One quarter into the year, it seems that the optimistic notes of January are a thing of the past, and restaurant reality has set in. Operators are extremely concerned about the double whammy of rising fuel costs combined with increasing commodity costs. Add in the earthquake and tsunami in Japan and the potential impact on some food imports, and it's a triple whammy. So what's an operator to do? If the murmurings I hear are any indication, pricing analysis is now on the front burner for many restaurant operators, as they seek to understand how they can protect margins given the confluence of events. So what options are on the table for restaurant operators as they face continued financial challenges?
Here's a list of options and the rationale for each:
- Conduct Analysis
- Raise Prices
- Reduce Prices
- Menu Innovation
- Portion Control
- Stay the Course
- Expand Marketing
Restaurants have historically had limited pricing data. Despite the state of point-of-sale systems, operators don't always have easy access to their own pricing data, and obtaining consumer and competitive research is easier said than done. It is getting easier, though, to gather such intelligence, and savvy companies are devoting staff and budget to obtaining data so they can make fact-based decisions rather then using their best guesstimates.
Some operators raise price as a matter of course, while others do so as a last resort when responding to rising costs. While supply and demand logic would suggest that to build sales you should lower prices, the true result depends on how sensitive consumers are to price change and the marginal profit vs. marginal cost of the goods in question.
We've seen this tactic quite a bit recently, with operators touting the affordability of dining out. This is understandable given that dining out is a discretionary expense. The reality, based on our research, is that while some price promotion is occurring, this is not true for the entire menu. Intellaprice research during late 2010 showed that price promotions are not the only tactic at play, and that balancing deals and increases is a necessary combination for operators seeking to maintain both traffic and profit.
This comes in several forms, from creating new items with a lower cost of goods, to developing smaller portions that enable cost-conscious guests to dine out more affordably. Such innovation can serve in the same way as reducing price - by enticing customers with palatable prices, operators may in fact build ticket by keeping a total meal more affordable, perhaps selling more drinks or desserts.
Some friends and colleagues have asked if we'll see smaller portions as another way for restaurants to hold prices steady. It's certainly a possibility, but it's not going to be publicized and can generate negative guest perceptions if done too aggressively.
Stay the Course
Operators who abstain from any price change are making a statement of confidence. They do not want to risk alienating guests after a price increase and thereby sacrifice revenue and profit, and have made a conscious decision to stand pat. I often hear operators say that they have not taken price increases for years. Some are proud of this, and feel an obligation to maintain a perception of fair pricing and value to their guests. Others seem to lament it, because what seemed a good decision at the time is now a lost opportunity to make a price change.
There certainly are other options than the price-based ones, and we've seen a slew of them. Not surprisingly, loyalty and frequency programs, special events, and the goldmine of social media have brought stellar results to many companies. Allowing less of a focus on price, these avenues are a new way to tout value.
While the current environment may arouse pangs of panic, the best approach is to devise a strategy based on fact and follow that.