Report: Expect fewer restaurant discounts this year
- 2018 was likely the peak of restaurant promotions, with many brands offering $1 items to capture market share, BTIG said in a January industry report. This year will have less aggressive discounting as brands grapple with wage inflation, the firm predicts.
- Discounts did not increase same-store sales and led to additional margin pressure and criticism among franchisees, especially at Jack in the Box and McDonald’s, BTIG reported.
- The firm expects labor inflation to be in the mid-single digits through 2020, which it predicts will lead to restaurants to rethink pricing and promotion strategies.
While more value menus have cropped up in recent months among major chain restaurants, such as Taco Bell's new Cravings Value Menu, the overall trend appears to be reversing — with some brands beginning to back away from steep promotions and discounts.
Pulling back from aggressive promotions helped Olive Garden increase same-store sales by 30 basis points to 3.5% during the second quarter ended Nov. 25, according to BTIG. Given the strong economy and healthy consumer spending, management didn't feel that price promotions were needed, according to Restaurant Business.
Not all chains have been successful in driving increased sales, either. Wendy’s reported its first same-store sales decline in five years during the quarter ending in September. While discounts and value menus have helped drive traffic at Wendy’s, customers end up just buying the value items instead of the premium, costlier items, according to Restaurant Business.
Jack in the Box’s CEO previously criticized value pricing as not sustainable long term, and the chain has been less aggressive with its promotions than competitors, according to QSR.
While McDonald’s has grown same-store sales in recent quarters, traffic hasn't been growing enough even with value menu and discount offerings. Franchisees also have criticized the discounts, saying profits are being squeezed while wages are rising.
Wages are only going to go up further this year. Minimum wage rose in 19 states at the start of the year, which will put increased pressure on restaurants. Brands may turn to menu prices to make up the additional prices. Many restaurant chains also are contending with increased beef prices, which are expected to rise as much as 15% or more in the next two quarters. Pricing for fast food burgers rose 54% in the past decade to nearly $7, inching closer to fast casual prices. Given these conditions, restaurants may not have a choice when it comes to menu prices.
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