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Escaping the Discounting Trap

Most industry experts agree that it's too late to end the foodservice discounting wars. There are two basic trains of thought with fast feeders in today's economy: keep discounting deeper and deeper, or merchandise away from discounted menu items.

Here's what's happening with the deeper discount strategy. Quizno's initially discounted selected subs to $5, then developed the $4 Torpedo and just introduced the $3 Bullet. Some Quizno's franchisees indicated that the $4 Torpedo represented as much as 50 percent of their menu mix and the Bullet has driven down the average ticket even further. Quizno's is betting on higher customer counts to increase revenue. Subway is countering by testing $4 subs in some markets.

The question franchisees in every sector are asking themselves is: where does it end? By the same token, what would have happened to franchisees had corporate marketing chose not to discount? The outcome would likely have been a further erosion of profits and even more unit closures. Fast feeders as well as convenience store retailers have been forced into pricing decisions they would have never made in a stable economy.

According to a 2009 study conducted by Dollars & Consumer Sense, branded concepts may be devaluing themselves due to discounting. When consumers were asked how they perceive a brand lowering prices, 70 percent of consumers responded, "The brand is normally overpriced."

What does this mean to c-store retailers? Here are a few suggestions to merchandise away from the discount trap and increase margins.

-- If you are going to discount an item, never consistently do so. Offer the item as a monthly promotion and run a different promotion the next month. The trap the sub market walked itself into was offering the $5 sub, month after month, until it wasn't a promotion anymore, but a customer expectation.
-- Don't forget your brand's strengths. A sub concept should promote the concept's strength which is freshness and nutrition. For example, one of Arby's goals in 2009 is to present itself as a roast beef company and not as a discounter. The fast feeder feels that it built its brand by having the dominate brand in the roast beef category with few competitors.
-- Develop new menu items from existing inventory. For example, a pizza concept can develop a sub (for example, Domino's) and a breakfast sandwich can be created from the basic ingredients on hand for lunch. New products can be priced correctly to achieve strong margins.
-- Merchandise value at a price that will drive margins. Move customers up to a higher ticket with bigger portions. Carl's Jr has achieved this with its higher end burger ($6 in some markets). McDonald's is using this pricing strategy by introducing the Angus Burger.
-- When introducing new items, only introduce them one at a time and promote that item heavily. McDonald's takes more than a year to develop a new menu item, extensively test markets the item and then finally introduces it. While no one in our industry has the logistical problems that McDonald's has, the full process should be followed.
-- Cultivate price increases by adding value to existing menu items. Burger King is testing condiment bars to add value for better pricing. Bacon, mushrooms, bleu cheese can be used to develop a burger for a higher ring.
-- Develop new revenue streams but price them correctly from the start. Use that old adage "you can always lower the price." Home replacement items and breakfast items are good examples.
-- Don't forget customers are willing to pay premium prices for healthy items. Taco Del Mar has launched a burrito made with marinated chicken, pinto beans, long-grain rice and pico de gallo.
-- Don't alter the main product offering but utilize your existing equipment and skills to develop new lines of products. KFC went to a grilled product that is really doing well. Its sales and customer counts have increased and the company is now in the healthy category.
-- Focus on demographics. Most experts agree that the Hispanic market is a huge opportunity. Higher margin pricing can be introduced with new products. It is easier to design a new item and price it correctly.

These are just a few strategies, but powerful ones. The lesson to be learned is to avoid boxing yourself into the discounting war and if you have already done so focus on merchandising your way out of the trap.
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