Final Exam Question to Merchants: Calculate your Groupon’s ROI

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Groupon spent $208 million in marketing for the first three months of 2011, this represented 77% of its $270 million of gross profit for the same three month period.   Groupon’s marketing spending for these three months was driven by customer acquisition in international markets it had recently entered.  International sales represented 54% of Groupon revenue for this period.

By comparison, Google spent $246 million in sales and marketing in 2004, the year of its IPO; this represented 14% of its $1,732 million in gross profit for the same twelve month period.  International sales represented 34% of Google revenue for 2004, up from 29% in 2003.

Even allowing for Groupon’s relatively faster penetration of international markets, one might ask: what is it about Groupon’s offering that is requiring it to spend such a high percentage of its gross profit?   After all, coupons have been around for decades prior to the launch of Groupon, while Google’s AdWords product was truly new to the marketplace.  Is there something about the range of possible financial results for merchants on a Groupon promotion that requires more convincing, leading to the need for a relatively high marketing spend by Groupon?

To further explore this question, I asked the students of my Managerial Accounting and Finance class at Polytechnic build a simple Return on Investment model for a hypothetical restaurant owner using Groupon for the first time.

In this hypothetical exercise, a restaurant owner had 1,200 couples per month visiting his restaurant prior to running a Groupon promotion which attracted 240 customers, entitling them to a $100 meal, one that cost the restaurant $40 to serve.   Assuming that half these 240 couples were existing customers, and half were new customers, I asked the students to calculate what percentage of the newly found customers had to become “regulars” for the restaurant to get a reasonable 15% Internal Rate of Return (IRR) on the cost of the Groupon promotion.

The answer…… nearly 25% of the newly found customers had to become regulars.

For a free copy of the merchant Return on Investment model described above, please send a request at David@RudofskyAssociates.com.   It provides an easy way for business owners to model what the Internal Rate of Return of a Groupon promotion might be for them, under a variety of assumptions and scenarios.   And for some more interesting perspectives on merchants’ results with Groupon, check out these articles in “Business Week” and “Harvard Business Review.”

 

 

 

What to Do When the Cook Doesn’t Show Up

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My wife and I had an impromptu lunch a few weeks ago at Harry’s Burritos on 71st and Columbus Avenue in Manhattan.   Our waiter looked flustered when he seated us, and lunch took about forty-five minutes to arrive, way longer than we expected.

When my wife asked the manager why service was so slow, he responded that one of the two cooks had simply not shown up for work, and the single cook was overwhelmed.  He comped us for half our meal.   The food was very good when it finally arrived, and we left feeling sorry for the mom with two young sons at the table behind us, who still hadn’t received her food.

Probably Harry’s Burritos should have closed off part of the restaurant (rather than seating a full lunch crowd), or at least simplified the lunch menu.  Warning customers in advance that it was going to be a longer-than-average wait would have been nice too!

 

Stylitics wins 2011 Wharton Business Plan Competition

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Stylitics won the Wharton 2011 Business Plan Competition, beating out seven other finalists for the grand prize of $30,000 in cash and $15,000 in legal and accounting services.   The competition, which is open to any student of the University of Pennsylvania, began in the fall of 2010, with 210 contestants.

Stylitics motivates customers (with gifts like reward cards) to log what they wear on a daily basis, thereby capturing up-to-the-minute insights that it hopes will make it the “Nielsen for clothing.”   The company has developed a “new generation” of tools that can track and analyze actual offline clothing and purchase behavior.

Stylitics was judged to have the “most viable business plan.”    Obviously  a business plan is needed to win a business plan competition, and is also typically required to raise capital from outside investors, but how about a company that is able to self-fund, is a business plan still important?

Using Stylitics as an example, they believe there are 50,000+ clients for their services in the United States, and that at an average revenue of $5,000 per client, they have the potential to be a $95 million revenue company by 2015.   In the process of creating a business plan for Stylitics, one of the key questions that would need to be answered is: “what marketing strategy and tactics, and at what cost, is needed to build awareness and trial of our site among these 50,000 potential clients, in order to put us on a growth curve that gets us to the $95 million revenue level by 2015?”   Estimating this early years’ marketing budget is key to estimating the needed initial capitalization.

Although a self-funded company would not need a formal 25 page business plan write-up, it would still need to know how much it has to self-fund.   Therefore, the problem solving, decision making and disciplined planning that goes into answering questions like this all can be essential elements of successful start-up businesses, even if the end result is not a 25 page comprehensive business plan.

Sbarro Files for Chapter 11 Bankruptcy to Lighten Debt Load

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Sbarro Inc. filed for chapter 11 bankruptcy protection on Monday, April 4th, joining a growing number of restaurant chains that have done the same, such as Uno Holdings, Claim Jumper Restaurants and the parent company of Charlie Brown’s Steakhouse., the “Nation’s Restaurant News” reported.  If approved by the bankruptcy court, the company would be able to cut its $486.6 million in debt by $195 million.  (By way of comparison, competitor Papa John’s, which has grown to three times the size of Sbarro, and is not in financial difficulty,  is carrying only $95 million of long term debt on its balance sheet)

Since the founding Sbarro family immigrated from Naples and opened their first Salumeria in Brooklyn in 1956, Sbarro has alternated between public and private ownership, going public in 1985, and then being taken private again by the Sbarro family in 1999, perhaps due to their dissatisfaction with the company’s sluggish stock price.

The “Wall Street Journal” reporteed that “much of the pizza chain’s troubles go back to debt taken on in 2007 to back a buyout by private -equity firm MidOcean Partners” while in fact, the Italian quick-service operator had been under-capitalized and over-leveraged ever since 1999.   As reported in Sbarro’s 10-k reports, the company’s ratio of earnings to fixed charges dropped from 4.1x in 1997, two years before the 1999 buyout, to 0.7x in 2001, two years after.

After its acquisition by MidOcean Partners in 2007, the company was walloped by the recent recession, as foot traffic at malls dropped off, while flour and cheese prices climbed.   Sbarro is the only restaurant company in MidOcean Partners’ portfolio, which includes Freshpet, LA Fitness, Bushnell (fans) and Isotoner.    Sbarro had indicated in an SEC filing in late 2010 that there was substantial doubt it would be able to continue as a “going concern.”

The Sbarro company website says, “there will be no impact on our ability to deliver the great food and excellent service our customer’s have come to expect.”  Since I had never eaten at a Sbarro, I stopped in to their location at 46th and 5th Avenue, to sample a slice of their tomato and onion pizza, and can truthfully report that it looks great, with lighting that would make Julie Taymor proud, but tastes just average, with an unexceptional bread-like crust, and uninteresting sauce and cheese.

 

 

Harry & David Files for Chapter 11 Protection

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Harry & David Holdings Inc. filed for a pre-arranged  chapter 11 bankruptcy on March 28th, 2011 after having skipped a $7 million interest payment to bondholders on March 1st.  Harry & David’s sales had declined in recent years, as recession-strapped consumers and corporations cut back on discretionary gift purchases, and new competitors such as Amazon and Edible Arrangements entered the fruit basket business, competing with free/discounted shipping and innovative new fruit basket arrangements respectively.

Harry & David arguably would have been able to ride out the recession without the need for a bankruptcy if its balance sheet had not been weakened earlier in the decade.  Specifically, the acquisition of Harry & David by investment bank Wasserstein in 2004 for $254 million weighed down the company with $250 million of debt, as Wasserstein hastened to pay itself back for the capital it had used to make the acquisition, recouping 1.25x its original investment. The founding Holmes family had sold Harry & David to RJR Nabisco in 1986, a previous peak period for leveraged buyouts, and ownership of the company had changed hands additional times before Wasserstein’s acquisition in 2004.

The company’s bondholders, including Wells Fargo, will become the new owners, as they convert their debt into equity, the “Los Angeles Times” reported.     The company is continuing normal operations on the internet and its 70 remaining retail stores, under the leadership of Kay Hong, chief restructuring officer and interim CEO.  Harry & David’s previous CEO,  Steve Heyer, former CEO of Starwood Hotels, was appointed Chairman and CEO of Harry & David in March, 2010 by Wasserstein, and never moved to Oregon, choosing instead to run the Oregon-based company from his office in Atlanta, Georgia.   In February 2011, Heyer was replaced by Hong, the former CEO of turnaround firm Alvarez and Marsal, when it became clear, after a disappointing Christmas selling season for Harry & David, that some sort of financial restructuring was unavoidable for the century-old firm.