Raising Menu Prices? Do It Strategically
Courtesy of Boston Consulting Group
While traffic continues to sink, prices keep ticking up to cover the rising costs of running a restaurant. Since January, prices at full-service restaurants rose 1.96 percent and at limited service, prices rose 2.24 percent.
That’s according to research carried out by Victor Fernandez, vice president of insights and knowledge at research firm TDn2K. He said it’s the only thing keeping same-store sales positive at many brands.
“Year to date, we’re seeing traffic at negative 2 percent, that’s a lot. That’s been the trend since the recession,” said Fernandez. “Any time we see some comp sales, we’re seeing that really it’s average guest check keeping us up there.”
At first blush, that’s a scary correlation for anyone with a basic grasp of supply and demand. But he said that it’s not a perfect correlation by any means; some brands still have plenty of room to raise prices.
“There is a relationship between guest check growth and traffic in general, but what we also see is that top performing brands are able to drive more average guest check increases,” said Fernandez. “It seems like they can take a little more price because people like them and want to go anyway. But the rest of brands, there will be some inflection point where traffic is going to suffer greatly.”
But at this point, he said, it’s the only way to grow topline sales and everyone is doing it. Also in the price survey, Fernandez found that 60 percent of brands he surveyed were at least open to increasing prices.
Adam Berebitsky, who leads accounting firm BDO’s restaurant practice, said prices would keep rising up to cover the growing cost of wages, rent and other restaurant expenses.
“Thank god we haven’t seen any major changes in commodity prices,” said Berebitsky.
He echoed Fernandez, seeing sales flat across the industry, and it looks as if it will remain flat as more and more restaurant locations pop up across the country.
“The growth of revenue continues, but the pie is getting cut into more pieces because of the units coming online,” said Berebitsky. “It’s still a very good industry, well run companies are still throwing off good EBITDA, but it’s tough at the unit level. It’s very saturated and very competitive, there’s only a certain amount of price elasticity.”
That’s driving price increases, but by way of thoughtful menu engineering. And he has a little guidance for that increasingly important task. It’s time to revisit to the old grid of plow horses, dogs, stars and puzzles seen in the Boston Consulting Group’s Growth Share Matrix created way back in 1970.
“Who are your plow horses, who are really driving sales and where is that profit, can we tweak that to be a little more profitable? If a chicken dish is $10 and your food cost is $3, you can go to $10.50 and not bat an eye. Everyone is still going to see $10 so it’s more strategic,” said Berebitsky. “You’ll have those low-margin things that aren’t selling, those are your dogs. Then you have the stars that are you high sellers and high margins, maybe you do nothing to them.”
And a big opportunity might be the plow horse. “Those items that sell a ton but don’t make much money, those might be the one to focus on,” said Berebitsky.
Laying out the menu and taking price carefully is wise, he said, because simply raising prices across the board may lead to even further traffic declines.
“It’s a dangerous game, your first answer can’t be to raise prices. It’s an easy answer,” said Berebitsky. “But remember that there is a lot more competition and you still have to be competitive with your value proposition.”