Customer Counts: Stopping the Countdown

Customer counts went south through the second half of 2007, and 2008 still will be challenging. Here are a few of the strategies being put in place to bring consumers back to the table.

By Scott Hume, Editor-in-Chief -- Restaurants & Institutions, 1/1/2008

Think positively, as in positive same-store sales and guestcount reports.

At the close of 2007, positive thinking was difficult for most foodservice operators, given that so many socioeconomic factors-lower consumer confidence plus higher energy, commodity and labor costs-resulted in hard-tocome- by improvements in guest counts and sales. As 2008 begins, operators are seeking strategies that will bring customers back.

Identifying and implementing such strategies will not be easy: The forecast for 2008 is for continued hard work by operators. As Larry Miller, Atlanta-based restaurant analyst for RBC Capital Markets, phrased in a November report, "The light at the end of the tunnel just faded." RBC's consumer research points to "a continuation or more likely a worsening of sales trends," Miller wrote.

New York City-based Fitch Ratings issued an equally blunt and discouraging market assessment last month. Quick-service restaurants (QSRs) fared better than most in 2007 because they "did a better job responding to changing consumer preferences," the credit-rating agency said.

But no segment is likely to be spared the pain this year. "In 2008, however, Fitch expects the economic slowdown and reduced consumer spending to pressure revenue growth for the entire restaurant industry," the agency reported. "Weaker overall revenue combined with food- and labor-cost inflation will make 2008 a very challenging year."

The one possible upside is that the likely causes of 2008's difficult operating environment will be the same factors that made 2007 so trying. Operators have no trouble identifying the problems and have a year's worth of experience in adjusting to them.

"Based on our analysis, the middleincome consumer has pulled back their discretionary spending due to higher gas prices," Doug Schmick, chairman and CEO of Portland, Ore.-based McCormick & Schmick's told analysts in November. "While this has certainly hurt the casualdining segment most, it has also negatively impacted upscale and fine-dining concepts like McCormick & Schmick's."

QSRS LOSE THEIR EXEMPTION
Although it's true that many QSRs were reporting healthier quarterly sales and customer-count numbers through the first half of 2007, by year-end, even many lower-check-average concepts were feeling the pinch of consumers' unease about spending. Seattle-based Starbucks reported a 1% decline in customer traffic during its fiscal quarter ended Sept. 30, 2007-the first such reversal in its history-after instituting a midsummer price increase of about 9 cents per cup of coffee. That such a relatively small amount could make such a quick and significant impact on Starbucks' customer traffic indicates consumer's price sensitivity.

"The pressure we are seeing on [customer] traffic isn't entirely unexpected considering the challenging operating environment and similar trends reported across both the retail and restaurant industries," Starbucks President-CEO James Donald told analysts during the company's quarterly conference call. "It is apparent that our customers are feeling the impact of the economic slowdown."

Oak Brook, Ill.-based McDonald's continued to report solid sales growth in 2007 but also said it had stepped up marketing support for its Dollar Menu to maintain its appeal to lower-income consumers. Other QSRs also focused on value-meal offerings and lower-price limited- time specials.

With QSRs helped by "convenience spending" (consumers' willingness to spend small amounts on food away from home to save time) and higher-price concepts aided by expense-account spending, the midprice tier endured the mostchallenging year.

"Overall casual-dining demand growth is below 5%; for the back half of [2007] it is probably closer to 4%," Sandy Beall, chairman, president and CEO of Maryville, Tenn.-based Ruby Tuesday said in an October 2007 quarterly earnings call with analysts. "The bar-and-grill segment is probably worse than casual, and the last three to four years haven't been good for traffic or sales, really for the [entire] segment. Future demand growth for our mature segment probably isn't the most promising either."

Noncommercial foodservice isn't exempt from the pressures either: Another boost to the minimum wage this year will strain school, college and healthcare budgets already stretched by rising commodity costs.

Corporate foodservice will face these challenges as well as deeper cost-cutting that will hurt catering operations on which business-site foodservice has come to depend. Chicago-based researcher Technomic forecasts an especially difficult year for corporate-feeding operations; it projects only 1.3% nominal growth for the business-and-industry segment.

THE IMPACT OF UNCERTAINTY
In November 2007, the monthly Consumer Intentions & Actions Survey conducted by Columbus, Ohio-based BIGresearch found that only 37.3%-a little more than one-third-of consumers are confident or very confident that the economy will strengthen over the next six months. That percentage was the lowest the survey had reported since July 2006.

Gasoline prices are to blame for shaky consumer confidence and the decline in dining, says Phil Rist, BIGresearch vice president of strategy. "When gas prices go up, the first thing that tends to go is discretionary entertainment spending-movies and dinners out," he says. The research firm's November survey finds 32.8% of consumers saying they are dining out less often because of high gas prices. Smaller percentages say they have reduced spending on groceries (17.8%) or vacation/travel (31%).

"Some people cut dining completely, while others may take the family out but trade down to lowercost options," says Rist. "Maybe they pick the night when kids eat free or for half-price. But those 'Saturday night' restaurants are where we see people cutting back frequency."

The problem is not just that gas prices are high, it's that pricing is uncertain. "Part of consumers' angst is the fluctuation in prices," Rist says. "If gas is going to be $3 a gallon, OK, people will adjust. But if when you fill up your car or truck, you don't know if it will cost you $30 or $50, you can't adjust and people feel they can't control their lives.

"When prices go up and down, up and down for no apparent reason, people feel they're being manipulated," and that deepens consumer anxiety and reluctance to spend freely, he says.

STRATEGIES FOR 2008

So where does that leave foodservice operators? Gasoline and heating-oil prices aren't likely to decline or even stabilize. Prices for many commodities aren't likely to decline either (because corn is being diverted from feedlots to be used to produce ethanol fuel). Labor costs will go higher (2007's 13.6% minimum-wage hike will be followed by an additional 12% uptick this year). Increased minimum payments on credit cards will further dampen discretionary spending. And the uncertainty about the nation's political agenda won't be assuaged until the November election, if then.

Here are some of the strategies that foodservice operations already have indicated they will pursue to rebuild sales in such an unenviable marketplace:

1. WORK THE MENU
If consumers need stronger persuasion to dine out, the menu is the place to start. Expanding variety and creating items that diners don't find on every other menu is a popular strategy.

One of five new entrées at Carrollton, Texas-based T.G.I. Friday's restaurants is Lobster Tortelloni (lobster and cheesefilled tortelloni in lobster bisque, topped with lobster meat, Roma tomatoes, basil and Parmesan).

2. TIER THE PRICING
Higher-end restaurants are adopting QSRs' multi-tier (value menu, core items, premium items) menu-pricing approach to broaden consumer appeal. Heathrow, Fla.- based Ruth's Chris Steak House is trying a "Chef's Feature" menu section where it can offer more-attractively-priced specials. McCormick & Schmick's has added a sandwiches section to its menu, with selections priced between $7.95 and $13.95 (well below its check average of about $37).

3. BUILD IN VALUE
"We see the importance and relevance of adding one more key strategy, especially for these times, and it's called compelling value," Ruby Tuesday Chairman-President-CEO Sandy Beall told analysts in October.

His chain has lowered prices on selected appetizers and is using direct mail to distribute coupons for entrées. Tampa, Fla.-based Shells Seafood Restaurants announced a 12.1% decrease in same-store sales for the quarter ended Sept. 30, 2007, and responded with $9.99 entrée specials to bring customers back in.

4. IMPROVE CONVENIENCE
Consumers watch how they spend time as well as money. Operational improvements that make dining-especially at breakfast and lunch-quicker are appealing.

Lebanon, Tenn.-based Cracker Barrel Old Country Store is testing a new menu that emphasizes dishes that can be prepared and served quickly, such as baked chicken and smoked-sausage chili. A new lunch menu at Dallas-based Chili's Grill & Bar similarly highlights quickly prepared items.

Dallas-based Maggiano's Little Italy is adding delivery service. West Roxbury, Mass.-based Uno Chicago Grill is developing a fast-casual/takeout concept called Uno Due Go.

5. THINK SMALL
KU Dining Services at the University of Kansas in Lawrence created MarketFresh, a mini concept selling organic and natural foods, in The Market retail space in the university's union.

6. EXPAND DAYPARTS
In a down economy, moving closer to 24/7 operations is gaining in popularity. Dublin, Ohio-based Wendy's and San Francisco-based Jamba Juice will introduce additional breakfast items on their menus this year. Starbucks offers lunch in 70% of U.S. locations and continues to expand its salads menu. Ruth's Chris Steak House serves lunch on Fridays in select locations.