Just What American Apparel Didn't Need: A Groupon Blowout Sale

Last Updated Nov 19, 2010 4:39 PM EST

American Apparel (APP) is blowing merchandise out the doors again this week with a massive national Groupon sale coupon, good for $50 of clothes for $25. Company managers apparently didn't read the recent study of Groupon promotions that found they can be a hot ticket to unprofitability.

Oh wait -- American Apparel is already losing money. So how is this helping? Likely it isn't, and will only exacerbate the apparel chain's losses.

The Groupon study is interesting. Turns out Groupon shoppers aren't the kind most retailers would want -- they tend to be promotion-driven, buying only what's on sale and nothing else. And then never coming back. Additionally, a mass Groupon deal can be easily taken advantage of by existing shoppers, rather than drawing in new customers. It takes some thoughtful design of the promotion to make sure your business isn't simply going broke from offering the deal.

The Groupon model has worked better for situations that involve selling excess capacity, the study found, such as stadium seats for a football game or museum memberships. Here, the deal is basically found money -- otherwise the seats might well sit empty, or there'd just be fewer members of the museum. The organization really gives up nothing.

At American Apparel, they've cut prices in half. The only way that makes sense is if the merchandise is never going to sell, and the money paid keeps it from being a total loss. Maybe that's true, with the chain's recent switch to more preppy merchandise. Maybe the deal will help clear out the outdated merchandise and keep it from just being junked.

That's probably the best-case scenario. But the deal's good on any merchandise not on sale, so that means it can be used on the new, preppy stuff, too. A little more careful thought on how the deal worked might have avoided this problem.

There's no question the company needs to do something to get shoppers buying again -- sales at comparable stores were down an eye-popping 16 percent in the company's most recent quarter. But the Groupon blowout just exacerbates the company's financial death spiral and ups the troubled chain's odds of ending up in bankruptcy court.

Photo via Flickr user aikijuanma
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  • Carol Tice

    Carol Tice is a longtime business reporter whose work has appeared in Entrepreneur, The Seattle Times, and Nation's Restaurant News, among others. Online sites she's written for include Allbusiness.com and Yahoo!Hotjobs. She blogs about the business of writing at Make a Living Writing.