CAKE - MANAGING ATTRITION

In short, David Overton’s philosophy on pricing is to take it – whether you need it or not.

Specifically, yesterday he said “We found that if we just keep going up a little bit all the time, whether you need it or not, when times like this come (read significant food inflation), you're not behind the eight ball. And you don't have to have a 3% or 4% price increase.”  So, in short, the company does not think a price hike 1%-1.5% will impact consumer behavior in today’s uncertain environment.  While I can see his point, the concept must maintain its relative value over time.

What about the cumulative effects of price hikes?  The chart below shows just how much pricing cake has taken since 2007, on a consistent basis, and we overlaid the implied traffic/mix trends implied by the reported same-stores sales trends.  Looking at the chart, it’s clear that traffic/mix has declined over the past three years.  Particularly during the latter part of 2008 and in 2009, when food costs were down year-over-year and economic woes elevated the importance of relative value, CAKE experiences a precipitous decline in traffic/mix.  Clearly, we cannot conclude that that was caused entirely by the price increase but it is possible that these persistent increases – when they are not “needed” – are hurting the traffic/mix trends.  The recurring average check problem that has hampered CAKE’s top-line is a direct message from the consumer that the continuous increases in price can take the price-point to a beyond what they are willing to pay.

The history of the Cheesecake Factory is quintessentially American, it is a great concept and – on a personal level – I’m looking forward the opening of the company’s new store in the Short Hills Mall, right in my back yard.  An important component of the bull case for the stock is the ability of the company to improve average unit volumes through increased customer counts.  Currently, CAKE is producing average unit volumes of ~$9.7 million versus $11 million a few years back.

Clearly the Great Recession has impacted the concepts guest counts, but to what degree will the company be able to win back lapsed users and potential increase frequency from the core customer base?  More importantly, when are they going to visit the store?  One sign of the health of the concept is the fact that the restaurant is busy during peak meal times and generally operates with customers waiting to be seated.  In the past, CAKE has never been a “comp story” for just that reason; it’s very difficult to push more people through the peak meal periods.  Management is focusing on “shoulder” periods in an effort through get more people through the door.  Happy hour was a factor in the recent improvement in guest traffic.

What are the long-term implications of management’s pricing philosophy and the ability to attract new consumers?  Will they only come in for the latest deal at “happy hour”, or the small plates menu, which implies that the consumer likes the concept – just at a lower price?

In the current environment, with pump prices still high, many commodities and food prices still rising, and the unemployment picture still uninspiring, economic sentiment remains stagnant and consumer spending and confidence is challenged.  The debate about menu pricing and the ongoing impact on consumer behavior will continue for some time. 

CAKE - MANAGING ATTRITION - cake price traffic mix 07

Howard Penney

Managing Director