The Dish on the Daily DealWhat’s Your Take?

Mark Brandau has spent his entire career with Nation’s Restaurant News, beginning on the copy edit desk in 2005 and moving to the Chicago office in 2009 to assume full-time writing duties, covering Midwestern chains and marketing and advertising. He holds journalism degrees from Columbia University and Northwestern University, where he also teaches an undergraduate course in magazine editing. He lives in suburban Chicago with wife Allison and 18-month-old daughter, Cameron, and 3-month-old son, Luke. God help him.

Ryan Zink is Senior Vice President of Finance for F&H Acquisition Corp., a restaurant holding company that owns the Fox and Hound and Champps restaurant concepts. He has previously served in progressive management roles including Manager of Accounting and Director of information Technology since joining the company in 2000. Between 1999 and 2000, Ryan served in staff auditing roles with the professional services firm KPMG LLP.

Mike is the Founder and Chief Energizing Officer of BrandIQ, the only brand strategy and research consultancy that takes the right learning and makes it relevant to solve the toughest business challenges.Mike is a veteran marketing professional. His distinguished marketing career includes brand management positions with PepsiCo (Pizza Hut), the Dial Corporation, and CMO for Papa Gino’s restaurants. He also created, owned and operated his own award-winning restaurant in the Boston area.Mike holds a BA in Finance from Iowa State University and an MBA from the University of Phoenix. He is a member of the Entrepreneurs Organization (EO) and past board member for EO and the Kauffmann Center for Entrepreneurial Leadership. He is a frequent speaker on innovation, brand strategy and new product development. He is a guest lecturer on brand strategy in the California State University system and lives in Los Angeles.

NATION’S RESTAURANT NEWSMark Brandau @Mark_from_NRN

The Dish on the Daily Deal

In the beginning, there was Groupon

• Groupon sells its first daily deal in 2008– $30 million in revenue in 2009– $713 million in revenue in 2010– $568 million in 2nd quarter of 2012 alone

• Once “daily deal” is defined, competitors like LivingSocial, LocalEats, Blackboard Eats rise

• Groupon raises $700 million in Nov. 2011 IPO

Consumers love them, but operators…

• Operators bemoan lack of control over how many vouchers get downloaded and when they’re redeemed, making deal unpredictable

• Unsustainable rush of traffic frustrated staff• People showing up are coupon chasers, or,

worse, regulars paying less on one of their normally frequent visits

• Owners forgo half the revenue off the bat, then still split proceeds with Groupon

Posies goes viral

• Portland, Ore., restaurant Posies Bakery & Café, burned by a Groupon deal, writes widely shared blog post in 2010

• Dealing with fallout of $13 for $6 Groupon deal for months, ends up losing $8,000 and paying out of pocket

Yet, consumers still love these deals

• 75% of consumers surveyed by Technomic this past summer were aware of daily deal sites, and of those, 53% subscribe to at least one– 84% to Groupon– 46% to LivingSocial– 34% to Restaurant.com– 25% to Facebook Offers

• 90% have bought a deal in the past month

Deal users are unique visitors

• 24% used deal at restaurant they regularly visit• 30% used at restaurant they occasionally visit• 22% used at restaurant they’d visited just once• 24% used at restaurant they’d never visited• 11% used at restaurant they’d never heard of

But they’re surprisingly loyal (they say)

• 83% of first-time customers brought in by a daily deal have recommended that eatery to a friend or family member

• 67% returned later without a daily deal

• 59% agree: “When I use a daily deal, I spend more money beyond the value of the deal.”

• 65% agree: “I am more interested in restaurant daily deals than I am in other types of deals (travel, spas, fashion, etc.).”

• 79% agree: “I look forward to seeing those daily-deal emails every day.”

Source: Technomic Inc.

Groupon starts to evolve

• In May 2011, they release Groupon Now, which lets the merchants determine how many vouchers get released, and when they can be redeemed.

• In May 2012, the roll out Groupon Rewards, which acts as a loyalty program, managed by Groupon, using the consumers’ credit cards linked to their accounts

Groupon and 30-unit Sonic franchisee in Phoenix

Feb. 2012, franchisee teams up with Groupon and OLO to offer $10 for $5, or $15 for $7, to promote trial for online ordering platform in test.

No incremental costs beyond incremental food cost

“Success!”

AJ Bombers uses Facebook Offers

In May, AJ Bombers Madison runs Facebook Offer for existing $1 Burger Night on Tuesday. It’s targeted, going just to their fans, but spreading to their friends.

1,700 likes to begin with; gets 1,200 downloadsWent on a wait for TuesdaySales up 50% from previous week’s $1 Burger NightLikes increased 5%, total weekly reach shot up from 10,000 to 170,000EdgeRank score shot way up

Used to be free; Facebook now charges you about $5 in ads

Starbucks, LivingSocial crush it

In September, LivingSocial sells 1.5 million$10 Starbucks gift cards. Gift cards havea bounce back feature because $10 is higher than the average check

Record for number of vouchers sold

For comparison, in 2011, LivingSocial sold more than 290,000 vouchers for 5 Big Macs and fries at McDonald’s, which was No. 7 on Yipit’s list

Where’s it going?• Big guys getting bigger and diversifying

through acquisition or partnerships– Groupon launched Groupon Payments, then

acquired tablet-based POS provider Breadcrumb– LivingSocial and Chase teaming up to offer

customers LivingSocial Rewards Visa Cards• Smaller players chipping away

– Guys like LevelUp and Punchh on mobile loyalty– Womply gives automatic rebates to linked cards

F&H ACQUISITION CORP.Ryan M. Zink, Senior Vice President of Finance

F&H Acquisition Corp.

• Privately-owned restaurant holding company with a focus in concepts with a high-alcohol mix

• Maintain separate operating companies while leveraging shared services

• Purchased Fox & Hound Restaurant Group in 2006– Currently 80 units with an approximate 70% alcohol mix– $2MM average unit volume– Unpretentious bar with wide range of national and local beers

• Purchased Champps Entertainment in 2007– Currently 45 company-owned units with ~30% alcohol mix– $3.2MM average unit volume– Polished sports bar with chef-prepared, from-scratch menu

Our First Deal(s) – June 2011

• Why did we run the deals?– Pressure from our owners/board– Daily deal / group buy sites had buzz, particularly

Groupon with its then-upcoming IPO– F&H had run a test in two markets in April 2011

with promising results– Like gift cards, it generates something accountants

call “deferred revenue”

Construction of the Deal• The deal will require a 50%

discount– But won’t require a specific dollar

amount – We chose a $20 deal value with $10

price• The deal can be done for better

than a 50/50 split on the commission

• Choosing date and day of week for feature will affect total voucher sales

• Now required to contractually agree to honor vouchers for 5 years or forever (CARD Act)

Was the deal successful?Fox & HoundProfitability Model• System-wide campaign

• 28,911 purchased

• 23,387 redeemed

• $31.72 gross spend

• $741,725 gross sales

• $40,000 deferred revenue

• +$138,000 cash flow($1,642 per store ave.)

0% 10% 20% 30%Gross sales 741,725 667,552 593,380 519,207 Discount ($10) (233,870) (233,870) (233,870) (233,870) Net sales 507,855 433,682 359,510 285,337 Cost of sales (207,683) (186,915) (166,146) (145,378) Gross margin 300,172 246,768 193,363 139,959 Cost of labor (59,338) (53,404) (47,470) (41,537) Other variable costs (37,086) (33,378) (29,669) (25,960) Commission, less def. revenue (22,207) (22,207) (22,207) (22,207) Incremental cash f low 181,540 137,779 94,017 50,255

Per Store Average 2,161 1,640 1,119 598

Assumed Cannibalization

Running a Deal in a More Polished Concept

• We also used Groupon at Champps in June 2011– Ran in about 25% of our markets– Challenged in managing our

brand’s image with Groupon’s editorial voice

– Financially successful, even more than F&H on a per-store basis

• Currently running a campaign with LivingSocial– Similar voucher sales metrics to

Groupon– Significantly better in-restaurant

spend compared with Groupon– LS was more responsive to our

feedback on deal copy

A comparison of Champps’ two deals

Groupon (June 2011)• 13 Stores• 7,643 purchased• 6,530 redeemed• $33.31 gross spend• $217,514 gross sales• $8,000 deferred revenue• +$26,000 cash flow

($2,000 per store ave.)

Living Social (August 2012)• 11 stores• 9,471 purchased• Project 8,000 redeemed• $39.90 gross spend• $319,200 gross sales• $9,500 deferred revenue• +60,163 cash flow

($5,500 per store ave.)

Group Buy - Keys to Profitability

• Know if you will be selling to your current customer– Incremental visit vs. advanced visit vs. cannibalized visit

• Have a solid system to track redemptions– Validating redemption status of voucher at POS– Marking them sold in the merchant center– Capturing in-restaurant spend metrics

• Make sure you sell the right deal– Want significant spend above the deal value in-restaurant

• Negotiate the commission– Splitting the paid value 50/50 isn’t good enough

Daily Deals & Brand Health

Presentation prepared for: MEGOctober 19, 2012

Presentation by: Mike Murphy, CEOmmurphy@brandiq.bizwww.BrandIQ.biz

BrandIQ framework │Brand health measurement

27

Are Daily Deals Right For you As A Marketing Tactic?

28

The right brand strategy and marketing tactics that address the needs of different target groups is

critical General Population in Category

There are deal hunters in every

category There are consumers that value a great restaurant experience and don’t buy with deals

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Full-Service Restaurants

Limited Service Restaurants

Pay More for Quality

Experience

Look for Best Deals

Footnote 8% do no fit any particular segments

Example: Segmenting The Category

Smart Diners

13%

Segment Junkies

20%

Convivial Conventionalist

15%

Dining Reliant

14%

Thrifty Functionalist

12%BasicUsers 7%

Foodie Fanatics

11%

30

Full-Service Restaurants

Limited Service Restaurants

Pay More for Quality

Experience

Look for Best Deals

Footnote 8% do no fit any particular segments

Your Customers Within Each Segment

13

6

13

15

9

10

24

%

% %

%%

%

%

31

Not many customers fall in this segment

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Potential downsides if Daily Deals are not executed effectively

Loyalty

Repeat Visit IntentSatisfactionAdvocacy Extendibility

Negative Impact on Customer Satisfaction and Moreo If you don’t staff up to handle the surge, the new

customers may not receive the best experience and are likely not to return.

o Regular guests can feel annoyed they have paid full price, while new, non-loyal customers have their experience for a fraction the cost.

Short-Lived Business o Current customers come in on the deep discount, rather

than profitable visits from their regular dining. o New customers may not have any intention of coming

back and paying full-price.

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Potential downsides if Daily Deals are not executed effectively

PopularityEsteem

Damage to Upscale Brand’s Imageo Be careful not to undermine brand image and become

the best choice for guests when they want a “cheap” option (alternative – frequent diner program)

• Now the Daily Deal price is the price they think they should pay

• Real Price is now a “rip-off”

Losing Exclusivity o Could cause dilution of brand due to being typically in the

company of other ‘discounting’ restaurants/businesses

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Is your objective to ‘fill empty seats’?

Building long-term brand equity takes more…

This is a short-term strategy to build sales.

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2011 Study* analysis of 56,000 Yelp reviews of ~2,500 deals from ~2,300 merchants before and after Groupon in 20 major markets. Focused on “Groupon” and “Coupon” keywords on Yelp.

John Byers, Boston University, Michael Mitzenmacher, Harvard, Daily Deals: Prediction, Social Diffusion and Reputational Ramifications

If you’re going to use Daily Deals, make sure there are no negatives in the customer experience for ANY of your guests.

Up to 20%↓in review ratings on after usage.

More Critical? Or Worse Experiences?

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Is your objective to ‘Build the Brand’?

Gain Alignment

OperationalExcellence

Build a Loyalty

Program

MeasureImpact

(Touch points on Brand Health)

Highlight Brand DNA

“It’s all about the experience”

Questions, comments, hate mail

Mark Brandau, associate editorNation’s Restaurant News | www.nrn.com(312) 840-8435mark.brandau@penton.com@Mark_from_NRN