Subway's $5 Price point

07/12/08 05:49AM EDT
There are significant cost pressures on the restaurant industry and its suppliers; fuel related issues, increasing labor, utility and food costs. As a result, it's very difficult for companies to maintain their current price point. If the current trends continue, it's going to weed out the marginal players from the companies with good unit economics and strong balance sheets. The strong franchise systems will gain market share. Nearly every restaurant company has been taking some price (3%-4%) to mitigate margin pressure. What happens if the industry can't raise prices anymore?

Not long ago I wrote about traffic trends on deal in the QSR industry. It turns out that Subway is seeing a lot of price elasticity to the $5 price point. The 14% increase in traffic is nothing short of remarkable in this environment.

The problem for the industry lies in the fact that nearly every competitor is copying it; not just the sandwich guys but also the burger boys. The competition is trying its version of a $5 meal because it is such a good price point in this environment. The segment that could be hurt the most is fast casual. Fast casual chains are well positioned when people have money, but now people don't want to spend $8-$9 for lunch when they can spend $5.
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