Franchises buck the trend on value promotions

Value promotions continue to proliferate across the restaurant industry, and while the form those deals take largely depends on the customers who frequent a brand’s segment, some are trying to create better value perceptions by going against expectations. This week, Qdoba Mexican Grill began its new “extras aren’t extra” positioning, in which it would no longer charge customers for guacamole, fajita vegetables or queso. “We focus on our guests, and what they want and expect from us as a brand,” Qdoba president Tim Casey said in a statement. “Evaluating our guests’ experience, we learned that they appreciate a clear and simple menu structure and the ability to build a customizable and flavorful entrée without having to compromise on that flavor because their favorites, like guacamole and queso, cost extra.” Industry expert Aaron Noveshen, founder and president of The Culinary Edge consulting firm in San Francisco, called Qdoba’s move “ambitious” but wanted to reserve judgment on what it might do to the chain’s positioning for the long haul. While it’s nice for Qdoba to say to customers, “Look what we’re doing for you,” he said, it’s probably better to have a signature product or quality perceptions that fetch higher prices from guests. “It goes right in the face of Chipotle to say, ‘We’ll differentiate by giving this away,’” Noveshen said. “In the short term, it will drive some trial and excitement, but long term, it’s to be determined. Their food cost will go up, and hopefully they’ll drive enough incremental traffic to offset that. But ultimately, it’s a discount.” Above the fast-food fray Qdoba’s announcement earlier this month made waves because it stood in stark contrast to a wave of aggressive discounting in quick service. For example, Burger King launched a 10-piece order of chicken nuggets for $1.49 to go head to head with McDonald’s offer of 20 Chicken McNuggets for $5. Dairy Queen* added a line extension to its 5 Buck Lunch, and all three of Yum! Brands Inc.’s chains had heavy discounts to offer. Taco Bell promoted a $1 Cravings menu, KFC advertised its $5 Fill-Up combos, and Pizza Hut ran a $7.99 “Digital Deal” to spur online ordering. One quick-service franchise to buck that trend was Domino’s Pizza, which advertised the voice-ordering capability of its digital apps. “This is yet another example of how we use national promotions to focus on technology,” chief executive Patrick Doyle said during Domino’s third-quarter earnings call, “rather than exclusively focusing on new products for all of our national windows.” The strategy helped drive a 7.7-percent increase in same-store sales for Domino’s during the quarter. The chain also recently took up the price of its promotion on the Hand Made Pan Pizza to $8.99, from $7.99. “It’s an amazing product, and clearly we could support that,” Doyle said. “You have seen our national promotion remain consistent, but we really believe we have the best hand-made pizza out there and that the demand is there for it.” Noveshen called the wider move toward aggressive discounts in quick service a matter of customer segmentation, as fast-casual brands typically serve mostly higher-income individuals, while fast-food chains derive a lot of business from consumers who need to use value menus. “The QSR players look to having two different customers, and they’ve learned that having a value menu orientation is still important,” he said. Noveshen added, however, that dollar or value menus also play a different role as people’s eating habits have changed. “This habit of building meals out of lots of little things is on the rise,” he said. “So value menus play the role of the grazing menu and give people what they want from that perspective. These $5 meal boxes at Jack in the Box or KFC address the same thing: a lot of things for $5, not just one piece like [Subway’s] $5 foot-long.” Franchisees don’t love those kinds of offers, he conceded, but deeply discounted transactions are still profitable and still draw customers who can’t visit a restaurant without a dollar menu. “It drives the bottom line over the long term from the incremental sales it provides, without diminishing what the brand stands for,” Noveshen said. “But that’s purely in the QSR space.” A serious question in casual segments Outside of fast food, Qdoba told USA Today that it would rearrange some menu prices up or down to account for its free-extras move, something Noveshen said would be a necessary balancing act. “There are a lot of fast-casual brands who never discount, period,” he said. “They might do a giveaway as an introduction, they don’t coupon or discount. This is usually about stealing market share and frequency, but what does it say about the overarching health of your brand?” It’s a question casual-dining chains also manage, particularly at lunch, Noveshen said. He knows firsthand from his six-unit upscale-casual brand Pacific Catch, which he co-founded in 2003 in the Bay Area. “We’ve always taken the same approach with Pacific Catch: At lunch we have some lower-price items or a soup and salad promo at an accessible price, but we won’t discount beyond happy hour,” he said. “There are certain times when discounting makes sense to fill seats and get leverage against fixed costs. Happy hour doesn’t exist without a deal, but at dinner nobody’s expecting a deal.”