How do you explain a menu pricing strategy where discount meals complete with appetizers are offered up on the cheap, while at the same time, lunch entrées have been bumped up almost a dollar versus last year?
“In a recession when restaurant customers are perceived to be worried about high prices,” says pricing consultant Leslie Kerr, “you might guess that price increases on entrées would be minimal. And you’d be wrong.”
“What we’re seeing instead is the classic loss leader pricing strategy,” says the founder of Intellaprice, a pricing firm in Boston. A loss leader is a heavily discounted product designed to bring customers through the door, like a dollar double cheeseburger, for example. As long as customers also buy a drink and fries, or bring along friends who order more profitable meals, the loss is offset.
“At casual dining chains, the major players are advertising great deals such as dinner for two for $20 to pull in customers, but once folks show up, they’re hoping there’s a subset who decide, ‘I don’t need dessert, I’ll just get a regular entrée.’ Your higher-value customer may well be spending less than most of the others at the table, and might even feel virtuous. In the meantime, the spike in her entrée price is less noticeable.”
Intellaprice’s 2010 study, conducted in August and September, includes prices for nearly 12,000 beverages and 14,000 food items from casual dining brands in 21 markets nationwide. According to Intellaprice’s research, lunch entrées are up by $.93, dinner entrées rose by $.72, and kids entrées spiked by $.30.
If you want to save money, according to the study’s findings, draft beer is your best bet, followed by dessert, though this is not a good lunch strategy unless you’re a character on the show Mad Men. Intellaprice found that domestic and imported drafts were down by $.08 and $.11 respectively. Bottled beer and cocktail prices are up.
According to the study, prices have increased across most menu categories versus 2009. The only categories showing price decreases are add-ons and desserts — entrées, side items, and appetizers are all up.
“There’s no question that deals are still the top means of luring guests in,” Kerr said. “You may see price promotions on TV, but the overall menu tells another story: the need to cover costs through price increases.”
One might wonder if the increase in entrée pricing is just a sign of good things to come in the American economy. Perhaps at the tail end of the recession the American people are starting to spend more on food before they loosen up the purse strings on other items like computers and clothes?
Unfortunately not, says Kerr. The restaurant industry generally lags the economy, so rather than the rise in entrée pricing signaling good news, it’s more an indication of management doing what it feels is necessary to maintain profits.
“The goal of the discount meal deals you see on TV is to increase customer traffic. But we’ve seen some brands report that their profit suffers because of the deep discounting — traffic is up, but average spending per meal goes down. The restaurants need to do what they can to offset the profit loss from discounts.”
Intellaprice’s casual dining study, in its fourth year, tracks prices of all menu items. Other findings show that among chains surveyed, New York boasts the most expensive dinner entrées, at $15.01, while Los Angeles lunch entrées are priced highest at $9.27 on average.
Bar Beverage Prices Up Nearly 3%
Alcoholic beverage prices rose less than entrées, according to Intellaprice’s study. “This year, increases of more than $.20 on cocktails are rare,” she said, explaining that “the one exception was Sangria, which was up on average by $.46.” Though the $.19 average increase on drinks may seem low, Kerr explained that it’s based on a lower average price of $5.86 in 2009 that rose to $6.05 in 2010.
“Traditionally, a high portion of restaurants’ profits come from the bar, and beer prices show the most conservative change. Our research shows that on average, draft beers are down compared to last year for domestic and imported brands, while bottled beers are up slightly.” The study found domestic and imported drafts were down by $.08 and $.10, respectively, while bottled counterparts were up $.04 and $.08.
Average Casual Dining Prices
|Domestic Beer – Draft||$3.66||$3.58|
|Import Beer – Draft||$4.74||$4.64|
|Domestic Beer – Bottle||$3.69||$3.73|
|Domestic Beer – Draft||$3.66||$3.58|
Intellaprice is a full-service pricing intelligence firm serving the restaurant and beverage industries. Intellaprice publishes the Intellaprice Report, which is syndicated pricing intelligence on quick service and casual dining segments. Intellaprice specializes in pricing, profitability, and marketing analysis to help organizations increase sales, grow profit, and reduce competitive intelligence costs. Intellaprice was founded by restaurant industry veteran Leslie Kerr and is based in Boston. For more information visit www.intellaprice.com.