Menu Price Trends:
Food Away from Home: The CPI for Food Away from Home grew by 6.0% YoY in September 2023. This shows a consistent decrease over the last six months, marking the smallest yearly growth since December 2021.
Food at Home (Groceries): There's been a significant decline in grocery inflation, with an increase of only 2.4% YoY in September 2023. This contrasts sharply with the previous year's double-digit increases, peaking at 13.5% in August 2022.
Breakdown of the Food-away-from-home Sector:
Limited-Service Menu Prices: This segment prices increased 6.4% YoY in September 2023, a decrease from an 8.2% peak in April. This April peak was the highest 12-month gain since this data set started in 1997.
Full-Service Menu Prices: This segment saw prices increase by 5.1% over the same period. This growth is considerably slower than the 9.0% gains seen in 2022 and represents the smallest annual increase since August 2021.
CMG - Navigating the Complexities of Menu Pricing
In the current restaurant industry, price adjustments are almost as regular as LTO's. These changes often stem from factors such as inflation, rising operational costs, and the need to ensure that everyone, from the restaurant manager to the CEO, receives a bonuses. But with each price adjustment, an important question looms: is the company weighing the potential impact on customer behavior?
In 2022, CMG's comparable restaurant sales increased 8.0%. This was primarily driven by an increase in the average check by 7.1% and, to a smaller degree, a 0.9% increment in transactions. A deep dive into the average check reveals an intriguing story: a 12.0% boost from menu price hikes, somewhat offset by a decline in the check mix. This strategy wasn't limited to dine-ins. CMG also escalated its delivery prices by 17% in 2021. Chipotle has signaled intentions to increase menu prices, marking the first such move in over a year. This comes after the brand reaped benefits from its 2022 pricing strategy. The looming question is whether this decision is purely a defense against inflation.
The journey began in June 2021, when the brand increased its menu prices, citing rising wage expenses. Two more hikes followed this in the first half of 2022. By April 2022, Chipotle's prices had swelled by approximately 10%, reaching a peak increase of 15% by Q1 2023. However, the winds changed direction when the pace of restaurant spending slowed, and the costs of ingredients found some stability. Interestingly, earlier this year in April, Chipotle's CEO, Brian Niccol, commented on the robustness of the company's pricing. He indicated a temporary pause on any forthcoming price hikes. Fast forward three months, and there were hints of a possible reevaluation as year-end drew closer. Oue view has always been that they were always going to raise prices again in 2023 by 2-3%.
In essence, while price adjustments are an inherent part of the restaurant industry's fabric, it's crucial for brands like Chipotle to keep a pulse on customer sentiment. As they navigate the challenges of inflation and operational costs, the balance between profitability and customer loyalty remains paramount. Menu pricing is a delicate dance that restaurants have to master. At the heart of this CMG discussion is: "How much is too much?" Recent conversations have unveiled some key factors when deciding on what is the right amount.
CMG's CEO highlights the concept of "Competitive Positioning." By comparing their prices to similar restaurants nearby and banking on their "distinctly superior dining experience," they believe they've carved out some leeway to hike prices. The rationale? For the first half of 2022, they noticed that the "Price Elasticity" worked in their favor, with customer traffic being either steady or slightly on the rise.
Yet, there's another concept coming into play: "Anchor Pricing." Customers have a reference price - or "anchor" - they're accustomed to. If they remember paying a particular amount for a dish in the past, any significant deviation from that can trigger a reevaluation. With CMG pushing the price envelope over the years, the anchor's drift has become more noticeable. Social media is abuzz with discussions on this shift on the core products of burritos and bowls, causing some to rethink their patronage.
Consequently, this could start affecting the "Brand Perception." When diners feel the core offerings don't match their price in terms of quality, they might skip the extras or opt for cheaper alternatives. This can potentially lower the average transaction value and customer visits.
While the financials might not currently reflect this sentiment, it raises crucial questions about the "Long-Term Implications." The short-term gains in revenues and margins from price surges are evident. However, the horizon is clouded with uncertainties. Could we be witnessing a decline in customer loyalty or a drop in foot traffic? Negative word-of-mouth is a force to be reckoned with in the hospitality industry especially on social media, and it could have lasting repercussions.
In conclusion, while adjusting menu prices might seem like a straightforward strategy to boost profits, the layers of implications for brand perception and customer loyalty make it a complex decision. The future holds the answers!
Updated DPZ Thoughts
Updated trends for 4Q23 and 2024
The launch of the new loyalty program and the introduction of new product offerings like the Pepperoni Stuffed Cheesy Bread and the Emergency Pizza promotion are initiatives designed to drive sales and improve the customer experience. These moves are anticipated to heavily influence the 4Q23 numbers and possibly create a sustained impact in the subsequent quarters. The collaboration with UBER Eats is an interesting strategic move but many remain skeptical of the impact. Considering the growth and dominance of food delivery platforms, this partnership could significantly widen the customer base and improve convenience for DPZ's loyal customers. However, the real traction of this move will be more apparent as it accelerates in 2024. The reduction in the impact of pricing from about 2% to just under 1% for 4Q23 is attributed to higher redemption rates seen from the loyalty program Domino's Rewards. The increase in transactions is a positive sign, as it denotes customer engagement and trust in the brand. The challenge for carryout in comparing against the Mix & Match promo pricing from October 2022 is noteworthy. Yet, if trends remain steady, this could be a minor hurdle.
Two drivers to SSS in 4Q23 and 2024
Uber Eats Summary:
Domino's integration with Uber Eats is a strategic move to tap into a broader customer base, increase sales volume, and enhance profitability. We are optimistic about the potential outcomes of this collaboration and the eventual DASH agreement too.
Uber Eats Integration with Domino's: Objective: Domino's is actively integrating its services with the Uber Eats platform. This strategic move is part of Domino's broader initiative to tap into the growing food delivery aggregators market and cater to a wider audience.
Timeline: The company has set a clear goal to have Uber Eats handle delivery orders for all Domino's U.S. stores by the end of the current year.
Anticipated Outcomes: Incremental Delivery Volume: By joining forces with Uber Eats, Domino's expects to see an improvement in its delivery volume. This is because Uber Eats has a vast user base, and its integration can potentially introduce Domino's to customers who primarily order through the Uber Eats platform.
Market Share Growth: With this collaboration, Domino's aims to capture a larger share of the pizza delivery market. The convenience of ordering Domino's through a popular platform like Uber Eats can enhance the brand's visibility and reach.
Enhanced Profitability: The integration is not just about increasing sales but also about improving the bottom line. Domino's believes this move will create stronger economic outcomes for the company and its franchisees.
Future Expectations: While the integration is still in progress, Domino's is optimistic about its impact. The company anticipates that the benefits of this collaboration will start becoming evident in the first quarter of 2024. This suggests that they foresee a quick return on this strategic investment.
Customer Experience: One of the primary goals behind this move is to enhance the customer experience by offering delivery through Uber Eats. Domino's aims to provide a seamless and efficient delivery experience, especially to new customers who might come in through this channel. The company is also improving delivery times to ensure these new customers receive the best service possible.
Domino's "Downloads Rewards" Program
Domino's introduced its new loyalty program, "Downloads Rewards," on September 12. In summary, Domino's "Downloads Rewards" program is a strategic initiative designed to enhance customer loyalty, drive sales growth, and provide diverse redemption options to cater to different customer segments. The program's early results indicate positive engagement.
Key Features and Changes:
Reduced Spend Threshold: One of the significant changes in the program is the reduction of the spend threshold to earn points. Previously, customers had to spend $10 to earn points, but now they only need to spend $5. This change is particularly strategic for the carryout segment, where the average ticket size tends to be lower.
More Attainable Redemptions: The revamped program is designed to cater to lower-frequency customers by offering them more accessible redemption opportunities. Previously, customers had to order six times to get a free pizza. Now, the program has introduced redemption tiers at 20, 40, and 60 points, offering items from eight categories on Domino's menu.
Diverse Redemption Options: The new program allows customers to redeem their points for various items. In the past, they needed to order six times to get a free pizza. The new program features redemptions at 20, 40, and 60-point tiers and offers items from eight categories on our expansive menu. Joining pizza at the 60-point level are oven-baked sandwiches, pastas, and lava cakes; at 40-points, they feature our lines of Bread Twists and Stuffed Cheesy Bread; and at 20-points, they offer single-serve beverages, Parmesan Bread Bites, and dipping cups. So, after just two purchases, there are more items to choose from with redemption options.
Increased Engagement: Since the program's launch, there has been a noticeable increase in redemptions at the 20 and 40-point levels, indicating that customers are actively engaging with the new structure of Domino's Rewards.
Strategic Goals is to Drive Growth: The revamped loyalty program is a significant value driver for Domino's. The company aims to increase the number of active users and boost order frequency, which will help capture a larger market share in both the delivery and carryout segments.
Product and Technology Synergy: Domino's also leverages its loyalty program to promote new product launches. For instance, during the pepperoni-stuffed cheesy bread launch, the company temporarily reduced the redemption points required from 40 to 20. This strategy showcases how product and technology can be integrated to drive customer engagement and sales.
Enhance Customer Loyalty: The ultimate goal of the "Downloads Rewards" program is to foster customer loyalty. By offering a diverse range of redemption options and making it easier for customers to earn and redeem points, Domino's aims to encourage repeat purchases and enhance customer retention.
