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10/01/2011

The Deal Is On

Grocers and packaged goods manufacturers have barely dipped their toes into the fast-growing world of Groupon-style marketing – and for good reason, say some experts.

The razor-thin profit margins mean that offering discounts of 50 percent and then sharing the remaining revenue with a daily deal site is almost certainly a money-losing proposition.

The danger of fraud is real: "When you're talking 35 cents off Coke, it's one thing. When it's $50 off, that's another."

– Ben Sprecher,

Incentive Targeting

The danger of fraud is real too. "When you're talking 35 cents off Coke, it's one thing. When it's $50 off, that's another," says Ben Sprecher, vice president of marketing at Incentive Targeting, a promotions analytics and software firm in Cambridge, Mass.

Yet daily deals have become some of the hottest marketing tools around, and grocery chains don't want to be left on the sidelines, marketing experts say.

Getting to grocery shoppers

Demographics tell part of the story. The typical Groupon customer is young, college-educated, female and employed. She loves social media and has money to spend.

Groupon's customer base now includes more than 83 million subscribers in 175 North American markets, according to the company's Securities and Exchange Commission filing. In the first quarter of 2011, its subscribers bought 28 million Groupons from about 57,000 merchants selling in 140 merchandise categories, the filing says.

Groupon, which is the market leader in a sector that's rapidly becoming more competitive, requires a certain number of users to buy a deal before the deal "tips," or becomes active. It sends out offers in daily e-mails to subscribers and recently has expanded to present last-minute deals to consumers on their cell phones.

While the Groupon system has been highly effective at engaging consumers, some merchants have questioned whether the model attracts long-term customers. In addition, Groupon's 50 percent revenue split, as well as the hassle involved in handling a new coupon form, gives some merchants pause. But new competitors are creating different terms and delivery systems.

Some daily deal companies are willing to negotiate terms with participating merchants, says Ryan Levitt, co-founder of Chicago-based Deal Umpire, an auction platform for daily deal marketing programs. To help merchants sift through the various opportunities, Deal Umpire aims to aid them in negotiating with deal sites on everything from revenue split to credit card fees in order to boost profits.

"I think daily deals can be a great resource for grocery stores if the technology is there," Levitt says. "As mobile deals become more prevalent, people will be able to receive customized deals based on their buying habits straight to their smart phones. If grocery stores have the right partners with a large enough local presence, these deals can drive traffic."

In June, Massachusetts-based Big Y Foods tested a $24 Groupon for a seafood grilling pack.

Grocery test drive

Using another type of technology, Boston-based marketing firms Incentive Targeting and HaloEffect say food retailers and manufacturers can effectively use the Groupon model to drive traffic and reinforce customer loyalty by loading the deal directly onto customer loyalty cards. They point to a June 2011 test at the 61-store Big Y Foods chain in Massachusetts, where the merchant offered a $24 Groupon for a $39.99 seafood grilling pack that included lobster tails, mussels and clams. But unlike typical daily deals where the customer prints out a coupon with a bar code at home, the purchased seafood package was loaded onto the shopper's supermarket loyalty card. If a buyer wasn't a member of the loyalty program, he or she had to join to participate.

"The first one was truly a plumbing test. It sold much better than that – two or three times greater than we expected," according to HaloEffect president Tom Schneider. A subsequent Big Y Groupon for Porterhouse steaks sold five times better than expected, he says.

Targeting supermarkets

Groupon has already identified grocery as a largely untapped segment that it plans to target.

"Groupon is always interested in creating and offering deals that are beneficial for both our merchants and consumers. The Big Y was [such] a deal, a great example of just that," says Groupon spokesman Chad Nason.

While Groupon's major rival, U.K.–based LivingSocial, declined comment on whether it considered the grocery industry a tasty avenue for expansion, in September it offered a $20 gift card to Whole Foods Market for $10, which attracted 1 million people in 10 hours, Whole Foods reported.

With U.S. consumers spending an estimated $550 billion annually on groceries and the proliferation of daily deal sites, according to HaloEffect, the attraction is obvious. "This whole notion of working with bigger stores opens a multi-million-dollar potential business," says Bill Bishop, a veteran retail analyst with Willard Bishop Consulting in Barrington, Ill.

For food retailers, targeting daily deal promotions to the high-margin parts of the store is the key to not losing money. If a typical margin on a grocery item is 32 percent, grocers should promote big-ticket, high-profit items where the margin is more like 75 percent, advises Bishop. In most stores, those high-margin areas would include the bakery department and the deli case, especially freshly prepared foods.

After the incentive draws customers into the store, they undoubtedly will load up their carts with other items. "Then you have a logical approach," Bishop says.

If making money is the goal of the promotion, retailers should avoid creating a daily deal that discounts a total transaction. With that proposition, stores have no control over what items shoppers select. Savvy shoppers are likely to load up on sale items and goods from price-competitive categories where margins are thin.

"If you're just trying to sell a bunch of items and hope to make money, the metrics won't work," Schneider cautions. That strategy also is unlikely to build repeat business because bargain-minded shoppers will always be chasing the next deal.

Yet that's exactly the kind of deal Whole Foods offered its customers to help them stretch their budgets. "There are likely thousands of ways to slice and dice a $20 spend," said co-CEO Walter Robb in a release. The company tied the Living Social deal to blogposts from the company's team members who bought groceries for a weekend on a $20 budget.

Three-way partnership

Using the Groupon model at grocery stores often involves a third party: the consumer packaged goods manufacturer. Brands might use daily deals to encourage shoppers to sample a new product rather than handing out free samples on street corners.

Using the Groupon model at grocery stores often involves a third party: the consumer packaged goods manufacturer.

"Groupon gives you that spotlight on your brand and the opportunity to tell your story," Schneider says. It also gets the attention of consumers who wouldn't otherwise be thinking about the product. "Groupon has the power of suggestion," he says.

CPG manufacturers typically have large marketing budgets to promote their products, so working with Groupon or one of its many rivals, including Amazon.com, doesn't have to be an added expense. Plus, the brands can control their costs by limiting the amount of goods they offer as part of the deal. And most daily deal models pay on redemption, not distribution.

Manufacturers shouldn't bypass the retail channel if they want to preserve relationships there, marketing experts say, although some have done just that. In November 2010, Procter & Gamble offered a $25 Groupon for a $50 basket of P&G goods through Dormzy, an online grocery store in Columbus, Ohio, that specializes in care packages including nonperishable food items and health and beauty products for college students and young professionals. The P&G products were shipped directly to customers.

In April, General Mills offered a $20 Groupon for a $40 basket of its goods, with shipping to shoppers' homes included. The deal sold out when 4,500 Groupons were purchased. Selling a bundle of products directly to the consumer can effectively introduce several new items at once, marketing consultants say. And the manufacturer receives the full price rather than the wholesale price.

But when brands use Groupons to drive traffic to brick-and-mortar stores, it's a win-win for retailers as well because the manufacturers usually bear the cost of the promotion, Schneider says. In late July, Jewel-Osco stores in Chicago offered a $9 Groupon for $15 worth of Unilever ice cream brands like Ben & Jerry's, Klondike, Good Humor and Breyers. More than 1,500 shoppers jumped at the deal to save 40 percent off the cold treats on the first day.

While few expect daily deal promotions to replace the weekly circular or old-fashioned paper coupons anytime soon, the old and new can work together. Consider that the grocery industry is in the first phase of daily deal marketing, Bishop says, and results will improve as merchants use the opportunity more strategically.

Journalist Susan Chandler previously was a business writer at the Chicago Tribune, BusinessWeek and the Chicago Sun-Times. When Chandler isn't writing, she is teaching journalism students at Northwestern University's Medill School.