High gas prices are cooling restaurant sales

For some time, consumers threatened to cut back on discretionary spending to counter high gas prices, but in the restaurant segment, no significant drop was discernable until now. New data reported by MarketBrief (a combined effort between Technomic and American Express) shows consumers are truly weary of pain at the pump, and they're changing their food spending habits to offset the increase.

This change spells a challenge for the restaurant industry as Americans are turning to their own cupboards more often for meals. How that will affect the pizza segment remains to be seen, but a look at some broad industry data can help draw some reasonable conclusions.
 
Finding: Technomic researchers found that 67 percent of customers "agree" that they are at home more often. The change marks an 8 percent increase over the last five months.
Of the foods they're eating at home, 48 percent of customers "agree to some extent" that they are ready-to-eat foods from groceries. That's a 9 percent increase over late last year.
 
My observation/conclusion: Customers definitely want to spend less money, but they're not motivated to cook the food they buy; they still want it prepared for them. David Novak, chief executive of Yum! Brands, told a newspaper several months ago that America's "culinary IQ" is down because "people don't even know how to cook."

He's right.

If you've ever looked at Nielsen Ratings for Food Network shows or sales of high-end cookware, you'd think everyone aspired to be a home chef. But the truth is consumer desire to cook has yet to translate into action. For most, TV shows like "Emeril Live" and "Good Eats" are more for entertainment than education.

So what should operators do to win over ready-to-eat food buyers?

One possible solution is to convince them your food is not only ready to eat, it's better tasting and more healthful than ready-to-eat grocery food. A brother of mine once remarked that the food his wife brings home from the grocery is "so processed that it's actually half-eaten." Without even reading nutritional labels on the boxes his wife brings home (and to be fair to the ladies, he's no cook either), he knows it's not as good for him as fresh food prepared from raw ingredients.

So position your food as

Amazingly, 56 percent said they'd not be upset by an increase of $1 or more, and 13 percent "reported that no amount would keep them from ordering that menu item or visiting that restaurant, researchers reported.

made from the freshest ingredients and without preservatives. Push side items like salads or promote non-meat pizzas to shine some light on the less-frequented but more healthful corners of your menu.
And remember, if consumers want ready-to-eat foods, they want convenience. And what's more convenient than delivery?
 
Finding: Sixty percent of consumers said they want more variety from restaurants. Plus, they're more likely to choose restaurants offering coupons or combo meals.
 
My observation/conclusion: Pizza already is positioned well as a value-oriented option in the restaurant market. A family of four can easily fill up for $20 or less and get at least a pie, a side item and a 2-liter soda.

But the pizza biz could probably work on its variety as many have the same offerings: pizza, wings, breadsticks, subs and salads.

An operator outside of Cleveland just started selling spaghetti by the bucket and is reporting favorable results. (Talk about low food cost, low labor and convenient.)

Take-and-bake operations large and small have done very well selling desserts (both ready-to-bake and ready-to-eat) and salads. While marketing expert Kamron Karington suggests giving things like salads and desserts away to drive trial, think of how doing so would raise your value proposition.

And again, how can your operation be more value oriented than by burning its own gas to bring food to the customer's house? Again, promote delivery.

But if yours is a dine-in pizzeria, offer deals that require more than one patron come in. A place I frequent has a deal my wife and I call the "adult happy meal." On Monday or Tuesday we can share any pizza, any salad, plus two glasses of wine for $20. Given the high-end nature of this pizzeria's food, that's a heck of a bargain.
 
Finding: Most price increases won't scare customers off.

In the survey, consumers were told gas price increases could lead to menu price increases. They then were asked to consider a menu item that costs $10 and to determine how much of an increase would make them reconsider ordering that item or visiting that restaurant in the future.

Eleven percent said they wouldn't tolerate even a 25 cent increase, but the majority said they understood they have to share some of the burden for high gas costs and accept a price increase. Amazingly, 56 percent said they'd not be upset by an increase of $1 or more, and 13 percent "reported that no amount would keep them from ordering that menu item or visiting that restaurant," researchers reported.
 
My observation/conclusion: Don't fear charging for delivery. Consumers know high gas prices affect the way most everyone spends their money, and they know businesses are suffering, too. What's important, however, is to pass that charge directly to your drivers—and make sure your customers know that's where it goes. Not only does it show you care about your drivers, it shows you're not simply gouging them for a service that once was "free." 
 
Finding: The well of easy capital of the past few years is drying up. In recent years, consumer spending has been fueled by tax refunds and home refinancing, but this year debt-addled consumers are looking aggressively for ways to pare spending. Throw in the fact that gas prices have increased by double-digit rates for the third straight year, and you've got a vise-grip on discretionary income. MarketBrief researchers recommended the following:

1. Work the value formula with limited-time offerings, including "smaller-portioned alternatives at lower price points."

2. While consumers may not blame you for raising prices, do so conservatively. If you go too high, frequency could suffer.

3. Reward frequency.
 
My observation/conclusion: Since so much customer data is captured by pizza POS systems, pizza operators know who their best customers are. What an incredible competitive advantage.

Reward those customers now more than ever by inviting them back with rewards. Even if you give away a few freebies (sides, drinks, a smaller version of their favorite large pizza), you'll drive frequency and offset a lower ticket average.

Editor's note: Data for the May 2006 American Express MarketBrief was culled from an Internet survey of 500 consumers representative of the United States population. The survey has a margin of error of plus or minus 4.5 percent.

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