Pushing Up Prices – M&C Report

March 19, 2012

Pushing Up

Pushing Up Prices

U.S. consumers are willing to accept menu price increases, but restaurant operators must tread carefully.

Pricing pressures become more acute during period of economic uncertainty, for both consumers and restaurant operators. Rising food costs and consumer sensitivity to price increases create tensions and require a delicate balancing act. Technomic’s research has shown that restaurant operators may have a small amount of flexibility when it comes to managing price increases, but this flexibility has its limits.

While seven out of 10 U.S. consumers rank the price of the meal as one of the two most important forms of value (except when it comes to fine-dining), more than two thirds rate the quality of food an important part of the value equation.

Customers indeed are trying to save money where they can, but are willing to spend on things they deem worth it. Apparently restaurant visits often qualify. Only about 29% of U.S. consumers say they have recently changed where they purchase food in order to save money. Six out of 10 consumers are willing to spend more on a dish that has high-quality ingredients. And many of them are willing to spend more for healthy items, all-natural ingredients, new or unique international flavors and locally sourced ingredients.

Menu Price Expectations

Consumers have different price expectations for different service styles and dayparts as well. For example, at breakfast, nearly three-quarters of fast-food consumers are only willing to spend up to $5 a person. There is a much broader range among fast-casual restaurants, with two-thirds of consumers expecting to pay somewhere between $3 and $9.99.

Likewise, at lunch, 89% of fast-food consumers are willing to spend up to $6.99 per person, and three-quarters of fast-casual customers will spend between $5 and $9.99. The majority of consumers are willing to spend $11.99 or less on lunch at family style restaurants.

Lunch and dinner consumers have varied price expectations at upscale-casual and fine-dining restaurants, suggesting that a tiered pricing approach on menus might be most appropriate.

At limited-service restaurants, pricing expectations for dinner are similar to those for lunch, likely because these restaurants have not historically changed their menu pricing between lunch and dinner.

Consumers Understand Price Increases

Technomic research reveals that U.S. consumers notice price increases. A large majority of consumers reports that they have noticed that grocery prices have been increasing either sharply (28%) or moderately (54%). Restaurant price increases have been less noticeable, but are still registering: 10% of consumers report that restaurant prices are rising sharply and 51% report they are increasing moderately.

The majority of consumers understand the cost pressures faced by restaurants. Most consumers attribute the rise in restaurant prices to increased costs of gasoline (69%) and ingredients (62%). Very few consumers attribute price increases to operator greed (9%) or labor costs (7%).

Perhaps because they see price increases in grocery stores and understand the reasons for the, most consumers will not stop visiting restaurants because of higher prices. Just over a third of consumers say they would go to limited-service restaurants less often—though some would lower their costs by ordering less expensive items (21% to 25%) or fewer items (15 to 19%), and others will switch to a cheaper limited service restaurant (8% to 12%).

A greater percentage of full-service customers would reduce visits, though consumer responses differ by type of restaurant. Locally owned restaurants appear to run the biggest risks as a result of price increases. Consumers are more likely to stop visiting independents (20%) than they are most other full-service restaurants. Two-fifths (42%) of consumers report that they would reduce their visits to family-style and traditional casual-dining restaurants as the result of price increases.

How Restaurant Operators Are Responding

U.S. restaurant operators use a number of methods to raise prices with out raising the ire of their customers.

P.F. Chang’s China Bistro, for example, has fount that small increases between 2% and 3% are accepted by customers, and that the easiest way to raise prices is to restructure or reformat the menu. In general, customers assume that there will be a price increase associated with a menu restructuring, whether or not there actually is one. At P.F. Chang‘s, customers respond more negatively when their favorite dishes are removed from the menu than when prices are increased. President Lane Cardwell asserts that companies should research what their competitors are charging, but must consider their own customers and concepts first.

Firehouse Subs CEO Don Fox concurs. The growing fast-casual sandwich chain conducts surveys and panels in various markets to discuss pricing. He adds that improving the quality of menu items or dining experience provides operators a rationale for raising prices, as consumers will see increased value in the offerings. Firehouse Subs recently started rolling out Coca-Cola‘s Freestyle machines, offering consumers many more beverage flavors and combinations. Customers could see the value of this new beverage service and were willing to pay more for customizable options.

Restaurants need to be prepared for consumers questioning the reasoning behind price increases, says Keith Sirois, CEO of Big Boy Restaurants. He advises operators to arm their managers and servers with an explanation as to why there was an increase, and, when necessary, why the increase was so significant. In conjunction with a recent increase, Big Boy prepared a printed response card for servers to hand out to their customers. The cards showed how commodity prices have been rising and offered an explanation of why prices were raised in the restaurant.

Key Takeaways

Operators must take menu price increases if they expect to run a successful business while maintaining the quality of food offered. With the increasing costs of commodities and the higher price of labor, there is no way for operators to achieve profitability without re-evaluating pricing strategies.

The important thing to remember is that guests are smart. They notice price increases, and they see compromises such as decreases in portion sizes. To avoid upsetting their customers, operators should be prepared to explain why there have been changes on the menu.

This article came from a print version of M&C Report


Restaurant’s Strategy is to Add More Flair with New Fare

March 19, 2012

Restaurant Strategy

Restaurant’s Strategy is to Add More Flair with New Fare

Catalina Restaurant Group Inc. recently decided that if it wants to grow the popularity of its struggling Carrows Restaurants brand, it needs to move beyond its meatand-potatoes comfort food zone.
The Carlsbad-based company recently took steps to differentiate the chain from Coco’s Bakery Restaurants, the more successful eatery the company also owns, by testing out Asian and Italian-style items, such as pastas and new salads, at a few Carrows locations. It will be gathering feedback over the next few months on what to keep permanently on the menu.

The aim is to move Carrows beyond its current loyal following, among older patrons, and attract a wider clientele including young consumers, families and large groups, who are often seeking lighter and healthier fare.

“We’re testing out an Italian menu at our San Clemente restaurant, and we have different Asian menus we are trying out in Imperial Beach and Cerritos,” said company President Masaaki “Mark” Terada. “We will see what we hear from the customers; so far the new items seem to be doing well.”

Catalina now owns and operates more than 180 restaurants, primarily in California with a limited presence in Arizona and Nevada. About two-thirds are Coco’s, which Terada said have contributed most to boosting the private company’s annual sales to more than $200 million, while Carrows has been lagging.

Reviving the brand could prove daunting. Darren Tristano, executive vice president with restaurant industry consulting firm Technomic Inc., noted that Coco’s and Carrows both operate in a declining “family dining” segment where older established chains have been challenged by operators appealing to younger generations, such as Panera Bread, Applebee’s and Chili’s.

The youth movement has spurred several established family-oriented eateries to make changes. “We see this with Denny’s offering a late night “Rock Star” menu, and IHOP now offering a new fast-casual concept that relies on counter ordering, food delivered at the table and increased convenience,” said Tristano.

Glendale-based IHOP recently opened its first-ever IHOP Express location in San Diego’s Gaslamp Quarter.

Tristano says that Coco’s and Carrows are both primarily regional players, leaving them challenged to match the marketing and operational clout of larger national rivals. Family-oriented restaurants of all sizes will likely need to remodel existing restaurants, tweak their brand positioning and adjust menus to attract younger demographics.

Both Carrows and Coco’s are longtime California brands. Carrows was founded in 1970 as Carrows Hickory Chip Restaurant in Santa Clara, and Coco’s started in the late 1940s in Orange County.
The two chains were purchased in 1996 by Advantica Restaurant Group of South Carolina, which sold them to Catalina in 2002. Catalina itself was acquired in 2006 by Tokyo-based Zensho Co. Ltd., Japan’s largest restaurant operator.

Terada said Catalina continues to own the majority of its locations, although it does have 15 franchised Coco’s and four franchised Carrows.

Catalina for the most part has resisted the trend of rivals in recent years to add bar service and alcoholic beverages to its offerings, even though those items could add considerably to customers’ tabs.

“We want to keep a family atmosphere in our restaurants,” Terada said.

View the full article on San Diego Business Journal