Promotions and limited time offers are key components of many restaurant chains’ strategies to grow sales and capture consumer mindshare. They increase brand awareness, drive incremental sales to existing customers, attract new customers and are often built around products that are more profitable than regular menu items. As most restaurant operators know, however, successfully managing promotions and limited time offers can be extremely challenging and involve a significant degree of risk.
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Explore This IssueFebruary/March 2006
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So why are these programs so difficult to manage? At the heart of the problem is a lack of visibility into product movement and inventory levels in the supply chain. This often leads to costly stock-outs, overstocks and last minute product repositioning that negatively impact all parties involved – the operator, franchisees, manufacturers, distributors, and most importantly, the customer.
Compounding the immediate economic impact of stock-outs and overstocks are the longer-term risks to the quality and consistency of operator brands. Stock-outs can lead to two types of quality issues.
First, there is a quality of service issue. Restaurants can’t afford to turn away a good customer or turn off a new customer who came in specifically for that promotion. When a customer is unable to purchase a promotional menu item – that they may have made a special trip for – the experience can leave a negative impression in the customer’s mind and may even be perceived as false advertising. In the long run, stock-outs may also affect future patronage of the store; either by the same consumer or by others influenced by negative word-of-mouth.
Second, stock-outs can lead to supply chain quality issues. There is tremendous pressure at the restaurant to satisfy demand for popular promotions. This pressure can lead to several scenarios, all of which can impact the quality and consistency of the product and ultimately the operator’s brand:
- In order to maximize the yield for a product when they are at risk for a stock-out, restaurants may try to make the product go farther by cutting down on the portion size or not including certain ingredients.
- When there is a stock-out and the distributor substitutes the nearest equivalent, concerns arise about getting the same quality product they specified in their contract. Will it taste the same and meet the rigorous standards set out in the product development phase? Also, does the substitute product meet the same health standards of the contracted product?
- There is even less control in a situation where a stock-out occurs and the unit goes out on its own to a local supplier to get a substitute. Once again concerns arise about whether the product is consistent with the quality standards required by that restaurant company.
Customers rely on their favorite restaurants for a consistent experience, a key driver of brand loyalty. They expect burgers to taste the same from restaurant to restaurant and when stock-outs lead to changes in the recipe formulation, it can leave customers with negative impressions that reduce brand loyalty. Similarly, when restaurants hoard products to protect against a stock-out, but then end up with an overstock, they may stretch expiration dates or increasing portion size – a customer who then eats at another restaurant and gets the correct portion may feel cheated.
Admittedly, there are varying degrees of significance for stock-outs depending on the item – whether it’s a highly visible feature item such as a protein, or something less critical such as a candy topping. For example, if you run a limited time offer on chicken tenders, stock-outs are not an option – quickly finding an appropriate substitute for something as important as chicken can be challenging and create a host of quality and health issues.