future article, too.

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Restaurant Fraud & Theft – Part IV

The first three posts in this series covered fraud and theft of products entering the establishment, food theft, and alcohol theft.  Now, we’re going to look at outright theft of sales receipts.  While it’s unlikely that your servers are grabbing handfuls of dollars on their way out the door, today’s post looks at several more sophisticated methods of achieving the same result.

Many restaurants offer discounts to their guests once in a while.  Usually, these discounts are in the form of customer “comps” or “treats”.  Sometimes, customers or potential customers are given coupons to be redeemed for discounts.  Used properly, there’s nothing wrong with this practice to generate new business and reward loyal customers, but in the wrong hands, it’s the equivalent of handing out cash!

PRINTING MONEY

If you mail or deliver coupons to your potential customers, they receive the coupons, directly.  Giving out coupons in the guest check folder, at the front desk, or printed on a business card, makes them available to anyone, including your staff.  Not only can servers use these coupons to steal cash, they can give coupons to their otherwise full-paying, “regular” customers in return for a higher tip.  Unless your establishment has very strong supervisory controls, you must issue coupons directly to your customers or potential customers.

If coupons are used in your establishment, you must maintain control over all redemptions.  When a guest uses a coupon, the server must submit the coupon with the guest check to support the discount applied to the bill.  This helps prevent giving discounts that are not supported with a coupon, but what about supported discounts that really shouldn’t have been allowed?  If servers have a supply of non-personalized coupons, they can be used to “support” discounts on guest checks.  It’s difficult for a server to improperly use a coupon on a guest check paid by a credit card, unless there is collusion with the guest.

The real risk is with cash paid guest checks.  A guest, without a coupon, pays the full amount of the check.  After the guest leaves, the server attaches a coupon and enters the discount in the POS.  The server pockets the amount of the discount plus the taxes that were paid on the discount by the customer.  It may be possible to detect this type of theft, after the fact, by examining server cash paid checks.  If a server has a significantly higher percentage of coupons applied to cash checks than charge checks, you can be pretty sure this type of theft is being perpetrated. 

To catch this fraud before it happens, you’ll have to closely observe your servers as they present guest checks to customers, collect payments, and close out checks on the POS system.  You’ll be looking for checks paid in cash without discount coupons.  For these you want to make sure the check is closed out at the time of the customer payment and that no coupon discount is applied.  If servers fail to close out cash-paid checks promptly, there is a risk that the server will apply coupons later in the shift, pocketing the cash.

Many restaurants provide complimentary dinners for charities.  Rather than providing certificates with a set value, most provide letters and/or paper certificates that entitle the guest to “Dinner for Two” or something similar.  The manager should authorize all charitable donation discounts entered in the POS system, to ensure that only valid discounts are processed.  Once used, the certificates should be cancelled to prevent reuse.  Never allow staff to issue charitable donation certificates without management authorization.

RE-GIFTING

Too many restaurants still use paper gift certificates.  GroupOn and other similar companies issue gift certificates that are printed from the purchaser’s computer.  No matter how sophisticated the design, they are easily copied, to be used by others.  Dishonest staff or customers can systematically redeem fraudulent gift certificates.  By the time the fraud is detected, it is too late.

Sometimes, servers don’t even need to copy the certificates, they’re available on site.  Management must maintain control over all gift certificates, otherwise staff may gain access to them and present them as valid certificates.  It is good practice to cancel all certificates after redemption, to prevent unauthorized re-use.  A log should be used to record purchases and redemptions of gift certificates.

The best defense is the use of magnetic strip gift cards.  Ideally, these should be processed through your credit card authorization system, as offered by Moneris and others.  These systems provide better control over the issuance and redemption of gift cards. 

CHECK AND RE-CHECK

Even without a zapper cash can be skimmed from sales – the old fashioned way.  Letting servers and bartenders keep tables open after the check has been paid in cash invites fraud.  There are several variations on this one, but the most common one is to reuse a cash paid guest check with another table later in the shift.  Modern POS systems make it quite easy to split bills, allowing the dishonest server to split items on a cash paid table, into several cash checks each with an individual item, and transfer them to new tables.  Then, it is just a matter of finding another customer to purchase the previously rung in (and paid for) items.  This type of theft works well in a busy bar situation.

Well-run restaurants require manager approval for transferring items from one table to another. 

NOW YOU SEE IT…

A dishonest server collects cash to settle a guest check, claims the guests pulled a “Dine-and-Dash”, and tries to get management to cancel the entire bill.  Another variation is to claim that the customer complained about an item ordered (or the service) and use this to justify discounting or voiding items off the guest check.  Once again, if the check is paid with cash, the void can be performed after the guest pays, and the server keeps the difference.

The lessons, here, are to supervise staff to ensure all settled tables are closed promptly and never allow service staff to use discount and void keys without authorization.  Even though it is not lawful to hold servers financially responsible for walk-outs, most restaurants make their servers “know” that they will be held responsible, as a method of minimizing this type of fraud.

FINAL THOUGHTS

This concludes the current series on fraud and theft in restaurants.  Obviously, I have not discussed every tactic employed by dishonest suppliers, customers and employees.  I have tried to outline the more significant thefts and how to minimize their impact on your restaurant.  Not only is theft costly in terms of inventory “shrinkage”, it is the number one cause of assessments for “unreported sales” arising from tax audits.  If more restaurateurs knew this, they would devote more time and effort to minimizing the incidence of fraud and theft in their operations.

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Restaurant Theft Findings

Most restaurateurs know that theft is a problem in the hospitality industry, but very few know how much is going on in their own establishments. According to the U.S. National Restaurant Association, approximately 4% of all revenue is lost to in-house theft.  The latest figures from Statistics Canada, NPD Group and the CRFA, indicate that the average profit margin for Canadian restaurants was only 4.4% of operating revenue!  Based on these figures, approximately one-half of your profit is lost to employee theft.

As if that isn’t bad enough, the cost of missing alcohol is only half of the story.  Increasingly, restaurants and bars are learning that they have substantial tax liabilities resulting from stolen alcohol.  I urge you to learn more about this insidious practice, here.  It’s no wonder that 35% of restaurants fail because of employee theft!

With the help of Robert J. Quintero’s Masters thesis, The Theft of Alcohol in the Restaurant and Bar Industry, let’s take a closer look at employee theft in restaurants.  The author’s findings are based on a survey of 153 employees at 38 establishments in Lubbock, Texas.  While it is a bit dated (2001) and U.S-based, the major findings are likely to be reasonably similar in Canada.

Top 5 Types of Alcohol Theft

Based on an exploratory survey,  employees admitted to the following types of theft at some point during their employment.

1. 69.7% provided free drinks to friends
2. 56.6% took part in unauthorized drinking
3. 52.4% over-poured drinks to increase their tips
4. 41.4% failed to ring in all items ordered
5. 40.7% took alcoholic drinks for their personal use.

STUDY FINDINGS

The study analysed the effects of various scenarios on three major categories of theft.

1. “Giving Alcohol” included giving free drinks to friends and customers.
2. “Reciprocity” was the term given to theft by servers providing free drinks to other establishment servers in return for free drinks at their establishments.  Unauthorized drinks for the server and others at the employer establishment were also included.
3. “Taking Cash” included cash theft, over-charging customers and short-changing customers.

Is Theft Reduced by an Automated Pouring System?

Pouring profit into his own pocket

No.  Even I was a bit surprised by this finding!  The study found no significant reduction of Giving Alcohol (52.3%) with an automated liquor or beer pouring system.  Similarly, there was no reduction in Reciprocity theft (79.1%).  It appears that management is not properly monitoring the automated pouring systems, and employees are still able to provide free drinks to themselves, co-workers, friends and servers at other establishments.

Do More Satisfied Employees Steal Less?

This has to be true, doesn’t it?  I mean, a happy employee wouldn’t want to steal, right?  Wrong! The study found that Giving Alcohol and Reciprocity theft were not related to job satisfaction (although happy employees were less likely to Take Cash).  As hard as it is to accept, your happiest employees are likely to be more loyal to their co-workers, their friends, and those that can give them free drinks elsewhere than they are to you, the owner.

The Effect on Theft of Allowing After-hours Staff Drinking

This finding didn’t surprise me at all.  Allowing staff to consume alcohol after-hours substantially increases the incidence of theft.  Giving Alcohol was much higher at 64.8% (vs. 45.5%).  Reciprocity theft was higher, too, 88.9% vs. 73.7%.  Even Taking Cash more than twice as high (16.7% vs. 7.1%).  If it isn’t obvious, allowing staff to consume alcohol after-hours costs much more than the cost of the alcohol consumed!

The Effect of Allowing Staff to Give Away Alcohol (Comps)

Allowing servers/bartenders to give away alcoholic drinks (without authorization) is a recipe for disaster.  No big surprise, here.  The incidence of Giving Alcohol was 71.4% vs. 49.2% where this was not allowed, and for Reciprocity theft the figures were 95.2% vs. 76.5%.  The moral of this story is to carefully monitor all customer comps.

Summary

While this paper doesn’t cover all aspects of bar theft, it does provide us with a few interesting, even surprising, insights.  Even your happiest employees are probably stealing from you.  The vast majority of your employees take part in “Reciprocity” theft – they’re more loyal to other establishment bartenders than they are to you.  Installing an automated pouring system will not reduce employee alcohol theft.

So, what can you do.  Supervise, supervise, supervise.  Do not let staff drink after-hours, at all.  Require every customer comp (free drink) is authorized by a manager, entered in the POS and recorded in a log or ledger.  Of course there are many more things you can do to reduce employee theft.  These are the ones that follow from this study’s findings.

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