The customer data platform built exclusively for multi-unit restaurants.
In our new 15 minute LinkedIn live series, Bikky will meet with industry executives and thought leaders to dive into the most pressing topics facing the restaurant industry.
For our first session, we spoke with Ian Courtnage, CEO of Evergreens, on the value equation for restaurants.
As we discussed in our latest QSR Burgers blog, McDonald’s has been warning for two quarters now about inflation and how eating out is becoming less attractive for consumers.
We spoke with Ian about the challenges Evergreens and the broader industry have faced over the last two years, the long-term impacts of discounting, and which levers brands can pull outside of discounting to mitigate cost pressures.
Here’s a recap of our conversation:
What has the pricing environment been like for operators over the last 24 months?
Many believed the supply chain disruptions during the pandemic were transient — that pricing would return to normal or that the rate of increases would decrease post-COVID. In reality, while supply chain disruptions have stopped to a degree, there remain significant COGS and labor pressures. For Evergreens in particular, costs for these two lines on the P&L are up anywhere from 20-40% from pre-COVID levels.
What does the term value equation actually mean?
Most people tend to reduce value to just price. We look at it more holistically, seeing it as price + offering + service. Price is just a component of value. Value involves cost, but you also need to factor in quality, speed, and convenience.
Data from Bikky shows that the average price of an entree has increased anywhere from 6% to 28% since January 2022. How do you feel about the value equation in general for the restaurant category?
Brands need to truly understand their value proposition and invest in what actually delivers value to their consumers. Some restaurants may hold hard and fast to things that actually don’t matter to the consumer because it’s how they’ve “always done business,” but today’s environment doesn’t afford that luxury. Whether limiting a side dish or a free product, this is one lever that a brand can pull to mitigate cost pressures.
What are some other levers that you’ve seen brands pull historically?
Service models are evolving. People may instinctively gravitate to what seems to be the most discreet and easiest option without thinking about the repercussions. Kiosks, for example, have implications like:
These things have very real labor-saving implications, but can destroy a value proposition by confusing both your team and your guests. If customer connection and clear expectations are priorities for a brand, going down that path can erode their value proposition without them even realizing it.
Over the last couple of years, it seems like brands have been raising prices at the margins steadily and then more aggressively depending on the individual commodities that are affecting their P&Ls.
Is raising prices just the easiest lever, the lowest common denominator, that everyone falls back on in an environment like this?
It is, for sure, and of course there’s elasticity. It’s really difficult otherwise, as you can’t go and create a bunch of labor leverage overnight without compromising speed-of-service or the quality of other factors.
Menu innovation is the other lever people tend to pull, but it can create a large distraction depending on execution, especially if a brand has a complex system where now they have to install new equipment or train their team.
Over the last couple of years, there have been brands that focus on simplicity, which is beneficial in terms of labor and efficiency, as well as brands that do things to distract from the core value proposition and chase revenue at a significant operational cost.
During Q1 earnings, we witnessed brands that raised prices aggressively warn about traffic declines and the need for value. On the flip side, we have brands like Domino’s and Texas Roadhouse that haven’t raised prices in years and are thriving in this kind of environment. Could you walk us through how discounts play into this, how heavily you lean on them, and why it’s a slippery slope?
Up until the middle of 2021, Domino’s had 41 straight quarters of same-store sales growth because they knew the game they were playing and executed it really well. Being discount and bundle-driven is a large part of Domino’s value proposition, so it’s not a new tactic for them. In fact, there’s a subset of brands that take that approach: we know who we are, we know what our value proposition is, and we’re not going to be pushed off that very much despite how the economy is performing.
However, a lot of other brands will go back to the easiest tool outside of pricing to drive volume, interest, or mindshare—that being discounting. The issue with discounting is that it’s really hard to be margin-accretive. A brand can drive a significant amount of traffic, but at what cost?
It’s a way of subsidizing the same behavior that loyalty programs and targeting can replicate. Many brands that are going very discount-heavy are doing it in mass, which helps to stay top-of-mind, but how do you stay relevant without having to give away the farm from a discounting standpoint? This obviously also depends on whether a restaurant is a premium or mass market brand and where on the spectrum it fits in terms of income and category.
I heard from a stadium operator about a clever brand that came out with a $5 beer offer and included it in a value menu with 6 items (popcorn, hot dog, etc). They marketed the menu as value-driven when half of the items had elevated prices. Because absolute price points were lower, they were able to benefit from the halo of value, despite the fact that half the menu items were more expensive.
One strategy might be to anchor to price points that aren’t new, but get credit for value because customers simply didn’t realize an item was at an appealing price point. Rather than discounting, it’s about absolute value.
When you think about value for Evergreens specifically, are you responding only to changes in the P&L? Are you overlaying it with changes in your neighborhoods in your local markets? What do you think about the tradeoff between the pressures on the P&L vs. what your peer set is doing?
Everyone is fatigued from a customer standpoint of everything getting more expensive and service quality going down. Price is a lever that Evergreens tries not to pull and, in fact, we haven’t increased prices in 18 months.
A brand’s demographics and competitive set is definitely a factor. Evergreens might be able to raise prices quite a bit given who our customers are, but we would rather not do that. There are opportunities that can be found around menu structure, new items, the labor model, and other efficiencies to generate margin rather than going to the pricing lever.
How have you changed the labor model in the last couple of years?
Quite a bit. We’re trying to find a way to carve out some additional room, and I think tenure is an important factor. If you look at our P&L today vs. pre-COVID, it’s drastically different in terms of efficiency, particularly with the labor line when you actually look at entrees per labor hour.
At the same time, we keep iterating. We don’t want to go to a model where there’s a kiosk and the customer experience is purely transactional.
Where do you see inflation and the value equation going over the next 12 months? Is it going to get better, is it going to get worse? What are your thoughts around the environment we’re heading into over the next 12 months?
For operators, it’s not going to get any easier. On the smaller end, a lot of operators will go out of business particularly within certain markets that have disproportionate labor pressure. Everyone is going to be more hesitant to hike prices because of the macro narratives.
At the same time, for those brands that are large enough, they can take a ten-year view, stick to their value propositions and avoid the temptation of flooding their menu with new products that are irrelevant or discounting heavily. For example, Domino’s can generate 41 quarters of same-store sales growth because they know their value proposition and their demographic. Those brands are the ones that are going to win on an enduring basis — it’s the Costco method vs. some of the other things that we’re seeing.
The customer data platform built exclusively for multi-unit restaurants.