Foodservice 201: Intermediate Insights

As operators become more skilled, they can create more complex menus and pricing tiers for different menu items with different strategic roles. They can also begin to experiment more with promotions and limited-time offers to create excitement and drive volume.

THE ROLE OF FOODSERVICE

Intermediate operators are likely beginning to differentiate their offer, service and program, filling a real need in the marketplace. As the foodservice program becomes more established, there is less of a need for discounting, especially if the menu is slightly unique and differentiated from the competition. It's important to think about creating "signature" items that fill some marketplace gap and are appreciated and valued by customers, which will help drive higher retail prices and margins.

But remember that uniqueness is temporary in foodservice. Competitors will be at your heels ready to copy what you are doing, so be sure to continuously innovate the menu and focus on quality, consistent execution and customer service so you stand for more than price. It's much better to set the pace and let competitors work hard to keep up with you.

PRICE & MARGIN STRATEGY

At the intermediate level, variety and quality of the offer have likely increased, which will enable you to increase retail prices and your profits as well.

Remember to stay on top of your costs (supply costs, equipment and labor), which have likely increased as you expanded, and incorporate those increases into your pricing models. Gross margins only take your cost of goods into consideration, so be sure to focus on net margins too, which load in other costs.

The biggest challenge as your competitive set expands to include QSRs, grocery stores, drugstores and restaurants, is fighting the temptation to follow their pricing and promotions paths. "Don't get sucked into the discount-everything-game that some suppliers want you to play to move product," said Miller. "There is a fine line between too cheap and too expensive, and the risk is always being too aggressive one way or the other. Remember that when it comes to pricing, you can always adjust your pricing as long as it is in small increments. Be creative and think it through. And remember, if it always comes down to price, you need to rethink your strategy as a whole."

Some experts recommend "ladder pricing" instead of high/low promotional pricing to appeal to a wider consumer base across the menu board. Starbucks, for example, is doing well with this, offering dollar drip drinks, but selling specialty drinks for upwards of $5. "This way you cater to two different audiences without eroding margins," said Tim Powell of Technomic Inc., another member of the How To Crew.

Play with your prices in increments and measure what it does to unit volume. If volume decreases, you have increased prices too much, and conversely if volume increases very dramatically, it is likely you cut prices too deeply. Finding the right balance is the art of pricing.

PROMO STRATEGY

Promotions can play an important part in a chain's pricing strategy. When they are well planned and executed, they can create excitement, build volume, increase trial of new menu items and continue to build a foodservice image. Most experts are fans of bundling programs that cross-merchandise food and beverages, or food, salty snacks and beverages, etc., as well as rotating month-long specials and limited-time offers (LTOs).

Month-long specials might take a regular menu item and feature it at a special price, or a buy one, get a second one at a discounted price. There are many ways to structure promotions, but the best way to ensure their success is to plan them well in advance, and get suppliers involved to support the program. Make sure you have a goal for the promotion and it fits into the food-service program's overall strategy.

LTOs, on the other hand, are typically new menu innovations that operators offer for a limited time, creating excitement and volume. LTOs are also a low-risk way for operators to test new items they are considering for the regular menu. One expert said promotions and LTOs are an excellent way to fight menu fatigue.

"A good promotion is one that doesn't explicitly include price," said Powell. "Value plays — such as $4.99 combo meals or LTO iced tea for 99 cents — means that operators can work within their cost requirements to maintain margins. If a combo meal is always $4.99, it doesn't give the impression that it's only price. It speaks of value, choice and variety — and also price. A limited-time offer is great because it can rotate through and consumers know that the prices and products are temporary."

HOT TIPS

• As you increase the variety and quality of your offering, retail prices and margins should rise.
• Avoid following competitors with low-ball pricing and promotions, and stick to your strategy.
• Pricing, like marketing, is an art. Play with your prices in increments and measure what it does to unit volume.
• Promotions can play an important part in a chain's pricing strategy when they are well planned and executed.
• Limited-time offers create excitement and can be a way to test new items for regular menu consideration.