Convenience Store Food Service Consultant- Dean Dirks: News, Articles, Events

February 27, 2009

Marketing in Today’s Foodservice Environment

Growing foodservice sales has several challenges in today’s environment. The high price of fuel reduces inside customer counts and no matter how you look at it people just have less disposable income. In most cases, dispenser marketing opportunities are used for fuel promotions or beer and cigarette deals that may drive customers inside the store. This does not leave food service with a lot of options other than to grow segments (such as breakfast), offer new items or discount.

Traditional quick-service restaurant (QSR) companies have decided to compete with discount menus. This started heavily in December 2008 when McDonald’s had a same-store sales decrease for the first time in 56 months. In January 2009 McDonald’s came back with its $1 menu and every QSR followed suit to compete. Even segments that have not traditionally discounted — in particular Subway — were led into this trap when Quiznos ran a 12-inch sub for $5 special. Subway’s sales decreased so it matched the Quiznos promotion with a $5 sub program.

I call this discount marketing plan the “Pizza Model.” Years ago, the pizza market went to war discounting pizza and today the segment can’t sell a pizza unless it is discounted. The Subways of the world are walking into the same trap. At the same time, Subway and others may have had no choice because sales were declining.

One thing to remember is that the whole foodservice market is driven by the QSR companies, not franchisees. For the most part, QSR companies are not concerned with franchisee profit but with total sales. The companies get paid royalties on gross sales not the franchisees’ net profit.

Subway franchisees I talk to tell me that the $5 sub promotion drove sales by 10 percent to 20 percent. At the same time food costs went up 5 percent to 7 percent, so the net affect was lowering the bottom line profit.

Taco Bell’s “Why Pay More” promotion produced 6 percent sale growth. Menu prices are 79 cents, 89 cents and 99 cents. Franchisees are concerned that the sales mix of certain items on this menu is significantly hurting food costs. For instance, the 89-cent Cheesy Double Beef Burrito has high a food cost, slightly above 50 percent. When the promotion was launched, Taco Bell was betting on products like the lower-cost bean burrito to be a higher part of the sales mix.
The biggest danger in getting customers accustomed to a discounted menu is that when raw food prices go up, customers react negatively to raising prices to answer the higher cost of goods. The pizza market felt this hard when cheese rose 50 percent and flour costs doubled last year.

What is the answer in the convenience store world? I think gorilla marketing:

— Convenience stores need to be viewed more as the good guys; animosity for the oil companies is something retailers need to address. Quite honestly, I don’t blame consumers. Oil companies are creating huge profits and what charities are they involved in at store level? The charity work is always done by the retailer. I have always felt strongly about our responsibility as retailers to raise and contribute money for charities. We need to get more involved with fundraisers for charities like St. Jude Children’s Hospital, Breast Cancer or a multitude of others. This goes a long ways in separating retailers from the oil flags they wave.

— Remember, all marketing needs to drive sales back to the store. Get involved in school events. Give out free coupons for kids from first through eighth grade. You know that the parents have to drive them to redeem the coupon and rarely will they buy only the one item. Frequent reader programs worked well for me when I was an operator.

— Market your ability to deliver food to events.
— Tie foodservice marketing with the fleet fuel business. United Parcel Service was a big customer of a retailer I once worked for, and the drivers were required to fuel at our locations. We gave all the UPS drivers a free small coffee if they purchased a breakfast item. In most cases, they traded up to a larger coffee and we got a big long term lift due to frequency.

— Everyone needs to grow breakfast with presentation by the register. Retailer short-sightedness on receiving money for counter displays that don’t move product may need to be reviewed. Turns are where it is at, not stagnant placement money.

No matter how you look at it, we are in very difficult times and need to grow sales or we won’t survive.

This is January’s article written for csnews.com; it can also be found here: http://www.csnews.com/csn/foodservice/article_display.jsp?vnu_content_id=1003834847

February 19, 2009

Fast Food Franchisee Challenges

The fast feeder’s discount strategy is paying off with same store customer counts growing from the prior year.

While discounting has increased customer counts, the results haven’t helped the bottom lines of foodservice franchisees. The chart below shows how the leading fast-food restaurants increased store traffic by anywhere from 2,000 to almost 127,000 customers in the mid to later-part of 2008 — mostly due to their recently launched discounted menus.

The problem is that quick-service restaurant (QSR) profitability comes from royalties and does not equate into franchisees’ profits. For example, McDonald’s franchisees have formally fought the dollar menu because of its lack of profitability. Taco Bell is experiencing a 50 percent (yes, that is right) profit decline overall as its 79-cent, 89-cent, and 99-cent menu comprises 50-to 60 percent of the sales mix. While these price points drive sales, they may not drive profits.

Subway has discounted foot-longs to $5 from $7, while food costs have risen by 26 to 32 percent. The $5 foot longs account for about 65 percent of the chain’s sales mix. While sales have been maintained, and in some cased grown, the net profit for each store has actually dropped.

In addition to higher food costs, discounted menus create higher labor costs. Before the discounted menu, it took 1,000 units at $7 to produce $7,000 in sales. At that volume level, the location could be manned with two people. Now it takes 1,400 units to produce the same $7,000 in sales. Labor costs go up to produce those 400 incremental dollars because at key times three people are needed to man the location instead of two. Basically, Subway is adding labor dollars to product the extra amount in sales.

In the stand-alone QSR world, these factors are catastrophic. In the convenience store industry, increased customer counts will build incremental inside sales. It may come down to a basic philosophy in how you view foodservice. Do you want your food service to make money or do you want it to draw customers to the store?

At the end of the day, QSR companies focus on royalty growth, stock value and sales per store. These financial successes help franchise companies sell units to new franchisees.

This is February’s article I wrote for csnews.com; it can also be found here: http://www.csnews.com/csn/search/article_display.jsp?vnu_content_id=1003938137

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