Rising Gas Prices: A Triple Whammy for RestaurantsApril 17th, 2012 | Posted by in Menu Strategy | Pricing | Restaurant Trends
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:
- Pass the cost on to guests with price increases
- Keep prices the same and hope that increased volume makes up for the loss margin
- Keep prices the same and reduce portion size to keep plate cost constant
- Encourage bundling of higher margin beverage items
- Change marketing strategies (decrease spend in some areas, increase in others, change messaging, etc.)
- 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.
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