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Financing

Here come the restaurant discounts

IHOP and Burger King show the industry could start pushing more discounts amid a weak economy. RB’s The Bottom Line wonders if they are necessary.
IHop
Photo courtesy of IHOP

The Bottom Line

Restaurant chains are quietly pushing more discounts.

Earlier this month, Applebee’s said that it would let customers who order one of its steaks a dozen shrimp for the low price of $1. Perhaps not coincidentally, sister company IHOP on Monday announced a new “IHoppy Hour” value menu, offering various meals for $5 between 2 p.m. and 10 p.m. every day.

Not to be outdone, value royalty Burger King started pushing its own offer, a “$3 Snack Box” with a 10-piece chicken nuggets, medium fries, cheeseburger and a small soft drink. If that’s a snack I’d hate to see what a feast looks like. Wendy’s recently launched its Spicy Chicken Value Sandwich to be part of its 4-$4 value platform. And while the McDonald’s Travis Scott meal wasn’t quite marketed as such, at $6 for a full meal it was clearly a value offer—a Quarter Pounder with Cheese meal, for instance, costs $8 in Minneapolis.

Discounts are certainly understandable. The economy remains in a deep recession even if consumers aren’t necessarily spending like it is in one. And at least based on tales of long lines for food donations in various parts of the country, a large portion of the U.S. population is in need of low-priced food. The unemployment rate is still historically high at 8.4%.

Companies can be expected to push value in a situation like this, believing that a growing number of consumers are going to demand these low prices if they’re going to dine out.

“We do know that as we continue to work through this and the consumer gets a little more challenged, that value will be important,” Wendy’s CEO Todd Penegor told investors and analysts in August, according to the financial services site Sentieo.  

But discounting is dangerous, especially for chains that are still making their way through the pandemic. Many companies are facing challenging cost structures as they add new technologies or safety elements to provide consumers with some sign of faith in their offering. Giving customers a discount to come inside doesn’t necessarily help matters.

The growing number of discounts can also lead to a situation in which chains seek to one-up one another in a bid to get more attention.

What’s more, there are signs that consumers aren’t actually demanding value quite yet. A smaller percentage of customers made value orders last quarter, Penegor noted, and diners instead opted for more premium and combination products.

Subway’s controversial “$5 Footlongs When You Buy 2” promotion was also ineffective, leading the company to shift away from it quickly, though that failure might be due as much to confusion and a lack of franchisee buy-in than it was a lack of value offers.

Value will likely be important to many restaurant chains going forward, but it’s not certain yet when consumers will shift in that direction. And steep discounts that are beginning to appear could threaten industry profitability when it doesn’t need that kind of hit.

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