Oct. 25, 2005
Anticipated pressures on Americans' discretionary dollars may yield a business boost to pizza operators as winter approaches, according to restaurant researcher Dennis Lombardi. Like many, the executive vice president of food service strategies at WD Partners in Columbus, Ohio, believes rising petroleum and home-heating costs will eat into money the nation spends at foodservice outlets.
During a September investor conference call with Buckingham Research restaurant stock analyst Mark Kalinowski, Lombardi predicted customers will remain loyal to the foodservice brands they like, but he expects they'll spend less and possibly reduce the frequency with which they eat out.
"I just think what we will see is the consumer starting to look at less-lavish ordering," said Lombardi, the former executive vice president for restaurant tracker Technomic Inc. "Consumers are going to forego the appetizers and desserts. They may do without the bottle of wine and just have a glass instead."
He called the behavior of buying less-costly items from a restaurant a customer already frequents "trading down," and he said operators should expect to see more of that as the weather turns colder. In other words, where a regular might have chosen a gourmet pie for delivery, he'll probably be buying more one-topping carryout specials.
that may sound like bad news, it's not all bad. As habitual restaurant users, Americans will cut expenditures in areas they don't depend on as heavily, Lombardi believes. The reason why is simple: If cutting discretionary spending (not going to a restaurant) cuts people's discretionary time (because they now have to cook their meals), they will give up something else first.
"(T)he consumer's lifestyle is such that it is not as easy for them to trade away from restaurant meals or food away from home," he said. "People may say, 'I'm too tired to cook or I'm too stressed out to cook.' For the younger generations, they do not even know how to cook."
Such a situation favors the pizza industry, he said, because of its long history of promoting a lot of value for consumers' dollars. The younger generation is also its core customer. "I think pizza might actually be stronger in the back half of 2005 and into 2006."
Good service a must
The fact that consumers are less skilled in their home kitchens could mean they're well acquainted with food options and service requirements in restaurants, Lombardi said. Price may draw them to a pizzeria, but if every competitor has similar prices and equally good product, each business's service must set it apart.
"I think that as the consumer gets more and more demanding, customer service expectations are going to become more of a differential in terms of deciding where they want to spend their discretionary dollars," Lombardi said.
He recommended operators find ways to improve service through incentive-driven customer surveys rather than mystery shoppers.
"In my opinion, a good vehicle is these 'tell-us-about-us' type responses," he said. "On your receipt, it says, 'Please call us and answer a couple of quick questions and we will give you some kind of a discount or free dessert.' That provides monthly feedback to the unit level on how they are doing in terms of customer service."
Serving the bottom line
While delivery charges are becoming more common, most operators are reluctant to bump up menu prices. The temptation to do so this winter will be greater than ever, Lombardi said, as operators will face increasing pressure from
higher food and energy bills, as well as employees requesting pay increases to handle cost-of-living increases.
I think pizza might actually be stronger in the back half of 2005 and into 2006.
— Dennis Lombardi,
Still, he recommends operators keep menu prices as they are. The long-term potential negatives (customers going elsewhere for less expensive food) outweigh the short-term potential positives of increased margins.
"I think I would be very judicious about thinking about any kind of price increases," he said. One solution he suggested is to create limited-time offers that lower prices briefly, draw traffic and, hopefully, keep those customers coming back for the long-term." (T)he reality of this is that a lot of times these limited-time offers at $8.99 or $9.99 bring the traffic in and then the consumer ends, up once they are sitting in the chair with a menu, ordering the $12.99, $13.99 or $14.99 entree anyway."
One semi-bright note is that Lombardi expects food commodities prices to remain stable throughout 2006. Asked by Kalinowski if rumors of commodities price declines were true, he said, "I do not think anything is going to be dropping much over the next six months as the energy cost issues start working their way through the system. I think the important thing to keep in mind is no one is seeing any out-of-line spikes in any of the commodities right now."