Our Client’s Challenge
A major U.S. fast-casual restaurant operator with more than 400 locations was facing margin pressures.
The brand had been losing traffic for more than two years, and escalating minimum wages hit hard. To offset the related financial losses, the company increased menu prices by more than 10% (compared to an industry average of 2.3%). Price hikes had a devastating effect – loyal customers traded down, check averages remained at about $10 and each restaurant lost an average of 50 transactions per day. Overall, the brand saw an 11% decline in traffic.
RMS developed a customer-centric and long-term recovery strategy, which included item-level pricing recommendations by location.
To best understand customer buying behaviors, we conducted an extensive analysis of the operator’s unit sales and financial performance, using transaction data from the previous two years. From there, we applied our patented statistical methodologies, coupled with our industry-leading expertise, to identify locations that had lost customers due to the price increases.
We recommended price reductions and promotions on more price-sensitive items. These changes improved profitability and had a positive effect on traffic. In addition, we identified the trade relationship between specific items on the menu, to detect which prices should be increased or decreased to maximize profit.
For example, a low-margin, highly price-sensitive slice of pizza traded with a more profitable but also price-sensitive chicken sandwich. We recommended increasing the price of the pizza and lowering the price of the chicken sandwich, shifting demand toward the more profitable sandwich.
In highly sensitive locations that saw a decrease in traffic following the price increases, our recommendation translated into a small reduction in overall pricing, but a large increase in profits.
By improving their pricing methods, we helped the company achieve higher margins per transaction, an 1.5% increase in traffic, a net improvement in gross profit of just over 2 percentage points (ppt), and an average $26,000 growth of annual margin per restaurant.