While many restaurants have rolled out substantial discounts and deals to attract inflation-weary consumers, some are trying a different strategy: introducing carefully sculpted offers to keep business flowing without training consumers to expect to regularly pay less.
Sandwich chain Potbelly in July added in most of its locations a $7.99 meal deal bundling a small sandwich, chips and a drink, for example, but diners won’t find sandwiches at around half-price as at Subway.
“A lot of times you’ll see price-pointed discounts off of existing products,” said Potbelly Chief Financial Officer Steven Cirulis. The problem with that approach is attracting enough diners to outrun the discounts, Cirulis said, noting that while prices and deals at large chains such as Subway are on his radar, the two attract different diners.
“It’s great to see brands attempting to provide customers with value, but it doesn’t necessarily compel us to then do a race to the bottom,” he said.
Among the restaurant chains more aggressively fighting it out with deals and promotions, Starbucks, Shake Shack and Sonic have bet on buy one, get one free offers, while Applebee’s is selling $1 cocktails, 50-cent boneless wings and late-night half-price appetizers.
The restaurant industry’s offerings seek to entice diners back after around three years of raising prices, and it is working for some, analysts said. Some in the industry, however, are more concerned about getting stuck with big discounts after customers get used to them.
“If some product is half-price or buy one, get one free, if that’s out in the channel long enough, that’s just what the consumer comes to expect,” said Jim Salera, an analyst at financial services firm Stephens. “You run the risk of being viewed as always on promotion, so when you go off, consumers will just shop elsewhere.”
Red Robin Gourmet Burgers is trying to mitigate that risk while still giving diners something to latch on to. The chain has more than 30 bottomless sides, drinks and desserts as well as a $10 cheeseburger combo on Tuesdays and a deal on margaritas and shakes on Mondays. But it has not offered the kind of deep discounts across the menu it did in earlier days, calling them hard to come back from.
“We’ll have some offers out there,” said CFO Todd Wilson. “But we’re going to be really thoughtful about where they live and how they live as opposed to the deep discounting, the broad blanket approach that Red Robin has used in the past.”
Potbelly prefers bundling menu items over discounts, said Cirulis. “It drives sales, it protects margins for us, and we think it protects those visits that were most vulnerable,” he said.
Cirulis noted Potbelly tested an $8.99 combo, which came with a drink and a larger sandwich, as well as a complete meal that added chips to the combo for $9.99. The $7.99 meal deal that included chips prevailed, as it appeals most to customers who eat on the premises, a group that has been more likely to eat elsewhere or cut out visits, he said.
The $7.99 offering so far is a success, Cirulis said, although it is too soon to know the full effect.
Potbelly’s same-store sales, covering stores open for 15 months or longer, rose 0.4% for the three months ended June 30, compared with 12.9% in the same period a year earlier. Store-level margins were 15.7% for the three months ended June 30, compared with 14.4% in the prior-year period.
Value is also important for fast-casual restaurant chain Portillo’s. But price is only one part of what consumers think about when considering where they spend, said finance chief Michelle Hook. They also consider portion size, ingredient quality and dining experience, the focus for the eatery chain known for Chicago-style street food such as Italian beef sandwiches, she said.
Portillo’s runs limited-time offers such as seasonal milkshakes and ran a summer promotion on hot dogs in some areas outside of its primary market in Chicago. And the chain’s menu prices are competitive, Hook said, noting customers on average spend $11 at Portillo’s restaurants.
“But we don’t believe we should be a brand that’s discounting,” she said. “I don’t think that is the right strategy.”
Portillo’s same-restaurant sales, or sales by restaurants open at least 24 full fiscal periods, decreased 0.6% in the three months ended June 30, compared with 5.9% growth in the same period a year earlier, driven by a drop in transactions, executives told analysts in August.
Investors and analysts will be looking for signs that holding back on deals is working starting early next year, when many restaurant businesses will provide guidance for the coming 12 months, Salera said.
Companies with slower growth will face pressure to consider whether discounts would help improve their fortunes, Salera added: “The longer that that is the case, if the traffic trends diverge, those questions are going to get louder and louder and more poignant to say, ‘Hey, you should really do this.’”
Write to Jennifer Williams at jennifer.williams@wsj.com