With even vaunted Starbucks Coffee feeling the pinch of consumer stinginess, many restaurant analysts and observers are predicting a less than jolly holiday season for much of the foodservice industry.
As the same cost increases that are shrinking restaurant margins continue to eat into consumers’ spending power, operators are playing up their value propositions with a barrage of new marketing campaigns, special dining incentives and coupons intended to combat sluggish holiday sales. A proliferation of gift card programs also is offering something to believe in during what many see as a year without a Santa Claus.
Projections from economists at Standard & Poor’s and results from a consumer survey conducted by management consultancy Archstone Consulting point to the worst holiday retail spending season in five years. Estimates by both of those firms call for a spending increase of about 3 percent, just keeping pace with the projected inflation rate of 2.7 percent.
“It is apparent that our customers are feeling the impact of this economic slowdown,” Jim Donald, Starbucks president and chief executive said Nov. 15, when the Seattle-based company posted its first year-to-year decline in same-store customer traffic since the company began reporting that data three years ago. Starbucks said U.S. transaction counts for the September-ended fourth quarter fell 1 percent from a year earlier.
Many fast-food chains have used value-centric offerings to keep their customers from turning into Grinches, and now operators in other segments are doing the same.
Ruby Tuesday, which posted a 10.5-percent plunge in same-store sales for September, is offering in certain markets a coupon for $5 off two dinner entrées. Other chains, including IHOP, Smokey Bones, Bennigan’s and T.G.I Friday’s, also are offering coupons or incentives. T.G.I. Friday’s, for example, is offering a $5 “Bonus Bites” gift card when customers purchase a $25 gift card. The “Bonus Bites” card expires Feb. 29, 2008.
Holiday gift cards could provide the one bright spot in an otherwise dismal season, if the findings of two recent surveys prove true.
More than two-thirds of consumers plan to buy gift cards this holiday season across various industries such as retail and restaurants, spending an average of $199 in total on the cards, up from $139 last year, a recent survey by Deloitte & Touche USA found. According to Stamford, Conn.-based Archstone Consulting, gift card sales should tally about $35 million this holiday season, up 25 percent from last year.
McDonald’s Arch Card is again available, this year with new holiday-inspired designs. Starbucks has introduced a personalized gift card that can be purchased online or as a voucher available at stores that later can be created online. And Shoney’s, the family-dining chain, has developed scratch-and-sniff gift cards that smell like strawberry pie or hot fudge.
Dairy Queen is promoting its holiday gift cards with the introduction of a website and an incentive promotion. The website,
When reporting its negative traffic trends, Starbucks Corp., which operates or licenses more than 15,000 locations worldwide, including 10,684 units in the United States, cited the same problems nearly every restaurant company has pointed to during the past two months: a pressured consumer and rising costs.
In October and November, when public restaurant companies were reporting their latest financial results, analyst Robert Derrington at Morgan Keegan & Co. Inc. noted that 16 of 27 companies either missed their third-quarter expectations or reduced their outlooks for the full year. Almost all blamed the economy.
Starbucks’ chief operating officer, Martin Coles, said the chain’s customers, who observers had thought were so committed to the Starbucks brand that they could absorb price increases, such as the two the chain took in October 2006 and July, are suffering from too many pressures.
“Whether it’s through the increase in gas prices, the overhang from the breakdown in the mortgage market, increasing dairy prices or cost of living for them in general,” Coles said, “I think our customers across the United States are experiencing a very similar phenomenon.”
In addition to promoting its gift cards, Starbucks introduced Nov. 16 its first-ever national television advertising campaign, which will focus on its holiday beverage offerings. Television marketing was a tactic that Starbucks founder and current board chairman Howard Schultz had typically shied away from, instead preferring to rely on word-of-mouth and the differentiated “Starbucks experience.”
“I wouldn’t read into the advertising initiatives too much,” Schultz said during Starbucks quarterly conference call. “I think it’s a natural evolution of the maturity of the brand…I also think that we need to recognize that the category is evolving.”
“It’s hard to fathom that after 12 to 18 months of bad news that the consumer environment could weaken further, but it has,” said Larry Miller, a restaurant industry securities analyst at RBC Capital Markets Corp. in Atlanta.
According to Miller’s latest restaurant industry consumer research, which polled 1,000 consumers across the United States in November, 43 percent of respondents said they were eating out less often than they were six months ago. When that same question was asked in August, just as the effects of the mortgage crisis were coming to light, 39 percent of respondents had said they were eating out less frequently.
Looking ahead, 59 percent of respondents said they were planning to further cut back on eating out at restaurants, up from the 54 percent of respondents that claimed they would cut back in August.
“Will this holiday season be better than last year?” Miller asked. “No.”
That projection does not bode well for restaurants—especially those located near shopping malls or those that usually post strong year-end sales because of corporate banquets, catering or family celebrations.
And the news moving into the New Year is not so happy, either. Higher home heating costs and the housing market’s continued deterioration are expected to keep the chill on consumer spending. The most recent data from both the federal government and housing associations show a decline in home prices and home sales and a rise in adjustable mortgage rates. In addition, corporate layoffs, particularly in the financial services industry, have increased the number of people filing for unemployment benefits as well as those not receiving hefty holiday bonuses.
“It’s a rather scary time,” David Wyss, chief economist at Standard & Poor’s, said at a retail and restaurant industry conference Nov. 12 in New York. “The consumer is slowing down [and] housing will continue to be the squeaky wheel. That doesn’t leave a lot of room for anything else to go wrong.”