Groupon Deal Pushes Bakery To Brink of Bankruptcy

Groupon deal bakery"Twelve Cupcakes with a Choice of Flavours and Designs for £6.50 from Need a Cake. Value £26."

That is what Rachel Brown, 50, posted to Groupon UK, an international branch of the daily deals giant, in the hope of attracting new customers to her online-order bakery. Selling her hand-designed cupcakes at a 75 percent discount was going to cost her £2.50 ($3.90) a box. But that seemed like a small price for a lot of exposure.

It did, that is, until 8,500 Groupon users took her up on her offer, reports the Daily Mail. That $33,150 loss was compounded by the £12,500 ($19,500) in wages Brown had to pay to the 25 supplemental workers she hired to labor day and night, as well as extra distribution costs.

Brown lost her profits for the entire year in the 100,000 cupcake-making frenzy.

"Without doubt, it's the worst ever business decision I have made," she said. "It's been an absolute nightmare."

Brown had originally wanted an even more demanding national UK deal, according to Julie Mossler, the Director of Communications for Groupon. But it was Groupon that recommended a more gradual approach, in which the deal was rolled out to 15 smaller markets in succession.

"We checked in prior to opening each market as well as in the weeks after the deal, and the merchant was nothing but happy," says Mossler. "We were surprised to hear she'd gone to the press but we're working closely with her to see what we can do to help."

Need a Cake isn't the first business to be squeezed tight by a Groupon deal. There were several such stories in early 2010, and last New Year's, the president of a Japanese restaurant management company resigned after hundreds of Groupon customers received "osechi" meal boxes much smaller, sparser and sloppier than the promised bounty.

Afterward, Groupon, Inc., CEO Andrew Mason posted a subtitled apology on YouTube. The company faced a lot of criticism that its speedy global expansion came at the expense of a sound business model.

Groupon is "a loan sharking business," claimed the web strategist Rocky Agrawal in TechCrunch in June. The merchants received a cash payout upfront -- 50 percent of the total revenue from their offer -- but then had to give deep discounts for the next year, sometimes hurting their bottom line.

These are "incredibly expensive advertising campaigns" in disguise, he said.

Some merchants suffer from a "your eyes are bigger than your stomach syndrome," explains Mossler over the phone. They ask for as many new customers as possible, even if it's more than they can handle.

"In the U.S. in early 2010 we would have said OK because we trusted the merchant to know what maximum capacity was for their business," Mossler wrote via email. "You can't really look at a business owner and say we know your business better than you."

But Groupon wanted its deals to help its merchants. Repeat businesses are the backbone of its service, and an "osechi" style horror story is bad press for everyone involved. This would have been particularly damaging in the lead-up to the company's Initial Public Offering earlier this month. Andrew Mason had to convince investors that his young business model could be a real David to the Goliaths -- Google and Amazon.

The company's NASDAQ debut was ultimately impressive: Groupon sold $700 million worth of stock its first day, a tech IPO second only to Google's. But many financial commentators criticized the company for using a tiny float -- just a 5.5 percent stake -- to inflate demand.

Groupon has always had policies in place to prevent merchants from overextending themselves. The daily deals site assesses the capacity of the business, and recommends the number of deals it should offer. Now it may even mandate a cap.

All the merchants get called the day of the deal, notes Mossler. And they can always close the deal early if the traffic becomes overwhelming. "It's not like you sign on a dotted line," she says. "We're happy to jump in and close the deal in real time if it sells more aggressively than anticipated," she added via email.

Merchants have total control over their discount, except for its description. That is the exclusive work of Groupon's writers, who compose witty ditties in accordance with Groupon's particular editorial voice.

"We run literally more than 100,000 deals a day internationally," she says. "It's no different than any other form of marketing. A business should know what's manageable."

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