The Menu Price Fix Ship Has Sailed
For restaurants, a slumping economy means shifting to marketing to fill seats.
Good business practices are not just fundamentals employed when people are looking, making good business decisions apply specifically when no one is watching. Life for restaurant owners was much simpler in 2019. To operate successfully, we focused on three fundamentals:
Great food
Great service
Great branding
If an operator could master those three "greats," stable employee wages and commodity prices made modeling the business for profitability a straightforward exercise. Often the difference between a good operator and a great one was the authenticity of their branding. In short, restaurant operators that kept their seats full, enjoyed sustained profits and were well positioned for growth through duplication.
Then came Covid and the greatest disruption to the hospitality industry in my lifetime. I am old enough to have operated through the post-9/11 turmoil where my industry was devastated by a sharp reduction of travel. But those days never saw the shutdowns, supply chain shortages and the inflation that Covid responses wrought.
Covid, as I recently alluded to in this post, The Price Hike Dog and Pony Show, shifted restaurants away from pursuing the three greats, food, service and branding into what felt like a dystopia-based novel of Soviet-style supply shortages paired with Bidenesce hyperinflation and Orwellian government gaslighting about their incompetent, yet complicit behavior to the pandemic. Restaurants living this altered reality these past four years were conditioned to an easy fix. It was a one-trick pony show played out in all three rings of the hospitality circus:
Labor shortage problem - raise menu prices
Supply shortage problem - raise menu prices
Branding problem - raise menu prices
Are you seeing a pattern here? On top of raising menu prices, many restaurant operators also added service charges (see my post on the subject) and some even shifted to dynamic pricing. For those for whom dynamic pricing is a new concept, restaurants implementing this menu pricing scheme are akin to the airline industry using algorithms to adjust (inflate) fares in real time based on customer demand. Dynamic pricing restaurants will tell customers that they discount meals during low peak times and gloss over the fact that menu prices automatically inflate during high volume times. To put this into perspective, favorable pricing is only offered at times with low volume, so the "altruism" of that benevolence carries a very low cost to the operator. Conversely, menu prices increase during high peak demand, producing price gouging profits. Dynamic pricing, as the saying goes, "makes it up in volume!"
Entering our fourth year following Jedi master Fauci telling us through his daily briefings that, "these are not the pharmaceutical grifts you are looking for," the restaurant industry has settled back into economic equilibrium. Sure, interest rates and buildout costs are still hampering business growth, but the number of restaurant seats available has stabilized along with labor and commodity costs. Though costs have stabilized, that does not mean they have returned to 2019 levels. There is still great inflationary pressure on business operations. Restaurants that, for the last four years, played their menu price hand, their added service charge hand and their dynamic price hand are now staring at a pair of threes. Oh sure, they may still play their "one-trick-pony" bluff, but marketing focused competitors are holding full boats and will take the restaurant revenue "pot."
As consumers are now more selective with their food dollars, they are choosing the restaurants that didn't play the price hike game. They are choosing restaurants that maintained quality food, service, and branding throughout the pandemic as their survival tactic instead of the "price hike because I could" competitors.
Despite the media desperately attempting the smear lipstick on this economic pig, we are in a recession. When recessions seep into economies, restaurants are the canaries in the coal mine. Restaurants are generally the first to feel the hit as spending on food service is discretionary. Restaurant dining is a convenience to most and a luxury to few, but, when it comes down to tightening household budgets, an unnecessary expense for all. Purchasing food, even prepared food, from a grocery store is less expensive than most restaurants. So, when economies retract, food dollars necessarily shift from restaurants to grocery outlets. Statistics bear this out as nationally, we are seeing about a 5% drop in restaurant sales. My crystal ball says that this economic slump will continue for at least another 18-24 months. Whichever party wins the election this coming November will have a plus or minus 12-month effect on the recession.
Regardless of my over under prediction, restaurant will not enjoy protected class status in either upcoming administration. To survive and thrive, restaurants need to focus on their branding. They need to focus on the new ways consumers interact with their favorite brands. If the "old-school" marketing firm is pushing radio ad buys, billboard ad buys and discount flyers mailed to households to create engagement, no menu price trick will save diminishing revenues from those tired tactics. The new brand affiliation promotions require personal digital touches that are geared to consumers buying habits. Carpet bombing ad campaigns are out, and strategic digital ad engagements are in. The beauty of the latter is technology can track dining dollar results.
As restaurant operators move forward in what appears to be a shaky economy, they must focus on customer loyalty. This is not me saying this, it is restaurant revenues down 5% from last year saying it. Restaurants must meet their customers where they engage. It is not at the mailbox, it is not on a drive-by billboard, unless you want to spend like this guy:
And it is not in radio or television ads. All these eyeballs and ears, under the age of 70, have moved to streaming. Restaurant operators need to take a page out of the Netflix play book regarding their marketing engagement strategies. How did Netflix beat old Hollywood studios? By putting the convenience of their content at their customers' fingertips. Netflix went from a mail order distribution company to a content creator because of that simple convenience formula. Restaurants operators need to employ the same strategy with their loyalty programs.
As AI and giant tech companies continue to use algorithms to parse people into segmented marketing units to be harvested, like mere kernels of sweet corn on a thousand-acre farm, the restaurant that will win are the one that meet their customers on a personal level, on a human level. Restaurants are, after all, a face-to-face business. Successful digital marketing to restaurant customers needs to meet them in that same personal space. Right now, that engagement place is a 2 ½ by 5-inch piece of real estate held in the hand of your restaurant’s next best and loyal customer.