02/20/09 08:15AM EST
I read two articles yesterday that provided a rather conflicting picture of how casual dining companies and some QSR players are trying to gain market share in today’s environment. One was published by Nation’s Restaurant News and focused on how casual dining restaurants are offering discounts to drive traffic in this difficult environment. Specifically, the article highlights that both T.G.I. Friday’s and Ruby Tuesday launched promotions this week with coupons good for a free entrée with the purchase of another one. This is obviously not good for margins (casual dining EBIT margins on average have declined by more than 150 bps in each of the last four quarters through 3Q08), and the debate over whether discounting to drive sales is good for business in not a new one. I found this article interesting, largely because I came across it right after reading another article on that talked about how QSR players, Burger King and Jack in the Box, specifically, are currently targeting casual dining market share dollars by offering more premium products.

Although these higher priced items have the potential to boost QSR margins at a time when most QSR players are focused on discounting and promoting value, the fact that these new menu offerings are being pushed aggressively at the same time casual dining restaurants are providing “buy one get one free” coupons among its other value items leads me to believe that this might be the exact wrong time for QSR companies to focus on premium offerings. The article states that the lines between a QSR and casual dining product are starting to blur as QSR companies offer higher priced, higher quality products. This may be true, but the lines are starting to blur from a pricing standpoint as well, however, as casual dining companies desperately try to lure customers back into their restaurants. So then the question remains, where is the better value?

The article cites BKC’s CEO John Chidsey as saying “For someone who was having a premium burger at an Applebee's or a Chili's that's paying $9 to $11 dollars and can come to Burger King for a Steakhouse Extra Thick burger and pay $5 to $6 dollars, that's value to them.” Looking at both Applebee’s and Chili’s menus, I found that you can buy a hamburger for $7.49 and $6.79, respectively. You can buy Ruby Tuesday’s classic burger for only $5.99. Based on these prices, BKC’s Steakhouse burger does not seem to offer the same type of value because although people have less money to spend today, there is still value in going out to dinner, sitting down and having your food brought to you.

This QSR premium offering strategy will be made more difficult by both Wendy’s and Sonic’s recent aggressive push to drive sales with more value-priced menu items. Additionally, NPD data shows 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.

CKR is another QSR player that is trying to drive sales at higher price points. For CKR, however, this is not a new strategy. Instead, the company continues to sell premium priced items and has said it refuses to discount despite the moves by its competitors. CKR is in a different position than BKC or JACK because it is not choosing now to more aggressively push into the premium segment but is attempting to maintain and grow its share within the premium segment. For reference, Carl’s Jr.’s average check has been north of $6 since FY06 and has exceeded $7 in each of the last two quarters. Just this week, CKR said at an investor conference that its same-store sales have not held up as well as some of its competitors who have discounted more, primarily MCD, BKC and YUM, but management is working to protect both its margins and brand for the long-term.
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