Business 2.0 – May 2003

RESTAURANT.COM
The Deal Monger

Old Idea: People want content.
New Idea: People want a bargain.

Two years ago, Scott Lutwak, the CEO of Restaurant.com, took his family to Puerto Vallarta, Mexico -- on a trip that felt less like a vacation than a last hurrah. As he lay on the beach, he forced himself to face reality about the floundering company he had co-founded in 1999 with $7.4 million from angel investors. "I was thinking, 'OK, let's take a deep breath, come back, and shut this baby down.'"

While Lutwak's 135-person Chicago operation plays in a whole different weight class from the likes of Pets.com and Boo.com, it made the same mistake as those hundred-million-dollar disasters: Its business model made sense to everyone but its customers. The company created an all-purpose dining portal with menus, video tours, and a reservation feature, and it charged restaurants to put their webpages on the site. But Lutwak couldn't prove that the effort lured diners through the clients' doors, and the restaurants quickly bailed.

Before Lutwak could pull the plug, though, he learned of another failing dotcom, CitySpree, which sold gift certificates. Lutwak and his team realized that if they delivered the certificates by e-mail and stuck to restaurants, they could run more efficiently than CitySpree -- and even, gasp, make money. After going back to investors, Restaurant.com bought CitySpree at a bankruptcy auction for less than $500,000 and refocused on selling gift certificates. Now, instead of being just another nondescript dining portal, it would have its own identity as the gift certificate power seller. Lutwak then brought his clients this proposal: Let us sell your certificates from our site on eBay (EBAY). Unlike placing certificates in newspaper inserts, this campaign won't take any cash from your pocket -- we will simply keep the proceeds from selling the certificates. (A $50-off certificate at New York City's Manhattan Grille, for example, recently auctioned for $16.) Everyone, in short, sees value: Diners eat cheap; restaurants get traffic with no out-of-pocket for marketing; and Restaurant.com gets paid by customers who know exactly what they're getting -- namely, $25 or $50 off a meal -- rather than by cash-strapped restaurateurs who continually need proof of return on investment.

Lutwak and his team relaunched in July 2001, and the concept took off. Revenues doubled in the first five months. Today the company sells about 75,000 gift certificates a month at an average of about $9 each. Lutwak says the company brought in $5 million in revenues last year, is growing 12 percent each quarter, and has been profitable since the third quarter of 2002.

Driving traffic with discount coupons is not, admittedly, an Internet-age breakthrough. But Restaurant.com clearly couldn't survive without the Net. By claiming a spot on eBay, the Web's largest virtual mall, Lutwak gets an audience of millions of online shoppers. By e-mailing coupons to customers, it saved the single largest cost of most conventional coupon marketers -- postage and printing.

It's a model well suited for these hard times. "Restaurants have to be more aggressive to get people in the door," Lutwak says. "The big expense-account days are over. And price-conscious consumers are saying, 'I'm going where I can get a deal.'" Now they know where that is. -- M.A.