Domino’s Pizza on Tuesday said that it is bringing back its Emergency Pizza promotion, reprising the newfangled, buy-one, get-one-free offer in which all customers received a credit for a free medium pizza on their next visit.
That promotion helped propel the chain heading into this year, enabling the company to easily outdistance its competitors in the difficult pizza sector.
The chain’s performance over the past few months, including same-store sales 580 basis points better than Pizza Hut in the second quarter, is demonstrative of the reality in the restaurant industry right now: Those brands that have well-defined value propositions have been winning.
That is the conclusion from a report this week on the state of the industry from the investment banker Houlihan Lokey. Domino’s effective use of value, with a series of promotions such as discounts for student loan holders and “tips” for customers that get their own order, have helped it stand out during what has been a brutal year for the sector as a whole.
The Ann Arbor, Michigan-based chain wasn’t the only one. Cava, for instance, increased prices just 12% from 2019 to 2023, below the rate of inflation over that period and well below the 31% average price increase in the quick-service sector.
Unsurprisingly, Cava generated 14.4% same-store sales in the second quarter, including 9.5% traffic, one of the industry’s best overall performances last quarter.
Indeed, though it’s not explicitly mentioned in the report, Chili’s 14.8% same-store sales can be attributed to its ability to garner the value-seeking consumer with its $10.99 3-for-Me deal. While the promotion was, in fact, a discount, it nevertheless catered to the consumer that is looking to spend their money well.
The odd part of this year has been the loss of a value proposition at quick-service restaurants, illustrated by a Lending Tree survey showing that 80% of consumers consider fast food a “luxury.” Fast-food restaurants have long competed based on low prices and convenience. But years of price hikes have shattered that perception.
The problem for those restaurants, and the industry at large, is that wages haven’t kept pace with higher prices, leading to greater price sensitivity for consumers, the report notes.
In addition, how consumers view value has changed, or perhaps consumers have seen prices increase and are rethinking how they spend their money, at least when it comes to food.
Fast-casual brands, for the most part, have won the value game, not with price but with a consumer perception of higher quality for the price they pay.
Consumers will keep spending at brands they believe aren’t raising prices as fast as they could. But if presented with two meal options, they may be more likely to choose the one they consider a better overall value, because of quality or simply the amount of food they get, even if it costs a bit more. That certainly helped Chili’s.
The good news for restaurants, particularly fast-casual brands, is that inflation is easing, and wages are starting to catch up. The report expects those wages to catch up with inflation by the end of this year.
We’ll add that lower gas prices could also help, given their psychological impact on consumer perception of the state of gas prices.
More disposable income, and lower gas prices, could both help chains regain some of their lost customers. At the very least, that and the value offers brands have been running this year could quiet consumer concerns about menu price inflation.
That said, the industry remains intensely competitive, and that’s not changing. Restaurants continue to add more locations, meaning there are more places consumers can choose from when they’re dining out. That has squeezed some operators out of the market, leading to the rash of bankruptcy filings we’ve seen over the summer, the report notes.
But it’s also worth reminding that restaurants win—in any type of economy—when they give customers value for their spending. People may be more choosy in a time like this, but they will always put their money into a brand they believe is worth the price.