April 29 (Bloomberg) -- A former Microsoft Corp. product manager who once worked for Michael Dell’s hedge fund aims to do for restaurants what Expedia Inc. does for airplanes: fill empty seats during off-peak hours.
Dazhi Chen, a Harvard Business School alumnus, has amassed a staff of 20 from postings on Craigslist.com and is betting half a million dollars that his website, DailyGobble.com, can challenge LivingSocial and Groupon Inc. to become a premier-dining discount destination. The site is set to debut today.
Chen put up $100,000 of his own money to chase his cut of the $385.5 billion diners spend at restaurants and bars each year by offering food rebates on his site. He tried and failed a decade ago, using $1 million in funding on an effort Chen says was poorly timed to coincide with the dot-com crash. The rise of smartphones and online marketing convinced him to try again.
“There is very significant opportunity for new entrants to come in with innovation and gain significant traction, but these things are lightning in a bottle,” said Lou Kerner, a social media analyst at Wedbush Securities Inc. “Groupon has grown dramatically faster than anyone thought they would.”
Chen’s challenge is ensuring DailyGobble.com stands out among hundreds of online coupon sites, led by Groupon and LivingSocial. The 330 restaurants posting discounts on DailyGobble.com so far are Chen’s proof his concept has potential. Within a year, he projects quarterly revenue of as much as $7 million and net income of $250,000.
DailyGobble’s pitch to restaurateurs is that they only pay for coupons diners use, and they can limit discounts to specific times of day when tables typically sit vacant. Many established coupon sites, LivingSocial among them, charge up-front fees for listings and don’t permit time restrictions.
“We can use DailyGobble for times that the restaurant is not full,” said Darren Wan, 36, owner of Red Egg in New York, which is offering a 20 percent rebate on Chen’s site on Tuesdays and Sundays from 8 p.m. to 11 p.m.
DailyGobble charges eateries fees of 5 percent of food sales to list deals -- a smaller cut than most other coupon sites take -- and requires discounts of at least 20 percent, Chen said. Diners get rebate checks in the mail after spending enough to amass $25 in savings or can send funds to a PayPal account.
Rebates Versus Coupons
The refund model sets DailyGobble apart from Groupon and LivingSocial, among other deal sites, where buyers purchase the discounted items up front, then use coupons when they dine out.
“I think there will be some resistance and hesitation in getting the money back later,” said Greg Sterling, an analyst with Opus Research Inc. in San Francisco. “There’s a trust issue initially. If it’s easy to get the money, it will create a lot of stickiness and loyalty.”
Chen says diners will like avoiding the hassle and potential embarrassment of coupons, particularly in the two food-obsessed cities his site targets: New York and San Francisco.
A sales force is paramount to make such sites viable, said Sucharita Mulpuru, an analyst at Forrester Research. DailyGobble has nine employees on its sales team so far, Chen said.
“It’s very, very labor intensive,” Mulpuru said. “You have to get the word out to customers and you have to do it in a way that’s not predictable.”
The site now works through an iPhone application that lets diners photograph receipts and e-mail them to DailyGobble. Employees at the company’s one-room New York office verify the bill and start a rebate tab for customers.
Apps for Google Inc.’s Android software should be available within a week, and software for Research in Motion Ltd.’s BlackBerry will be released in four to six weeks, Chen said.
Other deal companies offer businesses delayed returns, usually giving the eatery 50 percent of its money within three to 10 days and the rest as many as 40 days after the deal, said Alberto Gonzalez, 46, owner of New York-based GustOrganics. They also don’t let businesses pick the time customers can use the deal, he said. A flood of coupon-carrying clients can overwhelm an unprepared small business.
“One of the issues we normally have with other deals is all the people with the deals come when we’re the busiest,” Gonzalez said. “We have to run the vouchers, and that takes time, and sometimes it gets complicated.”
Gonzalez, who is offering 25 percent off meals between 8 a.m. and 11 a.m. with DailyGobble, said other deal companies he’s used, including Groupon, DailyCandy Inc. and Gilt Groupe Inc.’s Gilt City, take as much as 25 percent of sales generated through their sites, versus DailyGobble’s 5 percent.
No coupons also means diners don’t have to slow the checkout process while managers verify authenticity, and the wait staff is tipped for the full amount of the bill, said Wan, owner of Red Egg.
Wan said he tried Groupon in February because of the breadth of its user base. The customers who came were the sort who “are always looking for deals” and often tipped based on the discounted price, he said.
“It’s hard to keep the wait staff motivated when they’re getting jerked on tips,” he said.
Groupon spokeswoman Julie Mossler said the company puts a note on vouchers reminding people to be good customers, and has data that show customers are spending 60 percent to 80 percent more than the face value of its coupons.
Wan says he has little to lose by trying DailyGobble.
“Best-case scenario, we’re able to fill up empty seats during specific times of the day when we don’t experience a lot of diners,” he said. “Worst-case scenario, you lose a customer that used to dine at your restaurant any time of the week, but now only dines when there’s a special available.”
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