Spas are better suited than restaurants to use daily deals sites such as Groupon, suggests a new report.
Do Daily Deals Signal a Distressed Business?
The study—“Does a Daily Deal Promotion Signal a Distressed Business? An Empirical Investigation of Small Business Survival”—examined 985 small businesses that offered Groupon daily deals in Chicago between January and July 2011. (Of these, about 60 businesses failed.)
The authors—Ayman Farahat at Adobe Inc., Nesreen Ahmed of Purdue University and Utpal Dholakia of Rice University—then checked out ratings and other information about these businesses on Yelp. They focused on spas and restaurants because they were the two largest categories.
They found that spas benefit more from daily deals because the marginal cost of spas is low, they have high fixed cost and they can anticipate a customer's arrival time. Restaurants are the opposite: high marginal cost, low fixed cost and limited ability to control the flood of customers.
That means the decision to offer a daily deal tends to be much more of a desperate measure for a restaurant than a spa — and a restaurant is much more likely to fail after offering one.
"This is validated by our results," says the study. "If a restaurant offers a daily deal without having any strong reason to do so, its probability of failing increases more than a spa that had some motivation for offering a daily deal."
The study’s analysis—check it out here (warning: it's not light reading, unless your daily vocabulary includes terms such as "bivariate probit")—actually is much more complex. The authors constructed statistical models that take into account hidden factors that would cause, say, a restaurant to turn to a daily deal, such as a struggle to generate sales or a high turnover of staff. They attempted to find a correlation between a business’s daily deals offering and the hidden factors that cause businesses to fail—or at least, as close as they could get without unfettered access to company accounts.
The study comes as one-time star Groupon fights for survival. The company’s stock plunged below its previous all-time closing low Monday, falling another 5 percent to $2.62. Friday’s close was $2.76, down 29.6 percent from the previous day, and marking the company’s first close under $3.
Last week, Groupon reported a $3 million third-quarter loss on lower-than-expected revenue of $591 million. It’s not the only daily deal company under the gun: Amazon has written off some $137 million from the value of its stake in Groupon competitor Living Social.
The authors say they plan to study both other categories of businesses and other daily deal providers.