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The Roundup June 24

Before you give away the store, you might want to check with the franchisees who own the store.

The sit-down casual segment of the restaurant industry has traditionally competed more on advertising and location than price, but these days, the chains appear to have little choice. Consumers hurt by the recession are eating out less. So the restaurants are fighting one another for that shrinking pool of diners, using deep discounts, heavily advertised on television, to attract them. . . .

A T.G.I. Friday’s promotion in April and May offering $5 sandwiches and salads led to a small-scale revolt among franchisees. Ross Farro, who has seven T.G.I. Friday’s restaurants in Ohio and Pennsylvania, said the promotion included salads that normally sell for as much as $10 and a steak sandwich priced at $11.89 on the regular menu. The ingredients alone for each steak sandwich cost about $4, he said.

The promotion brought in a flood of customers, but Mr. Farro said he could hardly afford to feed them. Within days of the promotion’s start in late April, many franchisees began complaining to the chain’s parent company, Carlson Restaurants Worldwide.

(“,” New York Times, June 24) First, the branding worries. Most business analysts believe it is uncategorically a mistake for a major brand like TGIFriday’s or Chili’s to start competing on price. Once you lower the price, a.) you signal to the consumer that they’ve been overpaying and b.) consumers will become used to the new price point on your brand. If you’re selling $12 sandwiches for $6, that’s the price consumers will expect to pay long into the future. This ultimately led P&G to opt for only tiny price drops on “Tide Thursday” last week, when most analysts expected them to get much more aggressive on price to stave off the rapidly falling market share on many of their top-shelf brands.

Restaurants, especially in the casual dining sector, work much differently. They get most of their revenues from loyal, repeat customers who are, in fact, loyal to more than one dining option. The regular customer of Chili’s s probably also a regular customer of, say, Subway, Chipotle’s, McDonald’s, Shakey’s, and Olive Garden. The loyal Tide consumer, however, isn’t buying Tide this week and Gain three weeks later and Arm & Hammer in another four weeks. That buyer also doesn’t have the option of not buying detergent. But casual dining is a highly discretionary purchase and customer loyalty is based on what I call “the short list” of restaurant options. When a person says, “I want to eat out right now,” they then go through a series of options including not dining out. “Do I want to go McDonald’s. Nah. Chili’s. Not in the mood for Mexican. TGIFriday’s! Haven’t been there in a while, maybe I’ll go there.” It’s being on consumers’ short list of dining options that underlies most restaurant profitability.

So, during an economic contraction, restaurants must seriously consider offering discounts to stay on customers’ “short lists.” You never, ever want a customer to figure out that they have other, possibly better options. For instance, if a loyal customer, because of belt-tightening, decides to substitute fast food (or cooking at home) for going to Chili’s and discovers, to their amazement, that they like the alternative better, that’s worse news for Chili’s than aggressive discounting.

And what about the franchisees? Chain-wide discounts are just the same as any other promotion: corporate has an obligation to reimburse the franchisees, especially if the promotions force the restaurant to operate at a loss. Otherwise, it’s about the corporate parent saving the brand by throwing a certain percentage of their franchisees under the bus.


As goes California . . .

At least 19 states are still hammering out their spending plans as the recession wreaks havoc with their finances and sparks fights between governors and lawmakers. If spending plans aren’t approved, state workers may not receive their paychecks and some government offices may shut down.

(“State shutdowns loom as deadlines near,” CNN Money, June 24) More than one state is going to start shutting down and shedding blood. Top of the list are California and Pennsylvania. When they stop paying the bills, expect surprising ripples throughout the small business and entrepreneurial economy — a surprising amount of entrepreneurship and small business activity is tied to state and local governments. It will start at the local government level first — the state checks will stop coming and local government services will simply go dark, putting more than a few nonprofits and small businesses, well, out of business. And watch this space. We are preparing a special series of blogs exploring the budget crises among the states to start on June 30, when the pot starts boiling over. Watch for it.


When new media goes old media.

Meredith is launching a new magazine, Mixing Bowl, as an extension of its nascent social media site of the same name.

MixingBowl.com, an online community focused on cooking and other food topics, soft-launched in February with invites to known online “mavens” in the space. The site, part of The Meredith Women’s Network, now has 19,000 registered members and expects 180,000 unique visitors this month. It is inviting more members daily. The magazine, released Tuesday, has an initial distribution of 260,000 — all newsstand — indicating a push for an even wider audience than the site. . . .

Editorial in the magazine either comes straight from the site (as user-contributed recipes, for example) or focuses on members in other ways, like profiles and interviews. Myers noted that the audience on MixingBowl.com is younger than that of many other food magazines, and he expects the user-centric content of the magazine to engage the same young audience in print.

(“Meredith turns social site into magazine,” DM News, June 24) As old media desperately turns to new media to create online revenue streams to offset rapidly declining print sales, new media is turning to old media formats to widen its audience and make money in both venues. So what happens when old media gets taken over by new media? Content, content, content, and megatons of content, all crowd-sourced, crowd-tested, and crowd-approved to give maximum value to print customers. While all the clueless wonders at other old media shops are frantically, frenetically, and frivolously reinventing their old media product by, well, guessing.

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