SONC recently announced the addition of several value items to its menu. Earlier this week, on its fiscal 1Q09 earnings call the company stated that its change in strategy is in response to the fact that in the past several months, QSR growth has come primarily from value offerings. This statement is supported by the charts below, based on NPD data, which show that QSR deal traffic growth has really picked up since early 2008 and has been steadily increasing as a percent of total traffic since mid 2007. Based on this data, it suggests that SONC’s new value focus is necessary if it wants to be successful in gaining market share in today’s environment. It will, however, drive traffic at the expense of margins (please refer to my post from yesterday titled “SONC – Management Seems Disconnected from Reality” for more details). That being said, I think it is the right move in the near-term from a competitive standpoint.
As I have said many times before, the restaurant industry is a zero sum game so if SONC’s new value offerings enable the company to increase its traffic growth, this growth will be coming from somewhere…its competitors. And, SONC said that in the 10 days since it implemented its new value menu that its comparable sales growth and traffic have turned positive. WEN has also experienced success recently with its aggressive push into the value arena with the introduction of its Double Stack Cheeseburger, Jr. Bacon Cheeseburger and Crispy Chicken Sandwich, all for $0.99. Although Wendy’s 3Q company-owned same-store sales declined 0.2%, they improved sequentially throughout the quarter and were up 2.1% and 5% in September and October, respectively, following the September introduction of these three value items. Again, with this incremental growth, WEN is stealing market share from someone. I would guess that MCD, which has posted consistently strong U.S. same-store sales growth, has the most to lose should WEN and SONC continue to experience improved traffic growth.
BKC might be another potential market share loser as the company is currently pursuing a strategy that focuses more on its premium products. BKC is not abandoning its value menu, but it is increasing its focus on innovation that will give the company more pricing power. Pricing power is by no means a bad thing and if the company is able to achieve both increased pricing power and traffic growth, then BKC will come out a winner. Based on the fact that value is the current driver of industry traffic growth, however, I don’t think this will be the case. Specifically, BKC management said on its most recent earnings call, “You have to look at value in terms of price point accessibility, which is what our value menu provides but then value for the money also comes with premium products that are on par with casual dining that are available for a fraction of the price. We work the value for the money equation on both ends of our menu. We have no plans to abate our advertising levels around the value menu but we’re going to continue to drive against higher quality and innovation which are better values for the money then one can find in casual dining as well.” I think it will be difficult for BKC to gain share from the casual dining segment right now with all of the attractive price points casual dining restaurants are currently offering. Personally, I see more value in the $5.99 burger with endless fries that is now being promoted at Ruby Tuesday’s.
Like BKC, CKR could also experience some near-term market share losses as it maintains its premium offering strategy. CKR management has said numerous times that it refuses to participate in the discounting tactics of its competitors by offering what it calls “low priced margin impairing products.” CKR is probably making the right decision for the long-term because these discounting initiatives will inevitably hurt margins. MCD has maintained its same-store sales growth with the help of its Dollar Menu, but it has also seen its U.S. restaurant margins decline for the last seven quarters. So the traffic growth versus market share tradeoff debate continues…