The Dish on the Daily Deal Whats Your Take?

Mark Brandau has spent his entire career with Nations 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 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 Ginos 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.

NATIONS RESTAURANT NEWS Mark 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 2 nd quarter of 2012 alone Once daily deal is defined, competitors like LivingSocial, LocalEats, Blackboard Eats rise Groupon raises $700 million in Nov IPO

Consumers love them, but operators… Operators bemoan lack of control over how many vouchers get downloaded and when theyre 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 theyd visited just once 24% used at restaurant theyd never visited 11% used at restaurant theyd never heard of

But theyre 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 s 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. Its targeted, going just to their fans, but spreading to their friends. 1,700 likes to begin with; gets 1,200 downloads Went on a wait for Tuesday Sales up 50% from previous weeks $1 Burger Night Likes increased 5%, total weekly reach shot up from 10,000 to 170,000 EdgeRank 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 have a 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 McDonalds, which was No. 7 on Yipits list

Wheres 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 wont 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 & Hound Profitability 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.)

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 brands image with Groupons 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 isnt good enough

Daily Deals & Brand Health Presentation prepared for: MEG October 19, 2012 Presentation by: Mike Murphy, CEO

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 dont buy with deals 29

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% Basic Users 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 % % % % % % % 31 Not many customers fall in this segment

32 Potential downsides if Daily Deals are not executed effectively Loyalty Repeat Visit Intent Satisfaction Advocacy Extendibility Negative Impact on Customer Satisfaction and More o If you dont 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.

33 Potential downsides if Daily Deals are not executed effectively PopularityEsteem Damage to Upscale Brands Image o 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

34 Is your objective to fill empty seats? Building long-term brand equity takes more… This is a short-term strategy to build sales.

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 35 If youre 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?

36 Is your objective to Build the Brand? Gain Alignment Operational Excellence Build a Loyalty Program Measure Impact (Touch points on Brand Health) Highlight Brand DNA Its all about the experience

Questions, comments, hate mail Mark Brandau, associate editor Nations Restaurant News | (312)