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A Dollar of Groupon Takes a Dollar Off Your     Property Value (And a Dozen Neighbors)             How Discount Deal Sites...
Introduction                                        Pressured City RevenuesThe latest Internet craze is the daily deal sit...
provided sites for coupons, discounts, and        Daily Deal Sites Take Holdpromotions by local businesses.               ...
0 to 15 Billion in 3 Years? Really?               No wonder that other Internet firms, hungry                             ...
Downward Spiral For MerchantsIn a growing economy, such losses would bemasked by overall growth, but moreimportant, in a g...
in some cases positive since it facilitates       The “4 Dangers” of Daily Dealsbuying and selling between locals. DDshowe...
Multi-City Price Wars.Almost all                     Drainmonies, for           Large amounts of cash       Merchant and C...
As Sites Proliferate, Local                           Vendors That Help Set Up Local SitesDamage Increases               ...
    Potential Local Earnings and/or School             Don’t Need Legislation or Protests     Donations                 ...
Mea CulpaNotes                                                     This paper has received a lot of criticism,    1. Curre...
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A Dollar of Groupon Takes a Dollar Off Your Property Value


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A Dollar of Groupon Takes a Dollar Off Your Property Value (and off a Dozen Neighbors Too). How Discount Deal Sites Depress City Economies. Easy Ways to Encourage Local Competition.

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A Dollar of Groupon Takes a Dollar Off Your Property Value

  1. 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 CompetitionEd Lang, Chief Economist, Community Sustainment Coalition, edlang1@hotmail.comFirst published February 3, 2010. Updated June 10, 2011.See Author’s “Mea Culpa” – Page 10 downward spiral in local commerce, property values, and tax base. We’ll show that these problems do not occur in other types ofAbstract Internet commerce. We suggest a simple solution: communities should encourage theEconomic hardship has visited many creation of local discount websites thatAmerican cities, with reductions in property compete with or eliminate the national DDS’s;values, commerce, and tax base leading to such local sites are trivial to start, fit into tolayoffs of teachers, law enforcement, and the local community as naturally as a localother civic roles. At the same time a new type newspaper, provide better customer serviceof Internet website has become popular – and quality, and will naturally dominate onceDaily Deal sites (DDs) represented by local residents are educated about the impactGroupon and others (1). Other papers (2) on jobs and property values.have debated the negative effects of DDs onmerchants; we examineanother, much largerproblem: DDs representa large potential loss tolocal economies, as theydivert keystone cash-flows from local retailcommerce to out-of-state firms and create aA Dollar of Groupon Copyright © 2011 Edward Lang. All Rights Reserved. 1
  2. 2. Introduction Pressured City RevenuesThe latest Internet craze is the daily deal site. Cities from San Jose to Atlanta are alreadyThe two biggest competitor – Groupon and facing steep tax reductions. The DDs nowLiving Social (here called DDs) – have grown represent potentially millions of dollars moreto combined valuation approaching $US 18 lost annually.billion in a few years. It seems that everylarge Internet competitor from Facebook to Fortunately there is a straightforward wayNBC, plus hundreds of small competitors, for cities to prevent this, which doesnthave joined the fray. require taxation, political approval, or any other complex process. Cities can recoverEven by the standards of the Internet, it’s an these funds by enabling localextraordinary gold rush. Theres only one entrepreneurs—newspapers or perhaps web-problem--the gold all these enormous savvy teenagers— to create a competitivecompanies are chasing so frantically may very local business which will automatically re-well be somebody elses gold. direct these diverted funds back into the localPerhaps this is the reason that daily deal sites economy.have become so popular so quickly. There is Quite simply, communities can “take back”nothing more attractive to investors than a community which takes little effort and yetsiphons a lot of money out of someone else’s Community Advertising in the Pastpockets. This of course is perfectly legal, andwould be considered good business by any Lets take a moment to understand howinvestor who aims to maximize their community advertising has worked in theinvestment. past, and how web-based discount sites are changing the picture.However the results for local communitiesare potentially devastating: large amounts of For the past century, local towns and citieseconomic value and economic control, which have been relatively self-sustaining; localin the past had recycled in a sustainable residents provide services and value to eachfashion in the local economy other at fair prices.providing jobs for local Advertising theseresidents, are now siphoned goods and services --from that local community. what economists callCities that are already intermediationeconomically struggling in between therecession are drained of business and thecash just at the time they consumer – wasneed it most. handled either by local advertisingDaily Deal sites are an sales teams or byunsustainable business newspapers, flyers,model. or signage whichA Dollar of Groupon 2
  3. 3. provided sites for coupons, discounts, and Daily Deal Sites Take Holdpromotions by local businesses. In the past few years something new hasIf the owner of a pizza parlor had a Tuesday risen. The local newspapers have begun tohalf-off special they would advertise that fail, under pressure from the Internet-basedspecial in the local newspaper, or hire new outlets, and from (3). Inteenagers to walk around the town to post or their place, there have been many varieties ofhand out flyers. Local businesses have been discount or coupon-printing websites, andusing these methods for decades. most recently the Daily Deal sites.Advertising at the local newspaper or the Daily Deal Sitelocal yellow pages cost 10-20% of the cost ofgoods for any store; but regardless of the  Money paid to site, not merchantpercentage, more important was the fact that  Site takes 20-50% cutalmost all that money would be recycled back  Little of money is recycled locally…into the local economy: paying the salaries of most goes out of state.the teenagers delivering the papers, thenewspaper editors, or the rent on the Using our prior example, the owner of a pizzanewspaper’s offices. One way or another, parlor would offer a “deal” on the Daily Dealmost monies were local, recycled endlessly site. Customers pay the site directly. The site keeps 20-50% and pays the merchant thethrough the local economy sustainably. balance at a later time.Indeed, sustainability is what made these The 20-50% going to the DDs flows not backcommunities exist in the first place; a town into the local economy or the localwith an unsustainable economy, where largeamounts of cash flowed elsewhere, would newspaper, but goes instead to hundreds ofcease to exist. One can go back through miles away.history and find many examples of such ghosttowns. Thus a large part of the transaction flow in the community is now being removed fromIt has always been a normal function of city the local community. The DDs can pullleaders to work for the sustainability of their millions of dollars from the local economy—local economies, by attracting new business, money that will never return. The net resulttrying to keep business from moving, and is a relentless downwards spiral in theencouraging local residents whenever economic activity and assets. Transactionalpossible to “buy local” and keep money local. control of that local community is put into theThis is not just a slogan but an essential part hands of people who have no local stake inof survival. maintaining that community. A human link which has maintained community health forWe propose that city leaders will want to hundreds of years is severed.focus their energies on the problem of DDs, asan immediate and near-term risk to thissurvival.A Dollar of Groupon 3
  4. 4. 0 to 15 Billion in 3 Years? Really? No wonder that other Internet firms, hungry for more profits, are leaping into the daily3 years ago, Groupon was worth essentially deal business, hoping for their share of localnothing. Today, it is widely valued at $15 money – inevitably (and this part is neverBillion dollars. That is an extraordinary rise. mentioned) at the expense of the localMany successful entrepreneurs work for economy.decades and hire thousands of engineers tocreate many breakthrough products before Economic Loss Multiplierachieving such a value. What has Grouponcreated that justifies this value? Did they Some cash-flows in local economies are moreinvent a cure for cancer, or a new source of “important” than others. Such keystoneclean energy? No. They are an advertising businesses not only affect their own localsite with clever writing and an attractive participants, but have a multiplied effect ononline interface. They pioneered a new successful commerce in the rest of the city.format—true—however this function was Loss of local control of these keystoneprovided in the past by others. businesses can be an dangerous condition – as non-local players, who have no stake in theVenture capitalists say: “they have a very continuation of the community, can get holdsimple business model” – which translated of a crucial business and either inadvertentlyinto normal speech means – they do little but or intentionally crash the local economy.make a lot of money doing it Local advertising, via newspaper or flyer, hasMore important, Groupon and other Daily long been a keystone business. BestDeal sites now have opened access to what estimates of the dollar value to thehad been closely-guarded local economies. community, of a dollar lost to this keystone industry, are as follows:“It’s an open secret in the daily dealcommunity” said one participant at a daily Community Value Lost For Each Dollardeal conference “that Groupon is highly Spent on “Non Local” Daily Deal Sitevalued because they have finally crackedopen hundreds of billions of dollars worth of Respondent 1 4 Respondent 2 8local community transactions… and Respondent 3 10developed a formula to outsource and Respondent 4 25centralize the processing of those Average 11.75transactions with a very healthy slice for Table 1: Estimated multiplier to local economythemselves. Naturally we’re all going to jump of $1 dollar lost to out-of-community advertiser.into that gap and try to carve out a piece for Asked at ICMA San Jose 2010 Conferenceourselves.” We see that each dollar spent on Daily DealsWhen asked about the effect this would have leads to a loss of between 4 and 25 dollars ofon local economies the commenter said asset value to the local community. Or weunapologetically “Don’t know. That’s not might say “a dollar spent on Groupon takesreally my focus. My focus is to make money.” a dollar off your own property values and the values of a dozen neighbors.”A Dollar of Groupon 4
  5. 5. Downward Spiral For MerchantsIn a growing economy, such losses would bemasked by overall growth, but moreimportant, in a growing economy healthylocal merchants would not be forced to useDDs at all.Perhaps it is no coincidence that DDssucceeded at the same time as a severerecession. In a better economy it is unlikelymerchants would be tempted to give awaycontrol of their transaction.The result is a downward spiral. As the localeconomy is drained of cash, it is more difficultto attract new customers and thus more likelythat shop owners will turn to a powerfulDaily Deal site – in turn creating even morelosses. It’s a downward cycle in which only Other Internet Sites Don’t Causethe Daily Deal sites win. Same Problem 1. Recession-pinched local merchant needs customers, does “daily deal” When discussing these issues, a common objection is: “Well, if that’s the case, then this 2. Deal succeeds but 20-50% of means all Internet commerce (for books proceeds are taken by “out of shoes, or whatever) depresses the local state” website (in past this money economy…however we know that internet would have gone to local commerce doesn’t depress local economies, advertisers or newspapers) therefore DDs don’t depress local economies 3. Overall wealth of community is either. “ reduced…lower property values, In fact, DDs function quite differently from tax base, summer jobs, schools, other types of internet commerce, civic functions 4. Local residents, facing lower pay  Comparison with Craigslist and property values, cut back on For example let’s consider purchases Craigslist changed local communities 5. Even more desperate, local dramatically – it largely wiped out local merchant does more daily deals to classified advertisers. However it’s get customers essentially free and takes no cash from the 6. Even more cash from deals flows local ecosystem; thus the effect of Craigslist is neutral for local economies—bad for local out of town, causing even more newspapers but good for local residents—or depression of local valuesA Dollar of Groupon 5
  6. 6. in some cases positive since it facilitates The “4 Dangers” of Daily Dealsbuying and selling between locals. DDshowever are a diametrically opposite case: Why are large national brands so enamoredthey replace local advertisers with a model with Daily Deal model? Perhaps because itthat is higher cost and siphons money out of transfers significant financial control intolocal ecosystem. The effects on local their hands. From a local merchant’seconomies are disastrous. is a perspective, this is a dangerous andhighly sustainable business – it is likely to unhealthy transfer of control.continue for decades, since it adds much andtakes little – while DDs are inherently Community Daily Deal Modelunstable and will almost certainly disappear Advertising (2007-?)unless they recognize and repair these Model (1870s-problems in their business model. 2007) Comparison with Amazon Customer pays DivertAlthough in theory competes local merchant DDs re-route thewith local booksellers, the net effect on the directly, so transation into their merchant is in own accounts.local economy is minimal; Amazon sells control of cash.books so cheaply that the money paid to their No one else is 100% of transactioncorporate offices is more or less identical to party to the value is paid to Dailythe money that the local bookseller had transaction. Deal site instead ofalready been sending out to publishers to buy Local advertisers local merchant.the books for resale. This is bad for the local are paid for the Danger: As DDs ad, or a gradually gain financialbookseller, who lose a higher profit margin, percentage of the control of localbut good for local residents, who keep that deal “after the commerce, they canprofit margin in their pockets. One might fact” – they don’t begin imposingargue the desirability of keeping commerce control the onerous terms,local for other reasons, or we might argue transaction. increase delay tillthat Amazon’s very small markup represents payment, and/ora net drain on local communities. But on the replace with their ownwhole, from a purely monetary standpoint, lower cost brand.Amazon and many other online commercesites are neutral to local economies; shifting Local merchant is Delaydollars between local residents, but taking no paid upon Instead of being paidmore out of the local community than before. providing service immediately, theDDs again are the opposite case. They replace or product. They merchant must wait towhat was previously a local service, and are in control of be paid.removes an enormous amount of cash-flow all-importantthat was for hundreds of years a locally- cashflow. During this delay time,recycled flow. DDs makes significant revenue on “float” fees, while merchant loses.A Dollar of Groupon 6
  7. 7. Multi-City Price Wars.Almost all Drainmonies, for Large amounts of cash Merchant and Consumers Bothadvertising or are removed from localcoupons, are economy, causing long- Lose, Daily Deal Site Winsrecycled back term declines.into local Another common defense of the DDs model iscommunity as DDs take an “They get a lot of customers, sometimes fromrent, wages, or extraordinary other cities, to try out a new store.” Thislocal purchases. percentage (20-50%) produces the illusion of competition in whichLocal economy is of the transaction.therefore “self – it is claimed – the consumers win a lower Most of this is taken price. But again, the controlling fact is thatsustaining” – the out of the community,basis of all such discount “raids” will never remain small is not paid in local rentcommunity or wages. Community scale; they will always escalate into pricehealth for economy gradually wars. DDs take a significant cut of thehundreds of declines. “Downward purchase price out of that region, whichyears. spiral” as local decline means that economy in the effected cities and reduces purchasing the region will decline mandating ever-more- power of locals, extreme discounts. requiring merchants to resort to more and Merchant in City A: more drastic daily deals to attract ever-  Runs daily deal, attracts customers from decreasing customers. City A and City B. Daily deal site takes 20- 50%.Historically local Distractmerchants have Merchant in City B: DDs gradually replacebenefitted from a local products with“local trust”  Having lost local customers, they run their their own nationalmechanism. own daily deal to “win back” City B and City brand.Local customers A customers. Daily deal site takes 20-50%instinctively With DDs, theprefer to buy customer slowly begins Daily Deal Sitefrom local to transfer their “trust”merchants (again, from the local  Seeing price war, calls both merchants offerthey know that merchant to the Daily even more discounts. Daily deal sitethis protects the Deal intermediary. continues to drain money from region,local economy). DDs can gradually further impoverishing both cities. replace the local merchant completely Open competition between merchants is good with a nationally- for consumers. A price war provoked by an promoted brand. Local outside party, where that outside party is merchant loses completely. taking a “cut” of each battle, is bad for all.A Dollar of Groupon 7
  8. 8. As Sites Proliferate, Local  Vendors That Help Set Up Local SitesDamage Increases There are many firms that will enable such a local site setup – here are two randomlyIt’s important to remember that non-local pulled off the Internet (this does not is doesDDs in small numbers aren’t a problem; not constitute a endorsement in any way… aGroupon by itself has little impact. However little research will locate a dozen more):as of this writing, there are 400 daily dealsites including some of the largest media and  – “Will help you set upinternet sites. These competitors will be local franchise site in any city,flooding local markets with advertising requires minimum 10% contributiondollars to persuade local residents to to local schools. Provides technology“convert” away from local purchasing. Once and ‘entertainment value’ in the formthe dike is breached, an ever-increasing of short promotional videos made byamount of local funds will flow out of town. local teenagers mixed with celebrity promotions.”In a preliminary calculation we estimated the  – “provides aeffects of such sites on cities from 60,000 to turn-key technical solution with a500,000 population with widespread use: daily deal website that anyone can run. Provides not only websiteAnnual Economic Loss Estimated For One template but training and support toto Six Non-Local Daily Deal Sites (DDs) get you started.”City 1DDs 2DDs 6DDs60K -0.5% -0.9% -2.7%  Local Discount Site is Equivalent ofpopulation Local Newspaper150K 0 -0.5% -2.2%population Having a local Daily Deal website is like500K 0 -0.5% -1.4% having a local newspaper -- it makes sensepopulation and indicates that the community is vibrant and controlling its own economic future.A Simple Solution The key is to use local peer pressure and civic pride to push the national sites out of town.The solution is simple: Communities should This can be as simple as spreading the word(and inevitably will) create their own to local PTAs, church groups, and chambers of“Groupon clones”. This is similar to printing a commerce—that non-local Daily Deal siteslocal newspaper or “pennysaver” advertiser, are harmful to property values and local jobs.already routine for cities of any size, except Urge locals not to patronize local shops thatthat in this case it’s an online website. use non-local sites (not difficult, because shopPerhaps the local teenagers could run it— owners are wary of DDs in any case.) Localtheir internet skills and enthusiasm will make sites will perform better because localit successful. Technically it’s a trivial knowledge will provide better deals. It’s theexercise; such sites can be set up and running optimum business model for deal a matter of hours.A Dollar of Groupon 8
  9. 9.  Potential Local Earnings and/or School  Don’t Need Legislation or Protests Donations It is not necessary to pass laws, stageAssuming a community aggressively sets up protests, or send hate mail. The people whoit’s own local DDs, what is the cash potential started Groupon and such sites aren’t badfor the venture and for donation to local non- people; they are simply youngprofit causes? In this example we assume: businesspeople who have invented an amazing new concept and don’t realize the  A city of 100,000 population negative effect it can have on a large scale.  20% donation to the local school Locals can simply co-opt this new concept, as system—which shows local citizens the communities have done many times before. economic advantage of using such a local site instead of larger and  Small Towns Must Protect Their potentially more aggressive Economy From Technological Losses competitors. There are a dozen upcoming new  The site provides both local daily deals technologies, such a mobile commerce, which and local “coupon discounts” (4) will present similar traps for local merchants.  20% of citizens spend $100/year for Communities must learn to co-opt these daily deals, and $40/year for coupon technologies in a local fashion. A city that discounts cannot protect its economic boundaries may  An added 10% of citizens spend find it is no longer economically viable. It’s a $50/year for daily deals, and $20/year simple matter of survival – local survival for coupon discounts. against technologies that naturally aim to  Just as in any business venture, results drain off local value on a large scale. would vary depending on the local Again it is easy to block these sites, but this entrepreneurs and customers. requires positive action by local leaders.Annual Earnings and School Donation.Local Daily Deal Sites per 100K Conclusion: Maintaining a HealthyPopulation. $ Thousands. Free MarketAdoption Daily Coupon Total School Finally we should remember that the success Deal of the economy of the US and other free-20% of 2000 800 2800 560 market societies has long depended on openresidentsspend competition and “playing rules” that ensure100/40 the best results for all. Although the Daily Deal model is legal and does provide value,20% of 3000 1200 4200 840 the large-scale model is not necessarilyresidents healthy for communities. It is absolutelyspend appropriate for local communities to create a100/40, less predatory, more sustainable local20% spend50/20 alternative which provides the same valuable service without the negative side-effects.A Dollar of Groupon 9
  10. 10. Mea CulpaNotes This paper has received a lot of criticism, 1. Currently there are 400 daily deal most of it deserved. sites and growing. At best estimate, 95% of these are national – and People have said the paper was rushed, full of therefore potentially a drain on local unsupported claims, and harsh – all true. economies. However there is a justification. The “local daily deal” business model has significant 2. Benjamin Edelman, Sonia Jaffe, Scott problems which are being overlooked. The Duke Kominers (2010, Dec 17). To daily deal model could evolve into a more Groupon or Not To Groupon: The “sustainable” approach, which will not only Profitablity of Deep Discounts. better protect local consumers and Working paper. Harvard Business merchants, but ultimately proves more School. profitable for daily deal providers. 1-063.pdf This paper was posted hastily because there was a need to get the word out quickly, even 3. Although has before better research can be completed. eliminated many local classified advertisers, including newspapers, I hope that readers will ignore the many the effect on local economies has been failings of this paper and it’s author, and nil since Craigslist gives its service appreciate the ideas instead. 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.A Dollar of Groupon 10