Technomic: Raise prices but create value

Soaring commodity prices and downward pressure on traffic are forcing restaurant chains of all sizes and segments to raise prices this year.

However, executives on a pricing strategy panel at Technomic Inc.’s Restaurant Trends & Directions Conference said brands can minimize the attention paid to price increases by creating value all over their menus.

“If [guests] don’t notice, they can’t care,” said Lane Cardwell, president of Scottsdale, Ariz.-based P.F. Chang’s during a panel Wednesday at Technomic’s conference in Chicago. “If they do notice, what can you do to make them care a little less?”

Cardwell was joined by Don Fox, chief executive of Jacksonville, Fla.-based Firehouse Subs, and Keith Sirois, chief executive of Warren, Mich.-based Big Boy Restaurants International.

P.F. Chang’s took a 2-percent price increase — 1.7 percent on food and 0.3 percent on alcohol — when it rolled out a new menu format in March, Cardwell said. Firehouse took a 2-percent increase last year and this year, Fox said. While Big Boy has not taken any across-the-board price increases this year, a new menu scheduled to debut in a few months will contain higher prices, Sirois said.

Bundles of joy

When à la carte prices must be raised, fixed-price offers and combos offer guests a way to “opt out” of those increases, such as in the case of Chang’s for Two, the four-course deal that P.F. Chang’s has offered for $39.95 for several years, Cardwell said.

“It’s become a better deal each year because, as we’ve raised our prices three times in the last two years, we’ve not raised the price of the deal,” he said. “So by going to the dinner, you’ve avoided three different increases. You know what you’re going to pay and what you’re going to get.”

Big Boy’s bundling efforts in the past have been “hit and miss,” Sirois said. As a result, the chain won’t be advertising straight-up deals but instead will build sections of value into the forthcoming new menu as part of a barbell strategy.

“When you get around the $5 price point, you can get anybody to come in, but you can’t make any money,” Sirois said.

Big Boy’s new menu will include sections where people can build their own omelets and burgers, or bundle a growing number of breakfast items for increasing price points. Sirois is expecting a 3-percent lift in average check from the new menu.

By contrast, Firehouse a year and a half ago went from a set price for all small, medium and large subs to a menu on which each sub was priced individually, allowing the chain to take increases on certain sandwiches that had ingredients with rising food costs.

“We were nervous, because we’d had that single-tier pricing for many years, and the customer didn’t blink at it,” Fox said. “The value was there, and we just make sure not to push it too high.

But, he added: “I’m nervous about the day we’ll have to push that medium sub over $6 in one of my higher-cost-of-business markets like Washington, D.C. It’s just a matter of time and necessity.”

Operations, equipment add value

Restaurants should look anywhere for ways to add value — from reducing waste to touting new equipment — when they need to regain good will lost to price increases, Fox said.

“We’ve had a lot of success rolling out the Coca-Cola Freestyle in our system, and we took some price with that,” Fox said. “The consumer definitely sees the added value. We took 10 cents on all the drinks and embedded [it] within the combos, and the customer didn’t even blink at it.”

The Freestyle machine costs Firehouse a little more in terms of equipment lease and product cost, but it’s an ideal fit with the restaurant’s fast-casual service style and has helped drive traffic, Fox said.

“Within Firehouse, one of the key things I can move to impact profitability before I ever touch price is just getting more people to eat inside the restaurant versus takeout,” Fox said. “That eat-in customer is more profitable and buys more drinks. One hundred percent of the customers that eat inside have a drink. I have to feel like I’ve exhausted those options before I think about price.”

Raise awareness, not just prices

P.F. Chang’s took some significant price increases recently, such as hiking the price of its Chilean sea bass from $22.50 to $25, Cardwell said. He added that the chain faced three choices with the item: take it off the menu, raise the price or cut the portion size.

“When the guest understood what the true cost is for the item, they were fine with the increase,” he said. “Everything else was 20 cents here, 25 cents there. We got a lot more feedback on what we took off the menu than [on items that remained with a higher price].”

Big Boy had to raise its price for coffee this past year after the commodity cost doubled. The chain prepared a card for each server showing a graph of the cost inflation and a prepared statement about why Big Boy needed to charge more. Customers already understood, however, Sirois said.

“The shocking thing is that throughout the system, we had two inquiries about it [total],” Sirois said. “Coffee drinkers drink it everywhere, and they knew the price of coffee had gone out of sight.”

Don’t mix up your menu mix

Decisions to take price on certain menu items come from a restaurant’s recent pricing history, not that of their competitors, Cardwell said.

“You can look at what everybody else charges, but they’re on their own ladder,” he said, adding that he tracks which items have received price increases with each menu change going back several years. “Sometimes you’ll find you go back to your high-mix items, and those are the ones you go back to the well too many times on. You forget; your guest doesn’t.”

P.F. Chang’s is very careful with the way it prices its Chicken Lettuce Wraps, its most popular item.

Big Boy’s upcoming menu, which mixes low-cost traffic drivers and higher-margin premium items, is meant to give the chain wiggle room to take price in the future, Sirois said.

“You have to look at mix,” he said. “You could touch one item on your menu and hurt yourself in a big way in the eyes of the consumer,” he said. “The important part of a barbell strategy is to engage your employees, particularly your servers, to direct people to items that are higher margin and higher price. … It was such an education process to say to servers, ‘We want [the deal] to bring them in the door; we don’t want them to buy it.’”

Fox added that high-margin items that servers are instructed to upsell need to be unique and flavorful.

“You better make sure some of your best-margin items are some of your best-tasting items,” he said.

Contact Mark Brandau at [email protected] [3].
Follow him on Twitter: @Mark_from_NRN [4]