Shops grapple with fallout from group coupons

CHICAGO -- Local shops nationwide are pulling in thousands of new customers with group coupons online, but the deals can sometimes work too well, turning marketing into a game of retail roulette.

Some of the nail salons, restaurants and other small shops that have sold the coupons have risked both new and existing business as they struggled to handle the surge in clients.

For Crystal Nail Salon in Chicago, ratings at web sites like Yelp.com tumbled as owner Phu Bui struggled to serve up the 5,100 manicure-pedicure combinations he sold in June for 65 percent off.

"All of a sudden it went over the edge of my expectations, so I'm a little overwhelmed," Bui says.

Chicago-based Groupon, credited with creating the group discount concept and still the ballooning trend's leader, typically keeps half the coupon's selling price and charges retailers a processing fee. It e-mails deals daily to 11 million shoppers in 150 cities in 19 countries and this month started tweeting about group deals to many millions more.

Online deals

The messages, which cost retailers little up front, typically promote a service at a significant discount and require a minimum number of participants (the group) to take effect. Being available for only a day or two -- and often to a limited number of people -- gives them an added sense of urgency.

Bui -- who bypassed Groupon's recommendation to limit the number of $28 coupons -- says he'll consider offering an online deal again, even though some patrons complained of long waits, inadequate treatments and feeling rushed.

It may not pay off.

"They have this one opportunity to enhance an experience for a customer, and if they fail, then you might not be coming back," says Courtney Smolen, 29, whose appointment at Crystal was delayed 30 minutes.

Scores of websites besides Groupon offer similar deals, including buywithme.com, livingsocial.com and even some newspapers.

"If you're prepared, it can be a really great thing," says Tony Gordon, who offered coupons for half-price massages through Groupon.com in December. "If you haven't used your foresight or you haven't extrapolated what's going to occur, it could kill your business."

Hiring, expanding

Groupon suggested he add workers to book appointments, Gordon says, and he later hired four new therapists and expanded the Chicago salon. He says he achieved his goal of creating new long-term customers of some of the nearly 3,200 people who bought the discounts, and he would consider trying again. But the gamble was expensive: His shop received less than $20 for each massage, compared with the normal $84.

At Bikram Yoga Milwaukee, owner Bron Gacki had a very un-yoga reaction last month after selling nearly 2,500 Groupon coupons, when he expected to sell 1,000. He almost panicked.

"What if 2,500 people show up tomorrow? What's going to happen?" he recalls thinking.

Gacki and his employees have worked extra hours signing up new customers for five classes for $15, a steal compared with the usual $90. Classes are 20 percent to 50 percent bigger, and teachers are arriving early to make sure the studio can accommodate everyone.

CEO and founder Andrew Mason of Groupon says the company explains the risk shops take when they sign on. It tells its 30,000 clients not to expect to turn a profit on the deals and suggests they limit the number of coupons they sell. The company also thinks the risk of drawing too many customers will ease as it starts drilling down to offer coupons tailored to neighborhoods and smaller cities.

Most retailers don't cap the number they sell because they see it as turning away customers, says Chris Donnelly, a senior executive in Accenture's retail practice.

"You're a retailer, and it's in your DNA as a retailer to sell people product."