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A major U.S. fast-casual restaurant operator with more than 400 locations faced margin pressures. These were largely driven by escalating minimum wages and a decrease in customer traffic.
The brand had been losing traffic for more than two years. To offset the financial losses related to that, the company 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. Each restaurant was losing an average of 50 transactions per day.
Additionally, loyal customers’ checks stayed the same size (averaging $10). They were trading down to mid-tier burgers instead of buying the premium offerings they use to enjoy.
RMS partnered to develop 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 POS transaction data from the previous two years. From there, we applied patented statistical methodologies, coupled with our industry leading expertise, to identify locations that had lost customers due to the price increases.
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 maximize profit.
For example, if we identified that 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. This would shift demand towards the more profitable sandwich.
For the highly sensitive locations where traffic was down following the price increases, our strategy translated into a slight reduction in overall pricing, but a large increase in profits.
We successfully created higher margins per transaction while driving an increase in traffic by 1.5 percent. In total, we helped the company achieve a net improvement in gross profit of just over two percentage points (ppt). The result was $26,000 in annual margin growth per restaurant.