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Why the restaurant industry is shifting away from discounting

Chili’s, Outback and Burger King have been moving away from deals and coupons and toward everyday value—a likely indicator of current economic conditions

The economic trend for nearly every restaurant operator in 2022 was to raise prices, with most companies taking mid-single digit-- or sometimes double-digit menu price increases in order to keep pace with inflationary trends. But just as operators need to be careful to not alienate customers by increasing menu prices too much, they also must learn how to balance enticing customers with deals while making sure revenue still grows.

As this period of economic uncertainty continues, there has been an operational trend away from discounting and more toward everyday consumer value—a more complex equation that doesn’t just take price into account, but also quality of food and beverages, uniqueness of menu items, experience, and speed of service. On recent earnings calls, several restaurant executives have mentioned taking a break from discounting in order to improve revenue returns for an industry that’s just lapping the COVID-19 omicron-related downturn from last year, including Bloomin’ Brands, Brinker International, and Restaurant Brands International.

“We’re seeing an attempt to shift away from discounting to offer something more consistent with everyday value for the consumer with a margin construct that makes sense for the restaurant,” Sara Senatore, a senior research analyst with Bank of America told Nation’s Restaurant News. “Several restaurants are reducing the amount of promotional activity and risking a reduction in traffic, because that traffic isn’t necessarily profitable for them.”

David Deno, CEO of Outback Steakhouse parent company Bloomin’ Brands has divided the company’s stance on discounting into pre-pandemic thinking and post-pandemic thinking. Outback led the way by edging away from discounting as early as 2019, which initially slowed traffic, but ultimately is part of the company’s strategy to build back long-term health of the casual dining brand.

“We tend to be very prudent with our discounting and promotions,” Deno said during the company’s first earnings call last month. “That's one of the reasons why our margins are hanging in there so well. But we want to build healthy traffic through sales layers. We don't want to participate in any big-time discounting or promotions.”

Instead, Deno pointed out the company’s focus on touting everyday value prices for premium items like the $16.99 steak with lobster mac and cheese LTO, that customers don’t have to wait for a coupon to try.

This is a common outlook and strategy for companies like Bloomin’ that want to de-emphasize discounting and turn the consumer’s attention toward value they can find on the menu every day.

Chili’s parent company Brinker International started shying away from discounting last year, and has already seen returns from this move, which outweighs the loss of traffic surges from regular promotional days:

“The past six months of promotional and merchandising strategy shifts have funded the start of return to national advertising,” Brinker CEO Kevin Hochman said during last quarter’s earnings call. “As a result, we're seeing incremental improvements in traffic trends versus the industry, as well as margin improvement from the reduction of discounting and promotionally comping food.”

Some companies are not outright turning away from discounting, but rather focusing more and more on the how the definition of value is evolving. For example, Yum Brands is touting menu value through product innovation and reinvention at different price points, including the return of the DoubleDown sandwich at KFC and two for $5 wraps in the first quarter. In the company’s recent first quarter earnings call, Yum Brands CEO David Gibbs contrasted the $2 burrito menu at Taco Bell with the introduction of newer premium offerings.

“Strong demand for the grilled cheese burrito is a fantastic example that proves Taco Bell can win in the big burrito category and participate in higher price points while maintaining value leadership,” Gibbs said.

Industry analyst Mark Kalinowski explained that as restaurants settle into a sense of normalcy, quick-service brands will be implementing this classic barbell value strategy, where they can appeal to price-sensitive customers on one end of the spectrum and also to customers with more discretionary income that might be interested in newer, premium LTOs. p

As the trend toward value emphasis sans couponing continues, a few brands are headed in the opposite direction, and have been discounting more, like Dine Brands. During Applebee’s parent company Dine Brands’ most recent earnings call, CEO John Peyton explicitly cited “innovative promotions” and “abundant value programs” as the direct drivers of the company’s success. There are a few theories as to why some companies are moving away from discounting while others use them as a growth driver:

“Bloomin’ and Brinker are mainly company-owned operations, while Dine Brands is 100% franchise-owned so they have different incentives,” Kalinowski said. “When the company owns the store, you’re going to care about your bottom line and cash flow. [For franchisors], they get royalties based on sales and leave it up to the franchisees toc make profits…so because that structure is different they often will take different strategies.”

Discounting is also a smart way to drive up traffic, even if only temporarily, Sara Senatore said.

“Discounting was a way to offer value and simultaneously drive traffic,” she said. “Historically, when input costs come down, pricing comes down, and there's an incentive to discount…This has all been happening in an environment that affords restaurants the ability to be more disciplined about pricing. During the 2008 global financial crisis, when you had deflation, that’s when restaurants began to offer sharp value.”  

Although experts still think we might see a recession in 2023, it will likely be nowhere near as economically traumatic as the 2008-2009 recession. Since there is still job growth happening, customers will be more likely to swallow price increases and fewer discounts.

For now, companies need to be mindful of balancing the needs of price-conscious customers with the needs of customers that choose to spend money on restaurant purchases to try new food items or familiar favorites instead of just bargain shopping. This is why, Senatore said, menu prices are just as much an art as a science.

Two of the largest pizza chains have both recently mentioned their focus on balancing value needs of different consumers. During the first quarterly earnings call of 2023, Domino’s CEO Russell Weiner emphasized that franchisees, “have to be mindful that value on our menu exists outside of national offers.”

Competitor Papa Johns offered a similar take on making sure the company offers value for customers through both reasonable menu prices and a constant pipeline of new menu items for people of different fiscal demographics to try:

“You have to strike that balance between the ‘absolute price point’ customer, and the ‘value for your money’ customer,” Papa Johns CEO Rob Lynch said during the first quarter earnings call of 2023. “It’s still very hard to go out and find a meal under $15 that can feed a family of four…. We are trying to make sure that we continue to innovate and find ways to deliver on both the value for the money as well as the absolute price point needs as customer price sensitivities increase.”


Contact Joanna at [email protected]

TAGS: Operations
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