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    Is it Time to Ditch the Discounts?

  • Some limited-service brands are dropping their discounting programs as they promote a more premium brand experience.

    Web Exclusive October 3, 2018 By Kevin Hardy
    Taco Cabana
    New customers at Taco Cabana have been more motivated by quality than discounts.

    In positioning Taco Cabana to be a more premium brand in the Mexican fast-casual category, executives knew they would alienate some of the chain’s loyal customers who were frequently motivated by promotions and coupons.

    That’s because, as it looked to offer a better taco experience, the brand decided it had to discontinue much of its discount and coupon programs.

    “We really worked to just get away from sending out those mailers like you get at Arby’s,” says Taco Cabana president Chuck Locke. “A lot of Taco Cabana’s guests would learn to live and wait for those.”

    Since Locke and Fiesta Restaurant Group president and CEO Richard Stockinger came on board in 2017, the company has improved ingredients like meats, oils, and cheeses. Locke says it’s “putting the taco back in Taco Cabana.” The brand is now concocting more composed tacos; before, many orders were for “naked tacos” that diners would later top with a sauce or salsa.

    “We really do more bundling than we do discounting,” he says. “And it’s been a hard one because we’ve lost some guests. We lose some of those old guests who want to fill their belly for $5.”

    At the same time, the company has gained new customers, he says. And those diners are more motivated by quality than deep discounts.

    Taco Cabana still offers military and first responder discounts, but other specials are more limited; the company recently offered $5 fajita meals on grandparent’s day and regularly promotes $3 margaritas on Mondays.

    Locke says moving away from deep discounting is only a small part of Taco Cabana’s wider turnaround effort, which is underway as the company celebrates its 40th anniversary this year. The brand was once known for stores with 24-hour drive-thru windows, but now many of those drive thrus have limited hours as the chain seeks to position itself above more price-minded competitors like Taco Bell and Taco Bueno. And the company is putting more emphasis on desserts and beverages.

    ­­Most Taco Cabana locations are surrounded by other quick serves, and Locke wants to see them stand out from the pack.

    “You look to the left and the right, there’s an Arby’s, a Taco Bell, a Jack in the Box,” he says. “It’s just a row of fast food and they’ve got stickers on the windows saying two for this, two for that.”

    So far, the changes appear to be working; Locke says traffic is up at the 170-unit chain. And in August, it announced it hit its first quarterly same-store sales gains since the second quarter of 2016. “It is really changing the brand, but I think we’re good. We’re seeing the traffic come around. The financials are looking strong,” he says. “This is our marching orders. We’re going to stick with it.”

    Even the world’s largest restaurant company is beginning to rethink discounting. Subway announced it would make its marquee $5 footlong promotion optional for franchisees. That special, now synonymous with the build-your-own sandwich chain, was the bane of franchisees who complained of its slim margins.

    "There are a variety of marketing tactics that operators use when they want to create a sales bump. This is just one of them. There are tools in the arsenal, whether they are relying on loyalty programs or apps or LTOs, name your program du jour.” — Leslie Kerr, president and founder of Intellaprice.

    “That’s really big, because they’ve hung their hat on that for a really long time,” says Leslie Kerr, president and founder of the restaurant pricing advisory firm Intellaprice. “It’s giving the franchisee a lot of leeway to say, ‘OK, we’re going to take the pushback and the feedback.’”

    Even as the U.S. economy expands and some chains move away from deep discounting, Kerr says, value hasn’t decreased in importance for restaurant customers. But prices and discounts are among a variety of factors—including quality and convenience—that motivate where consumers dine, she says. And operators don’t necessarily have to view ongoing value wars as a race to the bottom.

    “There are a variety of marketing tactics that operators use when they want to create a sales bump,” she says. “This is just one of them. There are tools in the arsenal, whether they are relying on loyalty programs or apps or LTOs, name your program du jour.”

    Kerr says leaning too heavily on discounts can train customers to expect deep markdowns. She says savvy operators have discounted incremental add-ons, not items that customers would ordinarily purchase regardless of price.

    “It’s really important to avoid discounts that are overly generous for items that consumers would already be buying,” Kerr says, “That’s why we see, when there are value menus, the smarter ones are about an upsell and getting guests to buy an additional item or a couple items, rather than, ‘Here you go, we’re going to give you this item you already wanted anyway and we’re going to give you a discount.’”

    As the major quick-service players continue to compete heavily with value menus, bundled pricing, and discounts, Jack in the Box has worked to avoid going too far and threatening franchisee margins. During an August quarterly earnings call, CEO Lenny Comma told analysts the company had deployed additional advertising and margin-friendly value offerings.

    “In this way, we believe we remain competitive today,” he said, “while protecting the brand's equity over the long term.”

    Comma said Jack in the Box touted some of the most favorable margins in the industry. To maintain them, the company spent an incremental $1.5 million on advertising in both the second and third quarters of 2018. Comma said that move helped avoid “the potential longer-term consequences of training customers to only come to us when we are offering an aggressive deal.”

    Jack in the Box also relied on buzzy LTOs to drive sales. Those included Sauced & Loaded Fries, a premium Cholula Buttery Jack, and a $3 bundle. Citing previous innovations with teriyaki bowls, jalapeño poppers, and tacos, Comma told investors to expect the proliferation of more “nontraditional items.”

    But the 2,241-unit Jack in the Box will be thoughtful about pricing those items. Asked about when the brand might relaunch a popular 99-cent taco deal, Comma told analysts that the company was testing several promotions. But franchisees, who are struggling against high labor costs, are wary of going too far with price deals.

    Comma advocated for a “more balanced approach than just tacos.” The company does need to establish value in the marketplace, but he believes it can do so with a continuum of prices below the $5 point.

    “So we may not ultimately get back to à la carte tacos at 99 cents,” Comma said on the call. “We may bundle them or do some other add-on-related features to the tacos to reestablish value.”