Serving up profitability goes far beyond pricing.
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A major U.S. fast-casual restaurant operator with more than 400 locations contacted us asking for help, due to margin pressures largely driven by escalating minimum wages and a decrease in customer traffic.
The brand had been losing traffic for more than two years, and to offset the financial losses related to this, the business increased menu prices by more than 10 percent (compared to an industry average of 2.3 percent). These increases only made the situation worse, resulting in an 11 percent decline in traffic, with each restaurant losing an average of 50 transactions per day.
Additionally, loyal customers kept their bills the same size (averaging $10) by trading down to mid-tier burgers, instead of buying premium alternatives as previously.
The business partnered with us to develop a customer-centric and long-term recovery strategy, which included item-level pricing recommendations by location.
We conducted an extensive analysis of the operator’s unit sales and financial performance, using EPoS transaction data from the previous two years to understand customer buying behaviours. We then applied our patented statistical methodologies, coupled with our industry leading expertise, to identify the numerous locations which had lost customers as a result of the recent price increases.
In response, we uncovered opportunities for the operator to improve profitability, while generating more traffic through price reductions and promotions on more price-sensitive items. In addition, we determined the trade relationship between specific items on the menu, to see which prices should be increased or decreased in order to maximise profits.
As an example, if we identified a low-margin, highly price-sensitive slice of pizza traded with a more profitable but also price-sensitive chicken sandwich, we would recommend increasing the price of the pizza and lowering the price of the chicken sandwich, to shift demand towards the more profitable sandwich.
For the highly sensitive locations frequented less by customers following the recent price increases, our strategy translated into a slight reduction in overall pricing, however, a large increase in profits.
This was a result of creating higher margins per transaction and driving an increase in traffic by 1.5 percent. In total, we helped the operator achieve a net improvement in gross profit of just over 2 percent points (ppt), resulting in annual margin growth of $26,000 per restaurant.