Restaurants and Institutions

Chris Muller

Is Your Operation Ready for the Great 2008 Restaurant Price War?
December 14, 2007

If you listen, you can hear the hints of the next price storm approaching. This time, though, the war won’t just be fought in the quick-service segment as it was last time (1997-2003). This time, the conflagration will expand and the casual /themers will be the ones spilling the most blood.

Chris Muller

Early indications are already being seen. The value menu is reemerging in the hamburger segment. But so are limited-time offerings on mainstream full service menus. Over the past few months, a number of “three courses for one price” offerings have appeared, a time-honored sleight-of-hand discounting tactic intended to increase perceived consumer value.

LTOs also are a good example of the limits to a restaurant leader’s ability to drive real consumer value. In the most simple of equations, it can be said that all restaurant consumer value is a combination of three variables:

the Quality of the products sold,
the Quantity of the portions,
and the selling Price.

The industry tends to chase these three variables in a sort of circular fashion, with each being matched to the specific market characteristic of the time.

Most recently, in part because of the surprising but rapid success of the fast-casual segment, the industry was focused on the quality of the products being offered. New menu items such as chicken Caesar salads, hot oven sandwiches, artisan breads and even healthful items that are trans-fat free are all examples of a tactical use of the quality variable. Traditionally, consumer price resistance during this time is minimal, so operators see margins increase even as food-cost dollars climb.

Before the recent quality focus, there was a long period when the determining variable for creating value was quantity, especially seen as oversized portions (Super Size Me!). This period lasted for quite a number of years, and could be termed the “Stack It High Era.” Every entrée was really enough for two meals (and the shift from “doggy bag” to take-home packaging proved it). Some people might remember when the national pizza players had sheet-pan-size items with names like “Big Foot” and the “Terminator.

Sometimes this tactic is not only about bigger sizes, it is also seen as the current rush for bite-sized hamburger “sliders” and Seasons 52-style mini-desserts. Smaller portions reflect consumer needs. Quantity works both ways in the competitive battle—big or small as long as it’s unique. During the time of quantity competition, customer price resistance remains low, but overall margins begin to shrink.

This leads to the threat of an emerging price war. With consumer confidence dropping for the past three months, and continuing reports of a prolonged downturn in restaurant unit sales across many segments, it should come as no surprise that the industry will again turn toward the variable of low prices to drive traffic. Almost anyone can slash prices, but maintaining lasting profitability and holding on to market share during an extended period of deals and discounts is the hard part. Price wars are wars of attrition. Only the strong survive, and at the end, even the strong are left weaker.

Keep listening for the sounds of impending price battles so you can be prepared as they approach because by the time you actually see them in your market, it might be too late to save your profit margins.

Posted by Chris Muller on December 14, 2007 | Comments (0)