A Dollar of Groupon Takes a Dollar Off Your Property Value

A Dollar of Groupon Copyright © 2011 Edward Lang. All Rights Reserved. 1

A Dollar of Groupon Takes a Dollar Off Your

Property Value (And a Dozen Neighbors)

How Discount Deal Sites Depress City Economies

Easy Ways to Encourage Local Competition

Ed Lang, Chief Economist, Community Sustainment Coalition, [email protected]

First published February 3, 2010. Updated June 10, 2011.

See Author’s “Mea Culpa” – Page 10

Abstract

Economic hardship has visited many

American cities, with reductions in property

values, commerce, and tax base leading to

layoffs of teachers, law enforcement, and

other civic roles. At the same time a new type

of Internet website has become popular –

Daily Deal sites (DDs) represented by

Groupon and others (1). Other papers (2)

have debated the negative effects of DDs on

merchants; we examine

another, much larger

problem: DDs represent

a large potential loss to

local economies, as they

divert keystone cash-

flows from local retail

commerce to out-of-

state firms and create a

downward spiral in local commerce, property

values, and tax base. We’ll show that these

problems do not occur in other types of

Internet commerce. We suggest a simple

solution: communities should encourage the

creation of local discount websites that

compete with or eliminate the national DDS’s;

such local sites are trivial to start, fit into to

the local community as naturally as a local

newspaper, provide better customer service

and quality, and will naturally dominate once

local residents are educated about the impact

on jobs and property values.

A Dollar of Groupon 2

Introduction

The latest Internet craze is the daily deal site.

The two biggest competitor – Groupon and

Living Social (here called DDs) – have grown

to combined valuation approaching $US 18

billion in a few years. It seems that every

large Internet competitor from Facebook to

NBC, plus hundreds of small competitors,

have joined the fray.

Even by the standards of the Internet, it’s an

extraordinary gold rush. There's only one

problem--the gold all these enormous

companies are chasing so frantically may very

well be somebody else's gold.

Perhaps this is the reason that daily deal sites

have become so popular so quickly. There is

nothing more attractive to investors than a

business which takes little effort and yet

siphons a lot of money out of someone else’s

pockets. This of course is perfectly legal, and

would be considered good business by any

investor who aims to maximize their

investment.

However the results for local communities

are potentially devastating: large amounts of

economic value and economic control, which

in the past had recycled in a sustainable

fashion in the local economy

providing jobs for local

residents, are now siphoned

from that local community.

Cities that are already

economically struggling in

recession are drained of

cash just at the time they

need it most.

Daily Deal sites are an

unsustainable business

model.

Pressured City Revenues

Cities from San Jose to Atlanta are already

facing steep tax reductions. The DDs now

represent potentially millions of dollars more

lost annually.

Fortunately there is a straightforward way

for cities to prevent this, which doesn't

require taxation, political approval, or any

other complex process. Cities can recover

these funds by enabling local

entrepreneurs—newspapers or perhaps web-

savvy teenagers— to create a competitive

local business which will automatically re-

direct these diverted funds back into the local

economy.

Quite simply, communities can “take back”

community advertising.

Community Advertising in the Past

Let's take a moment to understand how

community advertising has worked in the

past, and how web-based discount sites are

changing the picture.

For the past century, local towns and cities

have been relatively self-sustaining; local

residents provide services and value to each

other at fair prices.

Advertising these

goods and services --

what economists call

intermediation

between the

business and the

consumer – was

handled either by

local advertising

sales teams or by

newspapers, flyers,

or signage which


provided sites for coupons, discounts, and

promotions by local businesses.

If the owner of a pizza parlor had a Tuesday

half-off special they would advertise that

special in the local newspaper, or hire

teenagers to walk around the town to post or

hand out flyers. Local businesses have been

using these methods for decades.

Advertising at the local newspaper or the

local yellow pages cost 10-20% of the cost of

goods for any store; but regardless of the

percentage, more important was the fact that

almost all that money would be recycled back

into the local economy: paying the salaries of

the teenagers delivering the papers, the

newspaper editors, or the rent on the

newspaper’s offices. One way or another,

most monies were local, recycled endlessly

through the local economy sustainably.

Indeed, sustainability is what made these

communities exist in the first place; a town

with an unsustainable economy, where large

amounts of cash flowed elsewhere, would

cease to exist. One can go back through

history and find many examples of such ghost

towns.

It has always been a normal function of city

leaders to work for the sustainability of their

local economies, by attracting new business,

trying to keep business from moving, and

encouraging local residents whenever

possible to “buy local” and keep money local.

This is not just a slogan but an essential part

of survival.

We propose that city leaders will want to

focus their energies on the problem of DDs, as

an immediate and near-term risk to this

survival.

Daily Deal Sites Take Hold

In the past few years something new has

risen. The local newspapers have begun to

fail, under pressure from the Internet-based

new outlets, and from Craigslist.com (3). In

their place, there have been many varieties of

discount or coupon-printing websites, and

most recently the Daily Deal sites.

Daily Deal Site

Money paid to site, not merchant

Site takes 20-50% cut

Little of money is recycled locally…

most goes out of state.

Using our prior example, the owner of a pizza

parlor would offer a “deal” on the Daily Deal

site. Customers pay the site directly. The site

keeps 20-50% and pays the merchant the

balance at a later time.

The 20-50% going to the DDs flows not back

into the local economy or the local

newspaper, but goes instead to hundreds of

miles away.

Thus a large part of the transaction flow in

the community is now being removed from

the local community. The DDs can pull

millions of dollars from the local economy—

money that will never return. The net result

is a relentless downwards spiral in the

economic activity and assets. Transactional

control of that local community is put into the

hands of people who have no local stake in

maintaining that community. A human link

which has maintained community health for

hundreds of years is severed.


0 to 15 Billion in 3 Years? Really?

3 years ago, Groupon was worth essentially

nothing. Today, it is widely valued at $15

Billion dollars. That is an extraordinary rise.

Many successful entrepreneurs work for

decades and hire thousands of engineers to

create many breakthrough products before

achieving such a value. What has Groupon

created that justifies this value? Did they

invent a cure for cancer, or a new source of

clean energy? No. They are an advertising

site with clever writing and an attractive

online interface. They pioneered a new

format—true—however this function was

provided in the past by others.

Venture capitalists say: “they have a very

simple business model” – which translated

into normal speech means – they do little but

make a lot of money doing it

More important, Groupon and other Daily

Deal sites now have opened access to what

had been closely-guarded local economies.

“It’s an open secret in the daily deal

community” said one participant at a daily

deal conference “that Groupon is highly

valued because they have finally cracked

open hundreds of billions of dollars worth of

local community transactions… and

developed a formula to outsource and

centralize the processing of those

transactions with a very healthy slice for

themselves. Naturally we’re all going to jump

into that gap and try to carve out a piece for

ourselves.”

When asked about the effect this would have

on local economies the commenter said

unapologetically “Don’t know. That’s not

really my focus. My focus is to make money.”

No wonder that other Internet firms, hungry

for more profits, are leaping into the daily

deal business, hoping for their share of local

money – inevitably (and this part is never

mentioned) at the expense of the local

economy.

Economic Loss Multiplier

Some cash-flows in local economies are more

“important” than others. Such keystone

businesses not only affect their own local

participants, but have a multiplied effect on

successful commerce in the rest of the city.

Loss of local control of these keystone

businesses can be an dangerous condition –

as non-local players, who have no stake in the

continuation of the community, can get hold

of a crucial business and either inadvertently

or intentionally crash the local economy.

Local advertising, via newspaper or flyer, has

long been a keystone business. Best

estimates of the dollar value to the

community, of a dollar lost to this keystone

industry, are as follows:

Community Value Lost For Each Dollar

Spent on “Non Local” Daily Deal Site

Respondent 1 4 Respondent 2 8 Respondent 3 10 Respondent 4 25 Average 11.75

Table 1: Estimated multiplier to local economy

of $1 dollar lost to out-of-community advertiser.

Asked at ICMA San Jose 2010 Conference

We see that each dollar spent on Daily Deals

leads to a loss of between 4 and 25 dollars of

asset value to the local community. Or we

might say “a dollar spent on Groupon takes

a dollar off your own property values and

the values of a dozen neighbors.”


Downward Spiral For Merchants

In a growing economy, such losses would be

masked by overall growth, but more

important, in a growing economy healthy

local merchants would not be forced to use

DDs at all.

Perhaps it is no coincidence that DDs

succeeded at the same time as a severe

recession. In a better economy it is unlikely

merchants would be tempted to give away

control of their transaction.

The result is a downward spiral. As the local

economy is drained of cash, it is more difficult

to attract new customers and thus more likely

that shop owners will turn to a powerful

Daily Deal site – in turn creating even more

losses. It’s a downward cycle in which only

the Daily Deal sites win.

1. Recession-pinched local merchant

needs customers, does “daily deal”

2. Deal succeeds but 20-50% of

proceeds are taken by “out of

state” website (in past this money

would have gone to local

advertisers or newspapers)

3. Overall wealth of community is

reduced…lower property values,

tax base, summer jobs, schools,

civic functions

4. Local residents, facing lower pay

and property values, cut back on

purchases

5. Even more desperate, local

merchant does more daily deals to

get customers

6. Even more cash from deals flows

out of town, causing even more

depression of local values

Other Internet Sites Don’t Cause

Same Problem

When discussing these issues, a common

objection is: “Well, if that’s the case, then this

means all Internet commerce (for books

shoes, or whatever) depresses the local

economy…however we know that internet

commerce doesn’t depress local economies,

therefore DDs don’t depress local economies

either. “

In fact, DDs function quite differently from

other types of internet commerce,

Comparison with Craigslist

For example let’s consider Craigslist.com.

Craigslist changed local communities

dramatically – it largely wiped out local

classified advertisers. However it’s

essentially free and takes no cash from the

local ecosystem; thus the effect of Craigslist is

neutral for local economies—bad for local

newspapers but good for local residents—or


in some cases positive since it facilitates

buying and selling between locals. DDs

however are a diametrically opposite case:

they replace local advertisers with a model

that is higher cost and siphons money out of

local ecosystem. The effects on local

economies are disastrous. Craigslist.com is a

highly sustainable business – it is likely to

continue for decades, since it adds much and

takes little – while DDs are inherently

unstable and will almost certainly disappear

unless they recognize and repair these

problems in their business model.

Comparison with Amazon

Although Amazon.com in theory competes

with local booksellers, the net effect on the

local economy is minimal; Amazon sells

books so cheaply that the money paid to their

corporate offices is more or less identical to

the money that the local bookseller had

already been sending out to publishers to buy

the books for resale. This is bad for the local

bookseller, who lose a higher profit margin,

but good for local residents, who keep that

profit margin in their pockets. One might

argue the desirability of keeping commerce

local for other reasons, or we might argue

that Amazon’s very small markup represents

a net drain on local communities. But on the

whole, from a purely monetary standpoint,

Amazon and many other online commerce

sites are neutral to local economies; shifting

dollars between local residents, but taking no

more out of the local community than before.

DDs again are the opposite case. They replace

what was previously a local service, and

removes an enormous amount of cash-flow

that was for hundreds of years a locally-

recycled flow.

The “4 Dangers” of Daily Deals

Why are large national brands so enamored

with Daily Deal model? Perhaps because it

transfers significant financial control into

their hands. From a local merchant’s

perspective, this is a dangerous and

unhealthy transfer of control.

Community Advertising Model (1870s-2007)

Daily Deal Model (2007-?)

Customer pays local merchant directly, so merchant is in control of cash. No one else is party to the transaction. Local advertisers are paid for the ad, or a percentage of the deal “after the fact” – they don’t control the transaction.

Divert DDs re-route the transation into their own accounts. 100% of transaction value is paid to Daily Deal site instead of local merchant. Danger: As DDs gradually gain financial control of local commerce, they can begin imposing onerous terms, increase delay till payment, and/or replace with their own lower cost brand.

Local merchant is paid upon providing service or product. They are in control of all-important cashflow.

Delay Instead of being paid immediately, the merchant must wait to be paid. During this delay time, DDs makes significant revenue on “float” fees, while merchant loses.


Almost all monies, for advertising or coupons, are recycled back into local community as rent, wages, or local purchases. Local economy is therefore “self sustaining” – the basis of all community health for hundreds of years.

Drain Large amounts of cash are removed from local economy, causing long-term declines. DDs take an extraordinary percentage (20-50%) of the transaction. Most of this is taken out of the community, is not paid in local rent or wages. Community economy gradually declines. “Downward spiral” as local decline reduces purchasing power of locals, requiring merchants to resort to more and more drastic daily deals to attract ever-decreasing customers.

Historically local merchants have benefitted from a “local trust” mechanism. Local customers instinctively prefer to buy from local merchants (again, they know that this protects the local economy).

Distract DDs gradually replace local products with their own national brand.

With DDs, the customer slowly begins to transfer their “trust” from the local merchant to the Daily Deal intermediary. DDs can gradually replace the local merchant completely with a nationally-promoted brand. Local merchant loses completely.

Multi-City Price Wars.

Merchant and Consumers Both

Lose, Daily Deal Site Wins

Another common defense of the DDs model is

“They get a lot of customers, sometimes from

other cities, to try out a new store.” This

produces the illusion of competition in which

– it is claimed – the consumers win a lower

price. But again, the controlling fact is that

such discount “raids” will never remain small

scale; they will always escalate into price

wars. DDs take a significant cut of the

purchase price out of that region, which

means that economy in the effected cities and

the region will decline mandating ever-more-

extreme discounts.

Merchant in City A:

Runs daily deal, attracts customers from

City A and City B. Daily deal site takes 20-

50%.

Merchant in City B:

Having lost local customers, they run their

own daily deal to “win back” City B and City

A customers. Daily deal site takes 20-50%

Daily Deal Site

Seeing price war, calls both merchants offer

even more discounts. Daily deal site

continues to drain money from region,

further impoverishing both cities.

Open competition between merchants is good

for consumers. A price war provoked by an

outside party, where that outside party is

taking a “cut” of each battle, is bad for all.


As Sites Proliferate, Local

Damage Increases

It’s important to remember that non-local

DDs in small numbers aren’t a problem;

Groupon by itself has little impact. However

as of this writing, there are 400 daily deal

sites including some of the largest media and

internet sites. These competitors will be

flooding local markets with advertising

dollars to persuade local residents to

“convert” away from local purchasing. Once

the dike is breached, an ever-increasing

amount of local funds will flow out of town.

In a preliminary calculation we estimated the

effects of such sites on cities from 60,000 to

500,000 population with widespread use:

Annual Economic Loss Estimated For One

to Six Non-Local Daily Deal Sites (DDs)

City 1DDs 2DDs 6DDs 60K population

-0.5% -0.9% -2.7%

150K population

0 -0.5% -2.2%

500K population

0 -0.5% -1.4%

A Simple Solution

The solution is simple: Communities should

(and inevitably will) create their own

“Groupon clones”. This is similar to printing a

local newspaper or “pennysaver” advertiser,

already routine for cities of any size, except

that in this case it’s an online website.

Perhaps the local teenagers could run it—

their internet skills and enthusiasm will make

it successful. Technically it’s a trivial

exercise; such sites can be set up and running

in a matter of hours.

Vendors That Help Set Up Local Sites

There are many firms that will enable such a

local site setup – here are two randomly

pulled off the Internet (this does not is does

not constitute a endorsement in any way… a

little research will locate a dozen more):

Applaise.com – “Will help you set up

local franchise site in any city,

requires minimum 10% contribution

to local schools. Provides technology

and ‘entertainment value’ in the form

of short promotional videos made by

local teenagers mixed with celebrity

promotions.”

Localtowndeals.com – “provides a

turn-key technical solution with a

daily deal website that anyone can

run. Provides not only website

template but training and support to

get you started.”

Local Discount Site is Equivalent of

Local Newspaper

Having a local Daily Deal website is like

having a local newspaper -- it makes sense

and indicates that the community is vibrant

and controlling its own economic future.

The key is to use local peer pressure and civic

pride to push the national sites out of town.

This can be as simple as spreading the word

to local PTAs, church groups, and chambers of

commerce—that non-local Daily Deal sites

are harmful to property values and local jobs.

Urge locals not to patronize local shops that

use non-local sites (not difficult, because shop

owners are wary of DDs in any case.) Local

sites will perform better because local

knowledge will provide better deals. It’s the

optimum business model for deal sites.


Potential Local Earnings and/or School

Donations

Assuming a community aggressively sets up

it’s own local DDs, what is the cash potential

for the venture and for donation to local non-

profit causes? In this example we assume:

A city of 100,000 population

20% donation to the local school

system—which shows local citizens the

economic advantage of using such a

local site instead of larger and

potentially more aggressive

competitors.

The site provides both local daily deals

and local “coupon discounts” (4)

20% of citizens spend $100/year for

daily deals, and $40/year for coupon

discounts

An added 10% of citizens spend

$50/year for daily deals, and $20/year

for coupon discounts.

Just as in any business venture, results

would vary depending on the local

entrepreneurs and customers.

Annual Earnings and School Donation.

Local Daily Deal Sites per 100K

Population. $ Thousands.

Adoption Daily Deal

Coupon Total School

20% of residents spend 100/40

2000 800 2800 560

20% of residents spend 100/40, 20% spend 50/20

3000 1200 4200 840

Don’t Need Legislation or Protests

It is not necessary to pass laws, stage

protests, or send hate mail. The people who

started Groupon and such sites aren’t bad

people; they are simply young

businesspeople who have invented an

amazing new concept and don’t realize the

negative effect it can have on a large scale.

Locals can simply co-opt this new concept, as

communities have done many times before.

Small Towns Must Protect Their

Economy From Technological Losses

There are a dozen upcoming new

technologies, such a mobile commerce, which

will present similar traps for local merchants.

Communities must learn to co-opt these

technologies in a local fashion. A city that

cannot protect its economic boundaries may

find it is no longer economically viable. It’s a

simple matter of survival – local survival

against technologies that naturally aim to

drain off local value on a large scale.

Again it is easy to block these sites, but this

requires positive action by local leaders.

Conclusion: Maintaining a Healthy

Free Market

Finally we should remember that the success

of the economy of the US and other free-

market societies has long depended on open

competition and “playing rules” that ensure

the best results for all. Although the Daily

Deal model is legal and does provide value,

the large-scale model is not necessarily

healthy for communities. It is absolutely

appropriate for local communities to create a

less predatory, more sustainable local

alternative which provides the same valuable

service without the negative side-effects.


Notes

1. Currently there are 400 daily deal

sites and growing. At best estimate,

95% of these are national – and

therefore potentially a drain on local

economies.

2. Benjamin Edelman, Sonia Jaffe, Scott

Duke Kominers (2010, Dec 17). To

Groupon or Not To Groupon: The

Profitablity of Deep Discounts.

Working paper. Harvard Business

School.

http://www.hbs.edu/research/pdf/1

1-063.pdf

3. Although Craigslist.com has

eliminated many local classified

advertisers, including newspapers,

the effect on local economies has been

nil since Craigslist gives it's service

for almost no charge.

4. The daily deal type of site is the focus of

this paper, however another business

model – the printing of local persistent

coupons such as “5% off this Tuesday at

Bob’s Grocery” – is also a candidate for

a local website. Yet another is location-

based mobile marketing. Local

websites can combine various types of

discounts so residents can go to a single

local site consistently. This local effect

will offset the added confusion of

having multiple products. Major Daily

Deal site are already beginning to

include these other product/discount

categories.

Mea Culpa

This paper has received a lot of criticism,

most of it deserved.

People have said the paper was rushed, full of

unsupported claims, and harsh – all true.

However there is a justification. The “local

daily deal” business model has significant

problems which are being overlooked. The

daily deal model could evolve into a more

“sustainable” approach, which will not only

better protect local consumers and

merchants, but ultimately proves more

profitable for daily deal providers.

This paper was posted hastily because there

was a need to get the word out quickly, even

before better research can be completed.

I hope that readers will ignore the many

failings of this paper and it’s author, and

appreciate the ideas instead.