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.

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, edlang1@hotmail.com
First 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 of
Abstract Internet commerce. We suggest a simple
solution: communities should encourage the
Economic hardship has visited many creation of local discount websites that
American 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 to
layoffs of teachers, law enforcement, and the local community as naturally as a local
other civic roles. At the same time a new type newspaper, provide better customer service
of Internet website has become popular – and quality, and will naturally dominate once
Daily Deal sites (DDs) represented by local residents are educated about the impact
Groupon and others (1). Other papers (2) on jobs and property values.
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
A Dollar of Groupon Copyright © 2011 Edward Lang. All Rights Reserved. 1

2. Introduction Pressured City Revenues
The latest Internet craze is the daily deal site. Cities from San Jose to Atlanta are already
The two biggest competitor – Groupon and facing steep tax reductions. The DDs now
Living Social (here called DDs) – have grown represent potentially millions of dollars more
to combined valuation approaching $US 18 lost annually.
billion in a few years. It seems that every
large Internet competitor from Facebook to Fortunately there is a straightforward way
NBC, plus hundreds of small competitors, for cities to prevent this, which doesn't
have joined the fray. require taxation, political approval, or any
other complex process. Cities can recover
Even by the standards of the Internet, it’s an these funds by enabling local
extraordinary gold rush. There's only one entrepreneurs—newspapers or perhaps web-
problem--the gold all these enormous savvy teenagers— to create a competitive
companies are chasing so frantically may very local business which will automatically re-
well be somebody else's gold. direct these diverted funds back into the local
Perhaps 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 advertising.
business which takes little effort and yet
siphons a lot of money out of someone else’s Community Advertising in the Past
pockets. This of course is perfectly legal, and
would be considered good business by any Let's take a moment to understand how
investor who aims to maximize their community advertising has worked in the
investment. past, and how web-based discount sites are
changing the picture.
However the results for local communities
are potentially devastating: large amounts of For the past century, local towns and cities
economic value and economic control, which have been relatively self-sustaining; local
in the past had recycled in a sustainable residents provide services and value to each
fashion in the local economy other at fair prices.
providing jobs for local Advertising these
residents, are now siphoned goods and services --
from that local community. what economists call
Cities that are already intermediation
economically struggling in between the
recession are drained of business and the
cash just at the time they consumer – was
need it most. handled either by
local advertising
Daily Deal sites are an sales teams or by
unsustainable business newspapers, flyers,
model. or signage which
A Dollar of Groupon 2

3. provided sites for coupons, discounts, and Daily Deal Sites Take Hold
promotions by local businesses.
In the past few years something new has
If the owner of a pizza parlor had a Tuesday risen. The local newspapers have begun to
half-off special they would advertise that fail, under pressure from the Internet-based
special in the local newspaper, or hire new outlets, and from Craigslist.com (3). In
teenagers to walk around the town to post or their place, there have been many varieties of
hand out flyers. Local businesses have been discount or coupon-printing websites, and
using these methods for decades. most recently the Daily Deal sites.
Advertising at the local newspaper or the Daily Deal Site
local yellow pages cost 10-20% of the cost of
goods for any store; but regardless of the  Money paid to site, not merchant
percentage, more important was the fact that  Site takes 20-50% cut
almost 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, the
newspaper editors, or the rent on the Using our prior example, the owner of a pizza
newspaper’s offices. One way or another, parlor would offer a “deal” on the Daily Deal
most monies were local, recycled endlessly site. Customers pay the site directly. The site
keeps 20-50% and pays the merchant the
through the local economy sustainably.
balance at a later time.
Indeed, sustainability is what made these
The 20-50% going to the DDs flows not back
communities exist in the first place; a town
into the local economy or the local
with an unsustainable economy, where large
amounts of cash flowed elsewhere, would newspaper, but goes instead to hundreds of
cease to exist. One can go back through miles away.
history and find many examples of such ghost
towns. Thus a large part of the transaction flow in
the community is now being removed from
It has always been a normal function of city the local community. The DDs can pull
leaders 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 result
trying to keep business from moving, and is a relentless downwards spiral in the
encouraging local residents whenever economic activity and assets. Transactional
possible to “buy local” and keep money local. control of that local community is put into the
This is not just a slogan but an essential part hands of people who have no local stake in
of survival. maintaining that community. A human link
which has maintained community health for
We propose that city leaders will want to hundreds of years is severed.
focus their energies on the problem of DDs, as
an immediate and near-term risk to this
survival.
A Dollar of Groupon 3

4. 0 to 15 Billion in 3 Years? Really? No wonder that other Internet firms, hungry
for more profits, are leaping into the daily
3 years ago, Groupon was worth essentially deal business, hoping for their share of local
nothing. Today, it is widely valued at $15 money – inevitably (and this part is never
Billion dollars. That is an extraordinary rise. mentioned) at the expense of the local
Many successful entrepreneurs work for economy.
decades and hire thousands of engineers to
create many breakthrough products before Economic Loss Multiplier
achieving such a value. What has Groupon
created that justifies this value? Did they Some cash-flows in local economies are more
invent a cure for cancer, or a new source of “important” than others. Such keystone
clean energy? No. They are an advertising businesses not only affect their own local
site with clever writing and an attractive participants, but have a multiplied effect on
online 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 keystone
provided in the past by others. businesses can be an dangerous condition –
as non-local players, who have no stake in the
Venture capitalists say: “they have a very continuation of the community, can get hold
simple business model” – which translated of a crucial business and either inadvertently
into 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, has
More important, Groupon and other Daily long been a keystone business. Best
Deal sites now have opened access to what estimates of the dollar value to the
had 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 deal
community” said one participant at a daily Community Value Lost For Each Dollar
deal conference “that Groupon is highly Spent on “Non Local” Daily Deal Site
valued because they have finally cracked
open hundreds of billions of dollars worth of Respondent 1 4
Respondent 2 8
local community transactions… and
Respondent 3 10
developed a formula to outsource and
Respondent 4 25
centralize the processing of those Average 11.75
transactions with a very healthy slice for Table 1: Estimated multiplier to local economy
themselves. 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 Conference
ourselves.”
We see that each dollar spent on Daily Deals
When asked about the effect this would have leads to a loss of between 4 and 25 dollars of
on local economies the commenter said asset value to the local community. Or we
unapologetically “Don’t know. That’s not might say “a dollar spent on Groupon takes
really 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. 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
Other Internet Sites Don’t Cause
the 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 Craigslist.com.
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 values
A Dollar of Groupon 5

6. in some cases positive since it facilitates The “4 Dangers” of Daily Deals
buying and selling between locals. DDs
however are a diametrically opposite case: Why are large national brands so enamored
they replace local advertisers with a model with Daily Deal model? Perhaps because it
that is higher cost and siphons money out of transfers significant financial control into
local ecosystem. The effects on local their hands. From a local merchant’s
economies are disastrous. Craigslist.com is a perspective, this is a dangerous and
highly sustainable business – it is likely to unhealthy transfer of control.
continue for decades, since it adds much and
takes little – while DDs are inherently Community Daily Deal Model
unstable 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 Divert
Although Amazon.com in theory competes local merchant DDs re-route the
with 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 transaction
corporate offices is more or less identical to party to the value is paid to Daily
the money that the local bookseller had transaction. Deal site instead of
already 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 financial
bookseller, who lose a higher profit margin,
percentage of the control of local
but good for local residents, who keep that deal “after the commerce, they can
profit margin in their pockets. One might fact” – they don’t begin imposing
argue the desirability of keeping commerce control the onerous terms,
local for other reasons, or we might argue transaction. increase delay till
that Amazon’s very small markup represents payment, and/or
a net drain on local communities. But on the replace with their own
whole, from a purely monetary standpoint, lower cost brand.
Amazon and many other online commerce
sites are neutral to local economies; shifting
Local merchant is Delay
dollars between local residents, but taking no paid upon Instead of being paid
more out of the local community than before. providing service immediately, the
DDs again are the opposite case. They replace or product. They merchant must wait to
what was previously a local service, and are in control of be paid.
removes an enormous amount of cash-flow all-important
that 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. Multi-City Price Wars.
Almost all Drain
monies, for Large amounts of cash Merchant and Consumers Both
advertising or are removed from local
coupons, are economy, causing long-
Lose, Daily Deal Site Wins
recycled back term declines.
into local Another common defense of the DDs model is
community as DDs take an “They get a lot of customers, sometimes from
rent, wages, or extraordinary other cities, to try out a new store.” This
local purchases. percentage (20-50%) produces the illusion of competition in which
Local 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 that
sustaining” – the out of the community,
basis of all such discount “raids” will never remain small
is not paid in local rent
community or wages. Community scale; they will always escalate into price
health for economy gradually wars. DDs take a significant cut of the
hundreds of declines. “Downward purchase price out of that region, which
years. 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 Distract
merchants have Merchant in City B:
DDs gradually replace
benefitted from a local products with
“local trust”  Having lost local customers, they run their
their own national
mechanism. own daily deal to “win back” City B and City
brand.
Local customers A customers. Daily deal site takes 20-50%
instinctively With DDs, the
prefer to buy customer slowly begins Daily Deal Site
from local to transfer their “trust”
merchants (again, from the local  Seeing price war, calls both merchants offer
they know that merchant to the Daily even more discounts. Daily deal site
this 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. As Sites Proliferate, Local  Vendors That Help Set Up Local Sites
Damage Increases There are many firms that will enable such a
local site setup – here are two randomly
It’s important to remember that non-local pulled off the Internet (this does not is does
DDs in small numbers aren’t a problem; not constitute a endorsement in any way… a
Groupon by itself has little impact. However little research will locate a dozen more):
as of this writing, there are 400 daily deal
sites including some of the largest media and  Applaise.com – “Will help you set up
internet sites. These competitors will be local franchise site in any city,
flooding local markets with advertising requires minimum 10% contribution
dollars to persuade local residents to to local schools. Provides technology
“convert” away from local purchasing. Once and ‘entertainment value’ in the form
the dike is breached, an ever-increasing of short promotional videos made by
amount of local funds will flow out of town. local teenagers mixed with celebrity
promotions.”
In a preliminary calculation we estimated the  Localtowndeals.com – “provides a
effects of such sites on cities from 60,000 to turn-key technical solution with a
500,000 population with widespread use: daily deal website that anyone can
run. Provides not only website
Annual Economic Loss Estimated For One
template but training and support to
to Six Non-Local Daily Deal Sites (DDs)
get you started.”
City 1DDs 2DDs 6DDs
60K -0.5% -0.9% -2.7%  Local Discount Site is Equivalent of
population Local Newspaper
150K 0 -0.5% -2.2%
population Having a local Daily Deal website is like
500K 0 -0.5% -1.4%
having a local newspaper -- it makes sense
population
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 sites
local 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 that
that in this case it’s an online website.
use non-local sites (not difficult, because shop
Perhaps the local teenagers could run it—
owners are wary of DDs in any case.) Local
their internet skills and enthusiasm will make
sites will perform better because local
it successful. Technically it’s a trivial
knowledge will provide better deals. It’s the
exercise; such sites can be set up and running
optimum business model for deal sites.
in a matter of hours.
A Dollar of Groupon 8

9.  Potential Local Earnings and/or School  Don’t Need Legislation or Protests
Donations
It is not necessary to pass laws, stage
Assuming a community aggressively sets up protests, or send hate mail. The people who
it’s own local DDs, what is the cash potential started Groupon and such sites aren’t bad
for the venture and for donation to local non- people; they are simply young
profit 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 Healthy
Population. $ Thousands. Free Market
Adoption 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 open
residents
spend competition and “playing rules” that ensure
100/40 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 necessarily
residents healthy for communities. It is absolutely
spend appropriate for local communities to create a
100/40,
less predatory, more sustainable local
20% spend
50/20 alternative which provides the same valuable
service without the negative side-effects.
A Dollar of Groupon 9

10. Mea Culpa
Notes
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.
http://www.hbs.edu/research/pdf/1
1-063.pdf This paper was posted hastily because there
was a need to get the word out quickly, even
3. Although Craigslist.com 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 it's 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