Why Building Your Restaurant On Price Is A Recipe for Disaster

In the Gospel of Matthew, Jesus teaches a parable comparing wise men who build their houses on solid rock to those who choose instead to build on sand. In the Bible, Jesus’s lesson is about souls and eternal life. But in a different context, the parable holds just as true for QSR brands that insist on building their houses on price. That is dangerous, shifting sand from which even the largest QSR chains cannot escape.

Case in point: last week, The Washington Post ran an article called, “The Dark Side of Your $5 Footlong: Business Owners Say It Could Bite Them” that decried Subway’s decision to bring back the $5 footlong. While Subway corporate asserts it’s a necessary move to combat flagging sales, franchisees on the front lines are screaming that deep discounts as a permanent tactic are driving them out of business. And they’re right.

While corporate sits back and manages things like menus, store design, and marketing, local operators are on the front lines trying to deliver fresh food and brand consistency, all while managing franchise fees, rent, labor, utilities, maintenance, ingredients, store maintenance, and the ever-growing customer expectation of more for less. That last one explains why corporate would saddle operators with a promotion for $5 footlongs. It says nothing for why they’re not doing more to balance sales with franchisee profitability.

THE ECONOMICS JUST DON’T WORK.

According to the article, “In California, where the minimum wage will be $11 per hour starting January 1 … labor costs are up 50 percent from 10 years ago [while] the cost of a full-price sub has risen only 20 percent.” To make matters worse, “between 2009 and 2014, the United States added nearly 18,000 fast-food restaurants, according to the Agriculture Department—growing at more than twice the rate of the population over the same period …” Add in increased competition from casual dining, food on demand services like GrubHub, and meal-in-a-box options delivered right to your door, and you can see why the Subway franchisees are so panicked.

Not one metric is breaking in their favor.

Later in the article, the author quotes Malcolm Knapp, the founder and president of an eponymous market-research firm based in New York, who said, “Chains have no other choice in this ultracompetitive environment.”  With all respect to Mr. Knapp, I disagree, just as I did in a white paper I wrote nearly 10 years ago titled, “Promoting Value vs. Offering Discounts In The Quick Serve Restaurant Category.”

In it, I pointed out that while the terms “discount” and “value” are thrown around equivocally, they aren’t the same thing at all and that whether you’re a corporate QSR exec, or a frontline franchisee, your ability to navigate the pricing/profitability waters is wholly contingent on understanding the difference.

The clear problem with discount-driven value is its perilous impact on profitability. Simply cutting the price of a product designed to be sold profitably at a higher price isn’t a sustainable long-term approach for boosting customer perceptions of value. Industry leaders agree this strategy has the capacity to boost guest counts but accomplishes this at the expense of margin performance and a weakened brand image.

Today, there are some industry leaders who are offering a modernized definition of value and value menus. It’s based on what might be called “two-way value.” It’s value that works for both the consumer and the operator in that it delivers both a favorable customer price point and a strong margin for the operator.

One solution is offering right-sized products that can be competitively priced to both entice the customer and benefit the operator (imagine an 8” sub for $4). Others are driven by true product innovation, offering new flavor profiles and putting together unique combinations that delight the consumer with something deliciously unexpected. Add to that the concept of scarcity—offering these innovations for a Limited Time Only—and not only will consumers not want to miss them, they’ll pay full price for the privilege.

Contrary to the predominant trends regarding heavy discounting, they are not the only way to go, and certainly not the preferred way. When was the last time you saw Chick Fil-A discount their sandwich? Never? They don’t have to because their product is superior and consistent and their service staff is delightful. Here in Texas, Whataburger sells their “All-Time Favorites” burgers for more than what other chains charge for their combos. They don’t hear consumers complaining about the price. You know what they hear? “If I wasn’t so full, I’d order another one. Damn, that’s a good burger.” And it is.

In my paper, I quoted former McDonald’s CEO Ed Rensi and, ten years later, I still agree with him. “Discounting as a tactic that’s event-driven is one thing,” he said. “Discounting as a strategy is something else. It’s a very bad idea because it cheapens your product and your brand.” The longer something lasts, the more people get used to it. And the more it becomes the norm, the harder it is to break.

Every day Subway reinforces the idea that their flagship product is only worth $5 in the minds of their consumers is another day they are killing their profitability and the long-term viability of the brand. It’s a race to the bottom and no matter what they do, there will always be somebody cheaper.

Just imagine if their mindset was a race to be better.

MIKE SULLIVAN is the president at LOOMIS, the country’s leading challenger brand advertising agency. For more about challenger branding, subscribe to our blog BARK! The Voice of the Underdog