How discounting has changed the face of casual dining

04 November 2010 by
How discounting has changed the face of casual dining

The culture of the discount voucher has become the bane of the casual-dining market in America, with consumers trained to seek out coupons at the expense of restaurant margins. After booming with the recession, such promotions look set to continue in the UK. Tom Vaughan looks at how much they've reshaped the casual-dining market

Discount vouchers: two seemingly very dirty words. The two-for-one, money-off, meal-deal vouchers that permeate the casual-dining sector at present are, it appears, something of a conversational taboo among the chains' marketing honchos.

Of the dozen-or-so restaurant companies asked to comment on this piece, only a handful agreed. Why the silence? Are discount vouchers really the industry's dirty laundry - unavoidable and non-airable? Could it be that the scrap of paper customers pull out pre-meal are having an effect on the industry that none of the big chains want to be held responsible for?

To properly understand the stony silence, we need to rewind two-and-a-half years to when the trend started. James Horler, the proprietor and executive chairman of 10-site group Ego Restaurants, has maintained a keen interest in the activity of major restaurant chains since leaving his position as chief executive of La Tasca in June 2007, and pinpoints the beginning of 2008 as the major starting point for discount vouchers.

"It wasn't driven by the consumers, it was driven by the financial nervousness of restaurant investors when the markets turned," he says. "People were sat there with six-, seven-, eight-times leveraged debt and needed a way of keeping the banks happy." And the result? "It worked," he continues. "If you're starting at a gross margin of 85%, you can afford to give some away. What you can't afford to do is give away sales."

In fact, it worked very well. Stephen Broome, hospitality director at consultancy PricewaterhouseCoopers, goes so far as to call them the saviour of the casual-dining market. Despite the natural reduction in margins when a chain runs a discount promotion, vouchers have been extremely popular on both sides of the shop divide. Restaurants have been able to keep attracting custom during the worst recession since the Second World War - although exact figures are hard to ascertain - while cash-strapped Joe Public has been able to eat out at up to half the price of before. Restaurant chains please the banks, customers get hefty discounts on eating out - quite the love-in.

Not all, however, are convinced. Jeremy Roberts is commercial director and co-founder at Living Ventures, which owns three brands of restaurants through the UK, and says the group has shied away from discounting for a reason. "I think vouchers are a very blunt instrument and very hard to control," he says.

Robin Rowland, chief executive officer of Yo! Sushi, is similarly unconvinced of the benefits of discounting. "We've always been shy of carpet-bombing discounts," he explains. "When we do run them they are very short term and target a specific restaurant. If you run them for longer, customers start getting a fixed price in their head of what a meal costs at your restaurant and when you stop they get bill shock. It is not, in my mind, a long-term financial equation for success."

In fact, a global look at the cost of discounting shows why many might avoid it and those peddling vouchers might not want to be drawn into a discussion on the topic. In the US, countless chains have paid the price for huge discounting campaigns, says Peter Backman, managing director of hospitality consultancy Horizons for Success. "The States has gone into discounting in a big way, particularly in their fast casual and quick-service sectors," he says. "When you go in for discounting like that, it says ‘come and eat here, it's cheap' and you don't separate yourself from the competition. As a result you lose a lot of brand identity and brand loyalty. One chain becomes much like another."

Discount coupons, as they are known out there, have become a pandemic problem. Howard Cannon is chief executive officer of the Alabama-based Restaurant Consultants of America, and has watched the problem grow over the last 15 years. "Coupons in the US started 15 years ago with pizza chains and trickled through to the rest of casual dining," he says. "These days you'd be crazy to buy a pizza without a coupon. I clearly believe the trend has backfired, the consumer is now trained to look for coupons. If you look across the board, restaurants are down in sales and getting less per menu item. It's been getting more and more difficult to make money."

Signs are growing that the British public is becoming equally as expectant of vouchers. During a fortnight in March, a survey by hospitality consultancy Horizons for Success found that 15% of the dining public used a voucher. While a report by Zolfo Cooper in May found that the number of UK consumers who were more likely to visit a restaurant if it offered a price promotion had grown by 39% over the past six months.

Discount vouchers are swiftly forming two camps among restaurant groups, says Eren Ali, managing director of Las Iguanas, who uses the sofa industry as a comparison. "Look at John Lewis, love them or loathe them, they don't discount. Then there's DFS, whose business model is built on discounting. Some restaurants are relying on selling it cheap while others are trying to create neighbourhood restaurants with that John Lewis feel - where people go even though they know they can get it cheaper elsewhere."

Those trying to invent themselves as the John Lewis of the casual-dining world will have an undeniably tricky path in front of them, but the discounting route is arguably fraught with more problems in the long term. Once on such a path, it is very hard for a chain to turn back, says Ali. "Some brands are now etched in people's minds as discounters. God help them when they want to move backwards. It will involve a lot of surgery and a lot of money to change people's mindsets."

A full-proof strategy for weaning customers off vouchers has yet to be found in the US. Horler notes that in the last two months some restaurants stateside have moved away from discounts and towards other initiatives, such as giving away holidays to customers.

Whether or not the type of deals available are altered by the big chains, the consensus is that discounting will be here to stay for the immediate future. "The end certainly won't come until consumer confidence recovers suitably and we are ready to start spending again," says Broome. "When that does happen isn't going to be any time soon. I suspect it won't be until the end of next year, maybe not until the start of the 2012 Olympics."

Over that period of time, groups are going to have to cut corners and be worse off for it. More alarmingly, the problems associated with the discount trend are not specific solely to chains indulging in the practise.

The change of business plan at discounting chains could have an effect on the whole of casual dining, says Horler. "I think we're looking at an altered model for restaurant businesses," he says. "Sales are still there but the margins are down. Once upon a time investors were looking at getting their money back relatively quickly - within three years, that's going to be four or five years now."

So, is the silence coming from the major chains a guilty one? While discounting may be a short-term solution to the problems brought on by the credit crunch and subsequent recession, it is seemingly not without longer-term consequences, not just for the restaurants practising the strategy but for the industry as a whole.

Vouchers might just be a printed-out scrap of paper for a cheap Friday night but they are drawing lines, changing customer attitudes and, maybe, even stunting growth within casual dining - and they're not finished yet.

Discounting in response to market trends isn't restricted to high street restaurants. The recent recession has shown that contract caterers are no strangers to reacting fast to tempt in the trade.

When times were tough last year, Compass responded by conducting the most comprehensive segmentation research in its history. It found that if it could offer a hot meal for £2.50, it would win back office staff customers that were heading to the high street for lunch.

Compass won the best group marketing campaign Catey for its resultant "Why Pay More?" campaign, which delivered £3m in extra sales and set the standard for value meals in the workplace.

With as many as 15% of the dining public now using discount vouchers, should independent restaurants be worried? Should they just cave in and discount, at great cost, themselves? The answer, says Peter Backman, managing director of hospitality consultancy Horizons for Success, is no.

"To simplify it, if you have a £10 menu and run 50% discounts, you will attract a crowd who don't normally eat at that price point," he says. "They will be happy to trade up but will end up pissing off the locals who have gone there for years. You'll end up with the £5-price-point customers, and when you put the menu back up you will lose those and have to rebuild from scratch."

Paul Hemming, a partner at Zolfo Cooper, urges independent restaurants to sell on their strengths. "If you are a small independent restaurant, you need to sell the chemistry of the individuals at the restaurant, the local nature, the local sourcing - things aside from price," he says.

There are, however, a few tricks that can be played, says Backman. "You can offer deals such as giving a free bottle of wine if customers dine at the restaurant a certain number of times. You can play tunes on drinks because of the high margins."

Mark Selby is the co-founder of Wahaca, which has sites in Westfield, Covent Garden and Canary Wharf - locations all heavy with mid-sector eating. When discount vouchers kicked in as the recession worsened, he resisted the urge to go into competition with neighbouring brands.

"We stood our ground and made sure we still offered quality alongside value," he says. "I think we are value for money. We are not going for the customers who want a deal but the customers who want quality."

While the money issues come into it, offering a discount would also challenge the ethic of the restaurant chain. "Our margins aren't that great as an independent as it is," he continues. "But we want to make sure we are getting people now and in the long term because they appreciate quality."

Pascal Aussignac, who runs the mid-market-priced Chip+Fish restaurant in Westfield shopping centre alongside his Michelin-starred fine-dining restaurant Club Gascon in Smithfields, says that to discount isn't even the last throw of the dice for an independent. "If the Chip+Fish concept is failing, one day I will change the concept, I will look at rebuilding it," he says. "What I will not do is water down this concept, offer a discount and alienate our customers."

"We found mass discounting a rather blunt instrument. We saw a 6% increase in sales but a net drop in profits, and it's all about the profits in my mind."
Eren Ali, managing director, Las Iguanas

"With vouchers there's always the acceptance that you won't get the full product, and that's neither good for your brand or the industry as a whole. In fact, I think they totally erode brand loyalty."
Jeremy Roberts, commercial director, Living Ventures

"In the USA, restaurants are starting to realise that, because they are all going in for discounting, it's not doing any of them any favours - it's just cutting all their margins."
The Earl of Bradford, chairman, UK and US Restaurant Associations

"Once you start discounting, when you come off that scheme your custom will fall back again. Either you accept that you are to become a low-cost pizza or pasta restaurant, and the margins that go with it, or you have to recreate yourself."
Paul Hemming, partner, Zolfo Cooper

"It is already quite clear that big groups are seeing margin erosion and a large part of that is discount costs. Long term that's going to restrain an ability to reinvest - not only in sites but in training as well."
Robin Rowland, chief executive, Yo! Sushi

"People's appetite to invest in restaurants is going to be affected. I think we'll see a lack of creativity, a lack of new brands - the only people opening restaurants will be the big groups."
James Horler, proprietor and executive chairman, Ego Restaurants

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