After years of using six direct-mail coupon drops per year to drive customers in when a new product or limited-time offer was introduced, El Pollo Loco this year increased the number of coupon mailings to nine, along with adding more online-coupon deals and “bounce back” coupons issued in stores to generate return visits.
The company has also tinkered with the type of coupons they offer to help build check averages. Rather than issuing coupons for 99-cent burritos, the company is doing more buy-one, get-one coupon offers, such as offering a free chicken tamale with the purchase of two.
El Pollo Loco is not alone. As the recession drags on and consumers are increasingly motivated only by deals and discounts, many quick-service chains are relying more heavily on coupons as one method to increase traffic. Not only are they viewed as a more benign alternative to deeply discounted value menus, which train customers to expect rock-bottom pricing, but they have limited time frames, can be targeted to specific audiences and can encourage customers to try premium products they might come back to pay full price for later.
But current economic headwinds have altered the way many companies use coupons, and some worry that “over couponing” will increasingly become a problem as consumers receive more and more restaurant offers by mail, in newspapers, on the Internet and by cell phone.
“Couponing is a simple approach to a complex problem,” said franchising consultant Michael Seid, managing director of Michael H. Seid & Associates. “When it’s targeted, of short duration and designed to bundle other sales or upsell, it’s great. But use it too often or in a cycle, and you end up in a consumer rut, which is very hard to get out of.”
Rise of the coupon The use of coupons in the restaurant industry is up and growing, says market research firm The NPD Group, based in Port Washington, N.Y. For the quarter ended in September, industrywide coupon use was up 10 percent over the same period last year, according to NPD. With the skyrocketing popularity of social-networking sites like Twitter and Facebook, it’s no surprise that Internet coupons were the fastest-growing type, up 58 percent in the third quarter compared with the same time last year. By comparison, newspaper coupons were up 11 percent; Entertainment book coupons were up 10 percent; receiving coupons at a restaurant was up 6 percent; and the use of direct-mail coupons was up 2 percent. Of the estimated 3.6 billion visits to restaurants generated by a deal or discount during the quarter, coupons motivated about 14 percent, according to NPD. Other types of deals included buy-one-get-one, or BOGO, offers; dollar menus; combination meals; daily specials; and freebies. With the quick-service segment specifically, coupon usage was up 8 percent during the quarter, with the use of Internet coupons—up 61 percent compared with the prior-year quarter—driving the growth. “Within QSR, Internet coupon use is still relatively small, but it’s showing the largest growth,” said Bonnie Riggs, NPD’s restaurant analyst. “A year ago it was discounts and dollar menus. Now it’s coupons and BOGOs.” During the July to September quarter, restaurant traffic dipped 4 percent, Riggs notes, and NPD is forecasting negative trends through mid-2010. However, without the use of coupons and other deals, things could be much worse, she says. “If it weren’t for the deals out there now, the industry would be in a lot worse shape than it is,” Riggs says. “Anyone that’s going to survive this is going to have to offer up consumer incentives.” Whether and how to use coupons, however, is perhaps more art than science, and many say it depends on many variables as well as the company’s goals. Throughout the quick-service segment, officials are debating the merits of using dollar menus to get bodies in the door versus coupon promotions. Arby’s, for example, has long relied on coupons to boost traffic, but in light of deep discounting by competitors, Roland Smith, chief executive of the recently merged Wendy’s and Arby’s chains, said he plans to move away from coupon use. “Customers don’t need to wait for a coupon or a special promotion or something in the past they had to wait for,” Smith said in reporting the company’s third-quarter results in November. “We’ve seen our couponing, quite honestly, redemption go way down based on the fact that every other competitor is couponing and filling up everybody’s mailboxes, and it is becoming wallpaper.” Instead, Arby’s is moving to what Smith calls a “coupon value strategy,” which will allow the chain to maintain its “premium brand” status. Tests of a new dollar menu in the Southeast, for example, have been successful—especially in combination with a $5.01 combo deal—and will be expanded to new markets, Smith says. As a result, the company has cut back on coupon use in those markets, allowing the choice of either putting more funding into national advertising or “taking it to the bank to make sure margins continue to be strong,” Smith says. CKE Restaurants Inc., on the other hand, has avoided the addition of $1 burgers and instead has been using coupons more this year to help maintain the brand’s reputation for premium product, says Brad Haley, CKE’s executive vice president of marketing. “Coupons have broader demographic acceptance now,” Haley says. “It used to skew to women, but now all consumers are looking for them.” For Carpinteria, Calif.-based CKE’s sister brands Carl’s Jr. and Hardee’s, direct-mail coupons have had the highest redemption rate, he adds, but BOGO coupons drive the most traffic—though they’re also the toughest to deal with in terms of food costs. Haley sees growth potential in digital coupons. For the past three years, CKE has been working with Cellfire Inc., a mobile-coupon service that sends coupons to cell phones or wireless PDA users who download the free software. Recipients can show their cell phone coupon to restaurant cashiers who enter the code, which becomes invalid once it’s used to prevent fraud. CKE is also testing a system by a company called bCode, which provides printer/reader devices to restaurants to scan the cell phone coupon, print it out and erase the code from the phone so it can’t be used again elsewhere. Digital coupons are much less expensive to produce, but Haley predicts it will be years before digital replaces printed restaurant coupons. “There’s a reach challenge,” he says. “People need to opt in to get the coupons on their cell phones or computers.” Direct-mail coupons can target specific ZIP codes around a restaurant, however, and they can be used on a market-by-market basis or systemwide. Haley says CKE polls franchisees about coupon options before launching a program, and sometimes they choose not to participate—though Haley says CKE sees very little push-back because of the collaborative process. Franchisee resistance At other companies, franchisees in recent months have been more vocal about their frustration with the discounting the franchisor asks them to accept. “Franchisees and franchisors don’t always see eye-to-eye on the value of couponing,” says Dennis Lombardi, executive vice president of foodservice strategies for consulting firm WD Partners. “The franchisor has a bias toward top-line sales and maintaining traffic. “Depending on how they’re handled, coupons are most frequently an expense borne by the franchisee, who may not even agree with or support the coupon plan,” he adds. “The franchisee may see it as an opportunity to build sales, but they’re losing money on those sales and paying a franchising fee.” Denver-based Quiznos, for example, encountered push-back from its franchisees over its plan to give coupons for 1 million free sandwiches as part of its Million Sub Giveaway in February. Many franchisees said they couldn’t afford to participate and refused to honor the coupons, frustrating customers across the country. Justin Klein, an attorney with Marks & Klein LLP in Red Bank, N.J., who represented Quiznos franchisees in the recent settlement of an unrelated class-action lawsuit brought by franchisees who claimed the franchisor over-charged for supplies and didn’t provide enough support, says coupon use was part of the friction, though it wasn’t directly addressed in the recent agreement. “Quiznos overused coupons for the purpose of selling more product to the franchisees,” he says. “The net effect of using coupons was that franchisees were feeling the brunt of it. A BOGO coupon can turn your one sale from a 5-cent profit to a 10-cent loss.” Under the settlement, however, Quiznos agreed to establish a dispute process through which franchisees can voice their concerns about things like a coupon plan, Klein says. Quiznos wasn’t the only company that had to address a coupon mishap this year. When KFC launched its new Kentucky Grilled Chicken line this spring, talk show host Oprah Winfrey posted a coupon on her website for a free two-piece chicken dinner. An estimated 10.5 million coupons were downloaded from the site, but only 4.5 million were redeemed because of supply shortages and technical problems with the coupon. KFC later issued rain checks, but the publicity about the problems put a damper on the brand’s product debut. El Pollo Loco, based in Costa Mesa, Calif., at the time tried to take advantage of KFC’s coupon stunt by announcing they would accept competitor coupons. “It was a fun program, and it was nice to take some of our competitors’ coupons out of the hands of consumers,” says Mark Hardison, El Pollo Loco’s vice president of marketing. The problem, however, was that they opened the program to any competitor, not just KFC. As a result, restaurant managers sometimes had a tough time figuring out how to match the coupons non-chicken brands were offering. “We don’t have fried shrimp, but that’s what our GMs had to deal with,” Hardison says. In the end, however, the chain mostly saw its own coupons coming in. Like CKE, El Pollo Loco has the highest redemption rate from direct-mail coupons—this year the redemption rate ranges from 3 percent to 5 percent, up from 2 percent to 4 percent in previous years, he says. Direct-mail coupons can be used to lengthen a TV ad campaign, Hardison says. After a six-week broadcast schedule, for example, El Pollo Loco might drop a coupon during the sixth week. “It stretches it a bit while you can’t afford to be on TV,” he says. Lately, however, the company has noticed average guest checks declining with coupon use. “We’re not finding upselling is working as well,” Hardison says. “People are just getting the discounted item.” As a result, El Pollo Loco tweaked its practice to move away from low-priced deals, instead focusing on BOGOs. The chain in November offered a coupon for a free two-piece chicken meal with the purchase of a two-to-four-piece meal of equal or greater value. More than half of El Pollo Loco’s coupon drops are planned for specific markets, but to avoid the frustration consumers can feel when their coupon isn’t accepted, the company asks all stores to honor coupons—and in-store computers are programmed to accept them—even those from other markets, Hardison says. Seid, the consultant, fears over couponing within the quick-service world will result in the problem now facing the pizza segment, where, he says, consumer “loyalty follows the coupon, not the product.” “If the only reason you’re coming in is a discount, it’s a slippery slope to death,” Seid says.— [email protected]