The restaurant business is a “penny business.” By that I mean a successful operator must pay close attention to small amounts in several categories in order to convert sales to necessary profit dollars. The current economy is testing today’s already challenged restaurant businesses in a severe way.
One issue is gas prices and other factors that result in less discretionary income, which not only reduces dining out occasions, but also the level of expenditures when a consumer does dine out. A recent study by Booz & Company, a New York management consulting firm, shows consumers reduce their away-from-home spending by first adjusting their eating habits. The other big issue is the cost increases that restaurants are currently dealing with. Commodity, transportation and other costs are up, so their inputs to food cost (their biggest cost line item) are up. When customer counts are down and costs are up at the same time, it gets really dicey. Local restaurant businesses are all dealing with this in a variety of ways usually tailored to their specific concept, segment, situation and trade area. However, it’s times like these that can bring out the best in restaurateurs as it challenges them to be creative and uber-competitive.
Advertising and marketing become critical, even if only low-cost “guerilla marketing” tactics. With consumers holding on to their money, restaurants have to keep their name out there – – staying on the consumer radar screen is crucial. Lisa Davis, president of Lexington-based One Alliance Communications, believes that restaurants need to find ways to promote and market “value.” She also shared the insight that sticking your head in the sand and waiting for better days can be disastrous and that if restaurants aren’t at least moderately aggressive in their marketing efforts, they can only expect to gain as much as they invest. A good example of why Lisa is spot-on correct is the value message that is coming from an unexpected source. Wal-mart is running a TV ad campaign touting the savings possible when a family buys grocery items instead of patronizing restaurants.
Here are some observations and specific examples of how local foodservice enterprises are competing in a challenging economic environment:
Aggressive street level presence
If you drive down Man O’ War near the Hamburg area, you will often see someone in a Quizno’s “Q Cup” outfit garnering attention. This is a low-cost way to get “street presence.” Local Little Caesar’s on Tates Creek Road does this regularly as well.
Increasingly, there seem to be more casual theme restaurants that are using large banners to “shout out” to passing traffic special deals on certain nights, such as happy hour specials and the like.
Some chains and independents will mask price increases by keeping entrÈes the same price but increasing drink prices.
New product introduction
The local Long John Silver’s restaurants, owned by franchisee Jay Shoffner (Corbin Restaurants, Inc.), are participating in the chain’s introduction of their Freshside Grille menu. This new line of entrÈes include grilled tilapia, grilled Pacific salmon, and shrimp scampi. These lighter items give consumers new reasons to visit Long John Silver’s. It also offers an opportunity to trade down from casual themed, non-fried seafood to a less expensive alternative.
Thomas and King, the Lexington-based franchise company that owns 90 Applebee’s and seven Carino’s Italian Grill, recently announced staff reductions to decrease its overhead. Many large franchise organizations across the United States are taking similar actions.
Special discounting approaches
Dreams Dinners, under new owner Stephanie Bryan, is offering discounted gift cards for the holiday season. Applebee’s has announced a new happy hour promotion.
Aggressive cost control
At least one local franchise organization eliminated overtime, is actively adjusting thermostats, and has cut out all nonessential expenses.
Scaled back growth
The soft business climate combined with the tighter credit environment has restaurant organizations scaling back growth plans. However, for those with strong brands and track records, they may find growth attractive since many landlords will be more open to negotiating favorable lease terms.
Adjustments to the economy and the credit crisis are beginning to be made at the national level. Domino’s recently announced a plan to use its own capital to help its franchisees needing growth capital assistance. A key franchise finance player has been AIG Franchise Finance, which is a division of AIG, and their role going forward is uncertain.
One piece of good news for restaurateurs is that when the economy comes back, the same Booz & Company study found that eating out spending is the first spending consumers will bring back.
It is like most other businesses: the current economy is a time to adjust, adapt, survive and position yourself to prosper when the inevitable turnaround comes. For restaurateurs, it is specifically about “watching pennies” and “street fight marketing” for awareness.