Restaurant Sales and Earnings Misses Due to Marketing Miscues?

In May, a batch of disappointing restaurant sales/and/or earnings news were delivered: Wendy’s (WEN), Red Robin (RRGB) and Ruby Tuesday’s (RT). McDonald’s (MCD) did report softer April same store sales than hoped, but has not reported earnings yet.

The Wendy’s,  Red Robin and Ruby Tuesdays sales misses all seemed to be associated with marketing lower priced products that did not deliver enough customers to produce high enough same store sales. Said simply, it was hard to balance average check, customer traffic and product mix. The McDonald’s problem revolved around its “spare change” menu promotion in Australia, and the same average check weakness, but did not seem to have world-wide consequences.

Several factors underpin these results that have been known for some time:

• The positive effect of big TV driven marketing campaigns has been eroding for years.  With the rise of digital and busy lifestyles, the live TV audience has been shrinking for 14 straight quarters (per Michael Nathanson, Normura Securities).  Commercials are automatically skipped by many recording devices (see the Dish litigation).  The world is now too diverse now, where one size fits all, unlike the US suburban culture of the 1960s and 1970s when mass market TV was at its peak and restaurants penetration grew.
• At the same time, the true same store sales pops—my terminology for demonstrated marketing success, where a plus 1000 basis points positive movement in trend for more than one quarter happens—where you know it really worked, it wasn’t weather, the calendar, competitive intrusion, and it paid for the incremental media-- are exceedingly rare. Steak N Shake (BH), Dominos (DPZ) and just recently Jamba Juice (JMBA) are among the few since 2009.
• Overkill and clumped advertising. At some hours, I’ve informally polled that 40% of the total television ad plays are restaurants, and clumped together. Too many clumped commercials make for mush in the head. Late night commercials can’t practically be acted upon immediately, which the then MCD CMO, Larry Light, noted and tried to fix in 2004.
• Restaurant same store sales metrics mania:  achieving high enough or good enough same store sales is a pass/fail signal, for IPOs and earnings calls.  Its amusing now to hear pre-IPO companies referred to as a “mid single digit company”. Measuring to the same period last year is a simple analysis, but affected by so many different factors.  The unrelenting pressure to hit SSS goals, no matter what, is why so many companies go private.
• The competition doesn’t stand still.  A new burger, pizza or dish being introduced is often drowned out quickly by everyone else.

What can be done?

I’ve editorialized for a long time that an additional analytical platform other than same store sales gain from prior year is needed, helpful and doable.  Weighted moving average of a compound annual  growth, with most recent years weighted more heavily, or on a 3 year cumulative moving average basis, is very doable and make for less distortions.  A base year should be selected. In the restaurant space, perhaps 2009, the absolute valley of restaurant sales activity, might be a good jumping off point.

Analysts need to get a grip: it is not an unexpected phenomenon that customers trade down to less costly and profitable purchases when presented a desirable option. It is basic behavioral economics. Accept it, color the research report accordingly, and don’t set the target too high.  A deliberate high or lower average check strategy is not necessarily a “miscue”, especially if executed with other business plan elements.  More work on the multi-year continuing cumulative effects of low and high average check strategies is needed, particularly upon restaurant marketing and perceived quality.  

The business case should override the fiscal reporting calendar: marketing event schedules that do not exactly tie to fiscal reporting calendars and what happened last year also can make sense. You knew it got to be out of balance when, Clarence Otis (DRI CEO) apologized for “mistiming” Red Lobster and Olive Garden promotions in 2011.  

Restaurants can and should operate better, involve the franchisees (they are more margin oriented and do most of the work anyway) and be extremely careful to offer promoted deals that are too good of a deal, especially where portion sizes drive purchases. Ultimately, a robust new product concept pipeline, remodeled stores and sufficient store level cash flow to support it, and a more balanced not just TV only campaign of local store marketing, digital and social media, targeted communications and more store centric marketing, including where crew members actually communicate with customers, might be the point of self actualization.