Generation Y, better known as “Millennials,” are 18-34 year old individuals who are self-described as tech-savvy and progressive.

One of the latest challenges for the restaurant industry is trying to determine how to better cater to this segment. Should messaging be different? Do they like different foods? Do restaurants need to project a different atmosphere? A recent article in Nation’s Restaurant News suggests the answer to many of these questions is probably yes. But to what extent should restaurants focus their energy and resources on driving incremental Millennial traffic?

Let’s consider MealCo, a hypothetical restaurant, that decided to shift its marketing and menu strategies to focus on capturing more Millennials. MealCo is a 1,000 restaurant chain, each restaurant serving 100 guests per day, 25 Millennials and 75 from other generations. The average check from a Millennial is $15.00 and the average check from others is $20.00, making the weighted average check $18.75 and the average daily revenue $1,875 per restaurant per day.

After shifting its strategy to focus on the Millennial generation, the following scenario may be possible. The new program led to 10 incremental Millennial guests, but, because of messaging that appealed to a different population, MealCo lost 10 guests from the “others” segment. Although total restaurant traffic was unchanged, the segment shift caused a $0.50 decrease in check size and lowered revenue by $50/restaurant/day. Applying this across a chain of 1,000 restaurants equated to $50,000 in lost revenue per day, or over $18 million over the course of a year.

Though this scenario is purely hypothetical, it serves to illustrate the dangers of shifting strategies without testing.  The best way for restaurant chains to innovate with the least amount of risk is to run controlled tests in a subset of their restaurants to determine how the test-generated insights could be applied more broadly across the chain. If MealCo tested their new program in a subset of their locations or a subset of their markets, they would have been able to quickly and accurately determine the answers to three important questions:

1. Does this program drive incremental revenue?
2. Which elements of the program are most effective and in which locations does it work best?
3. How can we tailor this program for maximum impact moving forward?

Now let’s assume MealCo tested their new strategy in a subset of their restaurants. By testing they learned that, in aggregate, the program lead to a decrease in total restaurant revenue, as described above. However, in areas where over 50% of the population was between 18-34 years old, they observed a significant lift. MealCo then determined that 10% of their sites, 100 restaurants, fit this criterion. At these sites, MealCo learned that they would still lose 10 “Others” but would gain an incremental 20 Millennials. Despite a further decrease in weighted average check size, the 10 incremental guests drove $100 in incremental revenue per restaurant per day, translating to $3.65 million in incremental revenue across the chain.

Again, though this is a hypothetical example, it is a powerful reminder that initiatives based on trending topics –  like catering to the Millennial generation – must be tested before rolling out system-wide. With so many of the top restaurant companies beginning to embed testing into their decision-making process, those restaurants that do not test are now at an extreme competitive advantage.

In a recent interview on Bloomberg TV’s “Taking Stock with Pimm Fox,” APT CEO Anthony Bruce comments on how consumer-facing companies can measure the return on Facebook advertising dollars.

APT’s Jonathan Marek was quoted in the May issue of  QSR Magazine discussing how technology is helping restaurants “streamline operations and make sense of all the data they’re collecting.”

Check out “Your Place in the Cloud:” http://www.ourdigitalmags.com/publication/?m=11373&l=1&p=153

The LA Times reports that three out of four restaurant operators feel pinched by high gas prices, an economic factor possibly contributing to a small same store sales decline in February. Rising gas prices impact restaurants in three key ways. First, spikes at the pump are generally correlated with higher commodity costs. Second, higher gas prices leave guests with less discretionary income. And third, rising gas prices may decrease travel and therefore reduce restaurant traffic. All of these factors create significant margin pressure – only restaurants that pick the correct strategies to succeed in this environment will find the road to profitable growth.

The National Restaurant Association (NRA) reports that food costs have overtaken the economy as the number one concern for restaurant operators in 2012. Chains are seeing beef prices in particular go through the roof, such as Atlanta’s Ruth Chris Steak House, which reports an 11% increase in strip loin costs since the beginning of March. As input costs rise, restaurants have six choices to maintain profitability:

1. Pass the cost on to guests with price increases
2. Keep prices the same and hope that increased volume makes up for the loss margin
3. Keep prices the same and reduce portion size to keep plate cost constant
4. Encourage bundling of higher margin beverage items
5. Change marketing strategies (decrease spend in some areas, increase in others, change messaging, etc.)
6. Choose the best combination of the above strategies by location

Of course, picking between these options would be much simpler if commodity costs were the only variable at play; unfortunately, with more share of wallet going to the pump, some guests are likely to trade down to cheaper items, switch to less expensive restaurants, eat closer to home, or just dine out less (or not at all).

If, for example, gas is at $5/gallon and a car gets 20 mpg, a guest would save $5 by eating at a restaurant down the street instead of driving to one 10 miles away. This example suggests that urban restaurants would be much less affected by changing gas prices than suburban and rural locations. But more importantly is the fact that changing gas prices would impact every restaurant differently.

One of the important factors that may contribute to the elasticity between gas prices and restaurant sales is the distance to the nearest interstate. As gas prices rise, families – especially those in the target market for most QSRs – are much less likely to take to the road. Decreased road trips result in decreased traffic for chains that rely on these travelers, especially in the warmer months (when gas prices usually are at their highest).

Restaurant operators clearly understand that fuel prices (whether they go up or down) are an important factor in guest purchase behavior; but how do they choose strategies to maintain profitability amidst this volatile environment? The best way to understand the by-location and by-customer impact of changing gas prices is to test initiatives in a subset of locations. Testing allows restaurants to answer such question as:

• If I increase prices across the board, will the increased margins offset the decrease in guest traffic?
• If guests are dining closer to home, will hyper-local marketing initiatives, such as FSIs and coupons, generate a high ROI?
• Are restaurants located closer to major interstates more affected than urban locations?

Since discretionary spending is so variable by customer and location, testing allows restaurant operators to not only understand the success of an overall program, but also enables them to see for which locations and subset of customers the program was most effective, and then importantly, how to rapidly tailor the initiative for a profitable rollout.

You can’t afford to run on empty. Scientific testing is a robust way to manage external factors and drive profitability.

This year in particular, restaurant operators are having a difficult time understanding how much of their sales lifts can be attributed to better weather versus how much is simply due to the direct impact of a single initiative.

With such drastic seasonal changes, the only way to find the true incremental impact of any initiative is to test it in a subset of your restaurants. “Test” doesn’t mean trying something in all of your locations in Phoenix and Michigan and comparing it to balance of chain. Dust storms in Phoenix and snow storms in Michigan would derail any hopes of an accurate read. In order to find the true cause-effect relationship between any initiative and key performance metrics, it is necessary to set up representative tests and employ a scientifically-based control group strategy that has the potential to deliver highly statistically significant results.

Only through representative, scientific testing can companies really begin to understand the impact of their initiatives. Is it time to rethink what’s really causing your sales to change this year?

Hiring continues to be a key challenge for many restaurants. Michael Harms, senior business analyst at the Dallas-based People Report, recently commented that, “the ease of hiring and the ease of finding candidates is going away and going away quickly.” Since labor is usually the second largest expense for restaurants (other than food costs), hiring correctly can often be the key differentiator between making money and suffering large losses.  To successfully staff restaurants, executives must correctly answer three questions:

• Where and how much labor should I employ? Optimal labor deployment should consider how adding or reducing labor by location affects both profits and customer satisfaction. While many restaurants have complex staffing models, these models often fail to consider the intricate causal link between hiring and generating incremental profits. Deploying more labor at very busy locations may seem obvious in many cases. However, such restaurants may already be performing to their maximum potential in a given market, and adding labor may actually reduce their profitability. A finely-tuned labor strategy will go beyond simply measuring the cost of labor to understanding the accurate incremental impact of labor changes on key metrics.

• In which day parts should I hire more or less? More labor on Fridays and less on Tuesdays has often been the day parts model. However, as more check and customer level data becomes available, restaurants can get detailed insights into the day parts where labor changes would have the most impact. Using this Big Data, restaurants are now able to answer questions regarding how adding or reducing labor impacts sales or margins at the item level by time of day. These insights can be coupled with local labor market conditions to build a staffing model that optimally balances day part labor requirements with labor availability.

• How should I train and retain employees? In all service businesses, the staff is a core part of the customer experience. Restaurants try a variety of training programs to help improve operational metrics (e.g. wait times), customer satisfaction, and employee retention. However, many executives wrestle with the challenge of measuring which of these programs are having an impact. Being able to isolate the impact of various labor programs is key to preventing substantial investments in initiatives that may have low or no impact on key performance indicators.

The most robust way to understand the accurate impact of labor changes on your profits is to conduct scientific tests. Based on the findings of these tests, you can build a finely-tuned labor strategy by location. Click here to read more.

Baristas are becoming bartenders at select Starbucks locations, as the coffee giant recently announced that it will increase the number of locations testing its pilot alcoholic beverage program.High-margin alcoholic beverages are a critical aspect of overall Fast Casual profitability. To date, they are not an important (or even existing) part of many QSR menus – but they could be.

As commodity costs rise and competition grows, alcohol could be the answer to margin growth. Increasing sales of these beverages at QSRs may help keep a lid on food prices and drive more sales.

Imagine a very simple burger joint, selling only burgers, soda, and beer (see chart below). If drink sales with burgers mixed even 20% more towards beer versus soda, it would create an extra $27,500 in drink margins. This creates significant leverage for the business – this burger joint could afford to drop burger prices by 35 cents per burger and still keep the same profitability. Conversely, the restaurant could afford to keep prices the same, while rising food costs cause other restaurants to raise prices, creating a competitive advantage.

Adding alcohol to a menu creates operational challenges and opportunities. One obstacle is hiring employees that are old enough to legally serve alcohol, along with training qualified employees on the ins and outs of serving this new offering.

Adding a new category to a menu also creates an opportunity to drive traffic at traditionally off-peak hours. Starbucks’ new adult drinks will likely encourage customers to frequent the store after work or in the evenings, times that are much quieter than their morning and lunch-time rushes. Drink customers may be loyal Starbucks members, but they may also be non-coffee drinkers who have discovered a reason to come make a purchase. Not only can new menu categories create incremental guest visits, but they may also enable restaurants to extend their profitable operating hours. Some coffee shops and quick eateries have already adopted this strategy, offering beer and wine in some locations, luring in evening customers.

Restaurant executives should have confidence when making a decision as bold as introducing alcoholic beverages across their restaurant network. Initiatives such as introducing alcohol can have a significant impact on brand perception and types of customers, resulting in materially positive or negatives sales. Because the outcome is unknown, executives should consider testing their bold initiatives in a small subset of restaurants. Based on these results, they will be able to decide if the pilot was successful, which elements have the most profit impact, and how to tailor the program to have the most profitable rollout acorss the restaurant network.

Americans love eating and really love convenience culture—this makes the ascendancy of food-delivery sites like GrubHub and Seamless unsurprising. Restaurant owners watching the app-friendly trend are smart to consider launching an delivery service themselves.

With its sleek new website bkdelivers.com, this is just what Burger King is doing. A Washington Post blogger reports that “the Web essentially exploded” with reaction to the new service, despite the fact that it caters only to a smattering of locations in a few metro areas.

To prevent sandwich sogginess and limp french fries, Burger King designed thermal packaging with such touches as a separate upper-bun compartment for its Whopper. Chief brand and operations officer Jonathan Fitzpatrick claims that the special wrappers keep the Whopper “hot and fresh” and fries “hot and crispy.” The delivery fee is only $2.

Why haven’t fast food chains broken into the home-delivery market sooner? Can delivery work for burgers and fries as well as it has for pizza and Chinese food? A spokesman for Domino’s, whose sales are 70% delivery, doesn’t think so. “There is a reason that not all pizza places deliver,” he said. “It isn’t easy.”

He may be right. Before rolling out delivery programs, restaurants need to test whether it attracts new customers or merely cannibalizes in-location sales. Next, the operational and labor costs have to be worked out—and this is only possible through testing each factor independently. For fast-food companies, home delivery is a new ball game, and simply copying the playbook of existing food delivery franchises—as Fitzpatrick suggests— may not be a viable strategy.

Only five percent of American consumers eat three square meals a day, but they aren’t starving—they’re snacking. Restaurants worried that their high-margin meals are vulnerable to this trend should think about how to capture some of the snack market, or how to lure busy consumers back to sit-down meals.

USA Today reports how chain restaurants are adapting to all-day eating habits: McDonalds is making its new limited-time item the “Chicken McBite” rather than a sandwich, Dunkin Donuts has begun to sell its lunch sandwiches in the morning, many Applebees franchises are extending their hours to midnight, IHOP sells a to-go pancake that fits in a car cupholder, and Denny’s marries breakfast and dessert in its bacon maple sundae.

As these chains demonstrate, restaurants can grab share from conventional snack manufacturers by marketing like them. One way to do this is to embrace aggressive branding—Taco Bell, for example, now sells tacos on a Doritos shell. Another is to follow IHOP in selling take-away food like a convenience store does—the question is how to adjust your type of food to snack portions and commute-friendly packaging.

A restaurant’s correct evolution to the snacking trend requires testing changes one by one, and eliminating the risk of losses before rolling out new products nationwide. Click here to read more on how testing can help introduce new items.

Since Wendy’s launched its ninety-nine cent menu in 1989, consumer demand has led to value menus in many fast-food chains, and in this economic climate dollar menus are especially popular.

Rising food costs, however, have shrunk the already small margins on dollar deals. At the same time, cash-strapped customers are less likely to buy the full-ticket items on the menu.

Enter the TWO-dollar menu. What one consumer psychologist calls a “magical price point” has appeared on the menus of KFC, Taco Bell, and, most recently, Subway, USA Today reported. Taco Bell’s take on the two-dollar deal included chips and a drink, and Subway’s two-dollar sandwich is also marketed as a full meal, making the items on McDonald’s dollar menu look like snacks by contrast.

The two-dollar menu might be catching on quickly, but its effect will vary. Restaurant chains have to find out how to make it lead to steady profit. All restaurants should have robust answers to the following questions before getting in the $2 game:

• What items can retain a viable profit margin at $2?
• How will your current value offers (like Subway’s $5 foot-long) fare under the pressure of a better deal?
• How can the $2 deal be leveraged to sell pricier add-ons?
• Could the $2 deal be paired with aggressive marketing of seasonal specials?
• How will different franchises respond to a nationwide $2 deal?

Controlled testing is the smartest way to introduce this buzzing price point.