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Why some chains falter on price hikes

P.F. Chang’s, Ruby Tuesday and IHOP rethink their pricing strategies after traffic drops

Halfway into a challenging year marked by rising commodity costs, menu pricing is expected to emerge as a key issue for restaurant chains as they struggle to drive customers through their doors.

The need for pricing to address soaring commodity inflation has been a common theme in earnings reports all year, and many in the restaurant world have raised prices to some degree in various ways —some for the first time in years. Others have price hikes scheduled for the second half of the year.

The recent round of earnings calls has offered some insight into pricing.

Many chains, such as McDonald’s, Starbucks, Chipotle Mexican Grill, Texas Roadhouse and Panera Bread, have boasted positive sales trends that included menu price hikes with no impact on guest behavior.

Others, however, such as P.F. Chang’s China Bistro, Ruby Tuesday and IHOP, say they are rethinking their strategies on pricing and perceived value after seeing guests turn away in droves.

When asked why some brands are seeing better consumer acceptance of higher prices than others, analyst Bart Glenn of D.A. Davidson Research said it all comes down to consumer perception of value, not who has the lowest prices.

Restaurant brands that have invested in improving the customer experience with upgrades to environment, service and food quality have been able to raise prices without seeing traffic drop or menu trade-downs.

“If you offer a great experience, it’s not about absolute price,” he said.

But companies that haven’t elevated the experience or provided more for the money likely will see consumers start to trade down or shift to lower-priced menu items, Glenn added.

While Scottsdale, Ariz.-based P.F. Chang’s may offer an upscale experience in a casual setting, guests appear to perceive the brand as too expensive for more than special occasion use, company officials said.

For the second quarter ended July 3, the parent of the eponymous casual-dining chain and sister brand Pei Wei Asian Diner reported a nearly 30-percent drop in earnings. Same-store sales fell 2.5 percent at P.F. Chang’s and dropped 2.7 percent at Pei Wei, despite a 1.7-percent increase in menu prices in May.

Rick Federico, P.F. Chang’s chair and chief executive, told analysts last week that traffic slowed the most among guest tickets under $45.

Seeing a need for better entry-level pricing, Federico outlined a series of planned traffic-driving improvements, including adding more dishes in the $8 to $12 range at the Bistro chain, as well as dishes in the $3 to $6 range at fast-casual Pei Wei.

The menu tweaks come with plans to accelerate remodels, improve service and better market key brand attributes like “freshness” and “quality.”

At Ruby Tuesday, chief executive Sandy Beall last week also outlined strategies to revive stalling traffic trends, including the use of limited-time offers and improved service.

For its fiscal year ended in May, Ruby Tuesday saw same-store sales rise 0.9 percent — the first positive result in five years. However, the chain struggled in the aggressive promotional environment within casual dining, where two-for-$20 deals have become the standard.

“Value is definitely the word of the day. It’s what gets results,” Beall said.

Applebee’s Neighborhood Bar & Grill has successfully maintained its value position as a point of differentiation with the bar-and-grill segment while still raising prices, said Julia Stewart, chair and chief executive of parent company DineEquity Inc., based in Glendale, Calif.

“At Applebee’s, we definitely have room to price with inflation,” Stewart said this week after reporting same-store sales increases for the brand up 3.1 percent during the June-ended quarter.

Helping Applebee’s, however, is the brand’s menu overhaul this year. With 95 percent of Applebee’s menu new or improved by the end of the year, the chain has been able to engineer for value, she said.
Sister brand IHOP, however, has work to do to regain momentum.

In the second quarter, IHOP’s same-store sales dropped 2.9 percent despite an increase in average check. 

Stewart said research indicates that consumers are looking for more value at IHOP, and the chain is looking at ways to better communicate that message — though, she added, “It’s not just about price point, it’s what you get for that price.”

Contact Lisa Jennings at [email protected].
Follow her on Twitter: @livetodineout

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