Groupon Inc. is a two-year old company that specializes in daily discounts localized by city. Less than four months ago, Google Inc. offered to buy Groupon for $6 billion. That’s $6,000,000,000.00. What’s more astounding is that Groupon walked away from the deal. Yesterday it was announced that Groupon Inc. is planning on raising money in an initial public offering that could value the site at $15-20 billion. As a result of Groupon’s success, there has been a gold rush of new coupon sites springing up worldwide that work on essentially the exact same model.

In Toronto alone, there are no less than a dozen discount sites, of which, at least three contact us every day to offer a discount. We are also regularly asked by customers why we haven’t offered a discount on one of these sites. And we are further confused, by similarity of name only, with a nearby competitor who has offered several of these coupons. The Healthy Butcher was born on a premise of honesty and full disclosure, so based on these recent events, we find it fitting and appropriate to open our books and explain the position we are in when it comes to discounting. continued below..

Wish us luck! We have been selected as finalists in the Local Food category.  The winner will be announced tonight at the Direct Energy Centre.

We are pround to be an authorized dealer of the BIG GREEN EGG The Big Green Egg brings outdoor cooking to an entirely new level.  For the last month we have been offering absolutely unbelievable introductory prices... these prices will continue until April 29, 2011.  If you have ever thought about getting a Big Green Egg, don't lose this opportunity.  Learn more at: www.thehealthybutcher.com/BigGreenEgg or email egghead@thehealthybutcher.com.

HOW DO GROUPON AND OTHER DISCOUNT SITES WORK?

Discount sites tend to function as follows. Each day they post a “deal” that is between 50-80% off. It is rare to see a deal for less than 50%, and the average is probably 75% off regular price. That deal is emailed to the site’s registered users as well as posted publicly on the web. An example is: pay $39 for a facial and professional makeup application, a retail value of $185 (in this case the discount is 79%). A customer has the option during that day of using their credit card to purchase a voucher online, which they will later redeem at the store. Now, here’s where the discount sites make their cut – of the $39, the store will generally keep half, in this case $19.50, and the other half is kept by the discount site. The discount site immediately issues a cheque so that the retail store has “cash-in-hand”, even before any of the vouchers are redeemed.

All the discount sites use the same selling points:

• It’s “no cost” marketing (which is a misnomer, there’s just no initial or upfront cost);

• Broaden your customer base by bringing in new customers (further, many of the sites will argue that their users are of a specific “target market”);

• There’s a percentage of customers who don't redeem their voucher;

• The business gets paid immediately, so there’s money in hand prior to customers redeeming the vouchers.

Sounds good right?

WHAT WOULD A DEEP DISCOUNT MEAN FOR THE HEALTHY BUTCHER vs. ANOTHER TYPE OF BUSINESS?

In order to understand the difference between one company offering a discount and another company, you need to understand the concept of Gross Margin. Gross Margin, also called Gross Profit, is the percentage of revenue (i.e. the amount a customer pays for product) that is not attributable to the cost of goods sold (i.e. expenses that are directly attributable to the product being sold). For example, if you purchase a steak at The Healthy Butcher for $15 and the gross margin is 35%, that means $9.75 has gone to pay the farmer for raising the beef, the abbatoir for processing, and the transportation expense to get that steak to the store. The remainder, being $5.25, is the amount of money that must go towards indirect costs for the business, like rent, wages, administrative expenses, repairs and maintenance, and hopefully, profit. Appendix A at the bottom of the page shows industry-wide averages and company-specific Gross Margins as they compare to Operating Income.

Loaded with the knowledge of Gross Margin, let’s take a look at two cases:

CASE 1:

 A spa offers a coupon of $50 for $100 worth of services. Of the $50, they keep $25. The cost of the services is $35, based on a Gross Margin of 65%. If 10,000 vouchers are purchased, and the redemption rate is 75%, then the spa has a marketing expense of $12,500. If even a small fraction of the coupon buyers become repeat customers, we would say that the marketing campaign was a huge success.

CASE 2:

The Healthy Butcher offers a coupon of $50 for $100 worth of goods. Of the $50, we keep $25. The cost of the goods is $65 based on a Gross Margin of 35%. If 10,000 vouchers are purchased, and the redemption rate is 75%, then we have on our hands a marketing expense of $237,500 to deal with. What a difference a change in Gross Margin makes! And this case was only for a 50% off coupon; imagine the cost involved with doing a $75 for $400 deal.  Or imagine a slightly higher redemption rate, the cost increase for this marketing campaign is huge.  Further, keep in mind that the cost calculated above is only for the raw cost of goods sold, and does not take into consideration the increased cost of labour and other expenses required to sell a significant amount of additional product.  There is no chance we could continue to pay our farmers and continue business - insolvency would quickly follow.

THE BOTTOM LINE

Everyone loves a good deal, especially me (Mario speaking here). Everyone who knows me knows I’m one of the cheapest people around; I pickup pennies off the floor, I buy clothes at discount stores, and rarely splurge on anything. But when it comes to health, and food, I have learned firsthand that the old adage “you pay for what you get” rings more true than in any other industry. Sure, it is possible to spend a lot of money on food and not be buying Organic or local or even naturally raised (which in itself is a term that doesn’t mean much); however, there is no place where you can buy cheap food that was produced the way nature intended. When you see a deal that’s too good to be true, it probably is.

What we offer at The Healthy Butcher is the best product sold at the best prices possible. All of our meat is locally raised using ethical, sustainable and for most products, Certified Organic standards. We offer knowledgeable and friendly service. We know the farmers, the feed, the abbatoirs, and the transportation chain. We pay our farmers fairly for their efforts, which at the end of the day, is the only reason why many of the Ontario farmers we deal with are still doing what they are doing and not leaving farming outright. We offer complete accountability and disclosure of the product you are buying – who and where it’s coming from, and how it was raised, grown or produced. We even offer customers the opportunity to come visit our farmers with us – who else does that?

If these discount sites were to change their model – such as by posting much smaller discounts and taking much smaller commissions to compensate for the differences in gross margins – we would then reconsider participating. But until then, we can guarantee you that The Healthy Butcher will not, and cannot discount its products to absurdly low levels. Doing so would not only be a huge loss of money and possibly a bullet through The Healthy Butcher’s lifeline, but it would also be an utter insult to the farmers and producers who put in their blood, sweat and tears to produce the best food money can buy. Businesses that operate on higher Gross Margins can (and should in my opinion) take advantage of this new marketing method. We cannot comment on how businesses similar to The Healthy Butcher are able to make these deals work. Perhaps they are being seduced by the availability of quick cash in hand, often times a huge sum; maybe it’s bad business and the owners have not thought things through; maybe the regular retail prices are inflated; or maybe they are making compromises of some sort on product and service or both. In all cases we can think of, the proposition of The Healthy Butcher offering a deep discount is ludicrous and completely outside our value system. Cheap food is not sustainable.

APPENDIX A - INDUSTRY AND COMPANY SPECIFIC AVERAGES OF GROSS MARGIN AND OPERATING INCOME

Gross Margin Percentage = (Selling Price – Cost) ÷ Selling Price x 100

Operating Income is the earnings of a company before interest and taxes (abbreviated as “EBIT”).

What you should notice is that a higher gross margin does not necessarily equate to a higher operating income. Depending on the industry, there might not be a large “cost of goods sold”; think about Legal Services as an example – there is no goods at all, just the cost of time that the lawyers, clerks, etc. put into the work. Retail, but specifically, the grocery industry, is quite unique in that it generates a very low operating income with the assumption that high volumes will compensate.  Other important factors to consider when attempting to understand the vast differences between margins and profit in various industries are: the cost of skilled labour, location (i.e. rent expenses), economies of scale, fair trade practices, and market driven prices.

* Sources for the financial data:
http://research.financial-projections.com/IndustryStats-GrossMargin
http://www.p360.org/dsg.aspx?Data_Set_Group_Id=498
http://www.rim.com/investors/documents/pdf/annual/2010rim_ar.pdf
http://biz.yahoo.com/p/s_conameu.html
http://www2.snl.com/Cache/1001158230.PDF?D=&O=PDF&IID=4099878&Y=&T=&FID=1001158230
http://www.rbc.com/investorrelations/ir_annual_report.html
http://www.td.com/ar2010/
http://www.georgemorris.org/User/Doc/2009%20Food%20Industry%20Financial%20Results.pdf
http://www.markettechniques.com/assets/pdf/GTRMarch2008.pdf
 

To access previous issues of Live to Eat, click here.