07/20/2011 09:41 am ET | Updated Sep 19, 2011

Google Offers, Groupon Now Race To Fill Mobile Restaurant Deal Space

Reed Morse and Xander Pollock were still at Cal Poly when they started working on the intersection of cell phones and restaurants. They were taking a class on Android development when they came up with the idea for an app that would replace stamp cards to track stores' and eateries' loyalty programs. They didn't abandon their app at the end of term. Reed got in touch with his old friend Niket Desai, who was working for another startup, and asked him to join the team. They called their app, and their company, Punchd. They started marketing it to local businesses last summer.

On paper, digital loyalty programs should be easy sells. Customers like them because they're easier to keep track of than a myriad of flimsy business cards. And businesses like them because they show restaurants how loyalty programs affect customer behavior.

Other startups--most notably FourSquare--had tried getting businesses to create digital loyalty programs. But they had had only mixed success. Punchd's co-founders suspected that this was because it's always hard to get businesses to use new technology. They made sure that their product mimicked the functionality of paper punch cards, so businesses and customers would quickly understand how they worked, and they spent many hours perfecting their business interface.

"We are very good at quickly getting a person who has no loyalty program or a paper program to a digital program. Making things simple, and just work and go fast, was absolutely critical," Desai told the Huffington Post.

Punchd's first customers were all in or near the Cal Poly campus. But soon, its founders started getting inquiries from around the world. There are now restaurants that use Punchd in the UK, Canada, Germany and Australia.

Their big break came in early July, when Google offered to buy them out.

"This whole business moves toward mobile"

Why would Google want to acquire a small start-up whose greatest visible ambition was to replace the buy-10-get-one-free card at your local sandwich joint with a smartphone app?

One word: Groupon.

After the deal site turned down Google's $6 billion buyout offer, Google raced to catch up in the discount arena. They already had a huge share of the advertising business at large, but still had trouble capturing local ad dollars. There's real money at stake: Americans spent $600 billion at restaurants every year--far too much for Google cede the ground to Groupon.

The centerpiece of Google's deal strategy is Google Offers. Though it differs in execution from Groupon on the business side, the experience for the consumer is not dissimilar--one big deal per day. It launched on a beta test in Portland, OR June 1st, then expanded to New York and the Bay Area July 11th. But use seems to have softened after an exuberant first couple days.

Google does not seem worried about short-term adoption. Eric Rosenblum, Google's Director of Strategy and Business Operations, said, "I think that this space will evolve, and the model where you get one e-mail a day will move toward a more natural model."

Rosenblum said he sees the future of deals being "MoLo," or mobile and local. "I think that this whole business moves toward mobile as being really in situ," he said.

Right now, Google Offers' "MoLo" integration is limited. Their new Shopper 2.0 app includes, in addition to the normal daily deals, a feature called "Nearby Offers." These are often less drastic than daily deals; they might offer 15 or 20% off the base menu rather than more than half. They're also more limited in timespan: restaurants can release a few slots whenever they find themselves less busy than expected.

But Shopper 2.0 is only available on the Android. (Shopper, a more limited app, is available on the iPhone as well.) Part of the reason for this exclusivity, which Google representatives said was only temporary, is that Google has already begun to incorporate leading-edge technologies into Google Offers. Google Offers may soon link up with the in-development Google Wallet, which uses the near-field communication (NFC) chip inside some Android phone to make them into contactless credit card substitutes. Punchd could also be integrated into Google Wallet, allowing customers to pay and accrue loyalty points in one swipe of their phones.

Rosenblum tried to explain the synergy between the three apps. "Businesses generally have three big goals," he said. "They want people to come in, they want people to come back, and they want to manage capacity. Currently, deals only addresses that first goal. We're hoping to build products that will reach the other two."

Punchd will help get people to come back, and Nearby Offers will help manage capacity. If these are all rolled into one package, they will likely be formidable, at least if Google manages to convince Apple and RIM to support their platform.

But then there's the matter of hardware. Before Google can get Wallet to be widely useful, they'll have to get restaurants to buy NFC systems. This might be easy at national chains like TGI Fridays and Chipotle, but mom-and-pops will certainly take longer.

Spencer Spinnell, director of Emerging Platforms for Google, said he felt confident that NFC technology would soon become widespread. "If you're an IT decision maker, and you're contemplating a new point of sale device, NFC is absolutely in your decision set," he said.

Still, Google's timeframe rhetoric remains ambiguous--and there are already strong contenders for control of local, mobile restaurant deals.

"Suddenly, we sell out in five minutes"

Andy McGuire, owner and chef of Chicago pizzeria La Gondola, was an early adopter of Groupon's daily deals. He benefited from the pizzeria's location in tech-savvy Lakeview; thousands streamed in, clutching their Groupon offers. McGuire was happy to get new customers, even at lower margins, but the restaurant was overwhelmed. There were traffic jams in the pizza oven and on the phone lines.

He's not that interested in daily deals anymore. But he's become a diehard fan of Groupon Now, Groupon's equivalent to Google's Nearby Offers, which launched May 20.

"On days when we're really slow, I go on there, and then suddenly, we sell out in five minutes," he said. "As an end user, I'm not afraid of it, because I can control it. I can shut it off in two clicks if I want to."

Julie Mossler, Groupon's Director of Communications, argued that Groupon Now, which started in Chicago but is now available in dozens of cities, is especially well-suited to restaurant industry's needs: "Restaurants have a lot of fixed costs: they spend same amount on rent, ingredients and labor, pretty much, regardless of how much business they have. If there were a yoga studio, you could have an instructor teach an extra class after selling a deal. That's not so easy for a restaurant."

Groupon Now also has the advantage of incumbency; Groupon knows how to market itself to restaurants, and has a huge list of contacts to draw on. And if Groupon lacks Google's technological ambitions, it have the advantage of portability. You don't even need a smartphone to log into

"We didn't go take the deal."

Right now, the biggest drawback of both Groupon Now and Google's Nearby Offers is really selection. They're new technologies; many restaurants have yet to experiment. Some that do seem more desperate than appealing. Researching for this article, I played around a lot with Groupon Now in my New York neighborhood. I have yet to be enticed to buy a meal.

Even Nate Tyler, Google's communications director, a passionate, articulate advocate of Google Offers, admitted that he didn't find an actionable deal the one time he tried Nearby Offers. "I logged on last night at home in Chelsea, and saw that my local Indian place had 15% off, which was great," he said. "But I have to be honest: my wife has very high-end taste in restaurants. We didn't go take the deal."