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Groupon CEO Andrew Mason and OpenTable CEO Jeff Jordan Photographs by Jeff Sciortino (Mason) and Gabriela Hasbun (Jordan)
The Essex, on Manhattan's Lower East Side, offers creative cocktails, $1 oysters, and its signature Colorado lamb chops over ricotta gnocchi. On weekday nights and during off-peak hours, it also features lots of empty tables.
To fill his 150-seat restaurant in an economy that can spoil anyone's appetite, The Essex's owner, David Perlman, has turned to Internet coupons. Last spring, he used one of the hottest startups on the Web, Groupon, to sell $30 coupons at $15 each to about 1,500 people on the site's New York e-mail list. In August, Perlman went the discount route again, this time with the just-launched coupon service of OpenTable, the online restaurant-reservation booker. Slightly fewer than 1,000 people purchased that deal, a $50 coupon for $25. Still, Perlman says he favors OpenTable's service because it brought in gourmet diners who were more likely to turn into repeat customers. "We had a positive, profitable experience with both, but I liked OpenTable better, just because it is more geared toward restaurants," he says. "The people we attracted with OpenTable are people we want to add to our customer base."
Daily deals are everywhere online. That has a lot to do with privately held Groupon, based in Chicago, which has emerged from nowhere to revolutionize local advertising and build a business recently valued at $1.35 billion, according to two people familiar with the company.
Groupon works like this: It sends a daily e-mail to more than 17 million subscribers in over 230 cities, employing flowery prose ("A love of layers may even lead your archeological side through the house lasagna") to offer group discounts on everything from pastries and spa treatments to pilot lessons and restaurant meals. If enough people take the offer and pay in advance, the deal is activated and Groupon splits the resulting revenue 50-50 with the merchant. Subscribers get only one offer per day, which has left room for hundreds of copycats to offer their own variations on the formula. "We stuck a pin in something and now there's a giant eruption," says Andrew Mason, Groupon's 29-year-old founder. "The demand from business owners is much greater than anything a single business like Groupon can meet."
Restaurants account for nearly half of Groupon's deals, making OpenTable the imitator best positioned to eat its lunch. OpenTable, started 12 years ago in San Francisco, has put its reservation-management system into more than 14,000 restaurants. (Restaurants either lease computers for a $600 installation fee plus a $199 monthly subscription or they use the cheaper, Web-only option.) It seats about 4 million diners each month. Restaurants pay OpenTable up to $1 dollar per head; diners make reservations for free. The company has the e-mail addresses of tens of millions of gourmands, as well as a sales force devoted to pitching additional marketing services to restaurants using OpenTable. And like Groupon, OpenTable has its own overcooked valuation: Its stock, valued at $1.56 billion, is trading at 72 times its estimated 2011 earnings—more than six times the S&P 500 average.
OpenTable unveiled its Spotlight coupon service in August and has rolled it out in Boston, New York, San Francisco, Chicago, Washington, and Philadelphia. Spotlight is Groupon-like right down to the verbiage. ("Their menus showcase artisanally grown, fresh fare that sings.") CEO Jeff Jordan says Groupon's deals aren't tailored to people's individual interests. "Groupon is sending me ads for hair removal. Nature is doing that for me," he jokes. That lack of focus, he says, has created an opening for him to hone in on foodies.
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