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Discounting's Downside
By Marc Tracy
For as long as we can remember, we've been saying that discounting is an absolutely essential part of a recession-survival strategy. Does it cut your profit margins? Sure. But profit margins aren't worth the paper you calculate them on if you don't actually sell what you're trying to sell, and in tough times discounting is the only way to make sure that you are.
But is there too much of a good thing--in this case, discounting? The New York Times examines the predicament that many chain restaurants--which, on an individual level, tend to be owned by small franchisees, not big corporations--find themselves in as they have drastically cut prices amid the lower spending climate and the pricing war it has sparked. Get dinner for 2 for $20 at Applebee's; 2 entrees for the price of one at Ruby Tuesday and $6 entrees at Chili's.
The problem, according to some, isn't that the discounting is too drastic and is therefore destroying current profit margins. (Some franchisees have complained about this, too). The way we see it, you need less money to get by right now, as everything is cheaper; and besides, profit margins used to be incredibly high, and you're still making a ton of profit, if you're one of these restaurants, off of things like drinks (soft and especially hard). Besides, in good and lean times alike, great deals can be counted on to get more people in the door, where they will invariably proceed to purchase non-discounted items along with discounted ones. So for the time being, we suspect that you can get away with such sharp discounting, and that it may even be a wise strategy.
But "for the time being" is the key. The concern, according to the Times, is that the discounting now will leave these restaurants in an extremely unfavorable position after the recession abates. Now that prices are low, the thinking goes, it's going to be that much more difficult to bring them back up once a post-recession economic climate justifies and even requires doing so. On top of that, there is the legitimate worry that the discounting will do serious damage to these institutions' brands. If Chili's entrees can be sold, even at a discount, for only $7, then what does that say about Chili's quality? (Or any of the others? We have no specific beef with Chili's!)
The article is illuminating on its own terms, but it also opens up onto a much broader and more important subject: the fact that, even as you struggle to survive the lingering recession, it is time to start thinking about how you are going to proceed and get back to business as usual as the recession (slowly) fades away. We talk about this a lot when we talk about trying to avoid laying off employees. But this dynamic is relevant to all facets of your business. It is increasingly something you need to keep at the top of your agenda.
Comments (0)June 25, 2009 11:54 AM
