Welcome to Chopping it Up. I'm your host, Mike Hallen, the senior restaurant and food Service analyst at Bloomberg Intelligence. Today we're joined by Mark Cooperman. He's the chief operating officer of Revenue Management Solutions. Thanks for doing us, Mark, Oh, my pleasure and so it's good to see you man. It's been a while.
Absolutely.
Why don't we start out by, you know, telling the audience a bit about RMS and the service that you guys provide.
Sure, So, RMS or Revenue Management Solutions, we're a tech enabled company helping brands optimize their pricing to drive full flow through the profit of ability, while at the same time managing transactions. So we've been in business about thirty years. We work with over one hundred thousand restaurants worldwide. We collect competitive prices for over one hundred and seventy thousand
restaurants worldwide. Our business is really driven around understanding the dynamics around customer purchase behavior and whether or not future changes or what changes can be made to minimize the impact of guests, maximize flow through to the brands that we work with, and then manage those transactions over the long term. Right. We've seen over the last couple of years when you take a big price increase the impact
it can have on guests. And our focus is really on long term profitability, not necessarily meeting a quarterly goal.
Obviously a super hot topic right now. So you and the team recently did a report on quick service restaurants sales, so i'd kind of like to start out there. You know, we all know same sort of sales of jumped for most chains pretty significantly since twenty nineteen. But you know, you did some great work indexing back to twenty nineteen, which not enough analysts are doing these days, so that
was very nice to see. Can you talk a bit about the divergence between pricing and traffic over that time span and what that could mean for the QSR industry sales going forward?
Sure, So, as we look across the industry, what we've seen is that since twenty nineteen, QSR is down about twenty percent in traffic, right, and but we're still talking about positive sales, and that's really driven by a pretty significant increases an average check to the magnitude of about forty percent. Now, that's not necessarily driven across all all segments of the menu or all day parts. But on average, that's the impact that we're seeing across the industry, and
that's pretty significant. As we're going into twenty twenty four, there's a lot of weight and see and looking at competitors and really trying to understand who's that first mover, what are they going to do, and how are we going to react to that. There's no question what we're seeing is a lot of R and D around what should we do when someone makes let's say a significant value play, right, but to be the first mover on value right now? And we can talk about value and
what that means. That's where we see a lot of uncertainty going into next year.
Okay, what's the spread that you found between average check gains at takeout versus in restaurants? Right, So we'd assume that that change we're taking more on the delivery side, right, But if you could talk about that spread, I think that would be interesting.
You know, the spread that I was thinking about, you know, going into this was really about the timing of the changes that we saw across the menu. Right.
So for example, the first day part.
That was really hit was lunch okay, followed by dinner, and then what we saw in twenty twenty three was finally breakfast being touched and that had a really significant impact on traffic for breakfast. So breakfast was working, was
actually doing really well. In twenty one twenty two, really no price had been put into most systems, and then in twenty twenty three we saw a lot of price to the tune of fifty one percent relative to twenty nineteen, and so that really accelerated some of the changes that you know are impacting restaurants at breakfast. I think the channel that really stands out to me that's changed so
much as dining right that we've seen the customers. You know, what COVID did was it trained customers to use the drive through and the convenience of drive through. And while we've seen a lot of changes since COVID, that purchase behavior right of shifting back to dine in has not really happened, right, And therefore we do see the QSR picked up, and we also see that that takeout and delivery benefited from that.
Yeah, so what does this mean for store footprints?
You know, it's an interesting question in the context of existing restaurants versus future restaurants, right. You know, for existing restaurants, the opportunity right now is really taking a look at late night and drive through, right, and we'll talk a little bit about the labor model and how that relates to that day part. I think that brands are going to have to really look at what experience they want
to provide and dine in versus drive through. I think we're reaching a point here where I think in this industry we have to really go back to understanding value. Value being the relationship between the guests experience, whether it's food, speed of service, and price. And I think in dining we've lost a little of that, right, What is that
extra value associated with dining in the restaurant? I think brands are going to have to solve for that if they want to fill in guests again during that day point.
Okay, col let's get back to breakfast a little bit because that, in my opinion, that was probably the biggest surprise in the report, the fact that there was you know, massive outperformance of the breakfast day part for QSR since twenty nineteen. You know, that day part was a huge underperformer in the early days of the pandemic due to
increased telecommuting and family jains. Chains continue to underperform when we index them back to twenty nineteen, So what's kind of what's the dynamic there and kind of what's changed since the early days of the pandemic.
So you know, when we go back, obviously it makes total sense the breakfast would be hit, right, the need state for the consumer was different, right, And you know, I think that initial drop intuitively makes total sense. What makes made less sense to me when I look at the data is that we really started to see breakfast trending up in twenty twenty one, and maybe that's driven by the fact that brands were holding price on breakfast based on the fact that they were worried about guest counts.
Then when we got into twenty twenty two, we saw that traffic was basically on parody where brands were back in twenty nineteen. Okay, it's twenty twenty three, right that we're seeing the traffic is down twenty percent relative, and I really think that's driven by a lot of the price changes. It makes sense to me that brands had to touch price. You can only move so far and
get the necessary impact from breakfast. And I'm sorry, from lunch and dinner, So it was inevitable that breakfast would happen. And you know, in retrospect, one can make the argument maybe distributing price increases across more of the segments over time to ease that up, But I think it also makes sense that you wouldn't touch a segment when traffic is hurting. Yeah.
Yeah, so you answered my next question, but that that's very interesting. So you're starting to see some pushback on price, right, and it's something that we've been writing about that that you know, it was inevitable that that customers wouldn't be able to continue to pay the prices that they were seeing. You know, do you have any data on on kind of what's the dynamic here in same source of sales
like and in terms of that price pushback? You know, our customers, do you think they're going to continue to visit less you know, menu prices rolling off?
What?
What what does that mean for sales going forward? Are you seeing more check management? You know, any insight into those mew moving parts of same source sales?
Sure? So a couple of things. If we stay on breakfast and we look at some of the survey work that's been done to understand intended visitation. Right, what we see is that the intended visitation for coffee and pastry going into twenty twenty four is at its highest relative to all the other segments. So even though we see breakfast sort of hurting right now, when we look at what customers want to do, right, that is the segment where they actually want to be. So I think it's
an interesting data point. Right. On the one hand, we see the numbers, On the other hand, we look at how customers are potentially feeling. It doesn't exactly line up, right, So I don't feel like breakfast like hope is all is lost with breakfast? Right. I think some of the changes that we're seeing, unemployment holding low, right, all those factors are going to I think play into breakfast and hopefully a recovery there.
Yeah, and telecommuting isn't that quite at the levels it was a few years ago. It's still exact, so that should help too. And your note you also talked about labor a little bit. Can you talk about how that's affecting QSR traffic?
You know a couple things with labor, right, We're seeing that you know, obviously, unemployments at its lowest. Right, we're seeing that labor participation rates are almost at pre COVID levels, right. We know that, you know, when we look at who left the industry, you know, at least on the labor side, it's fifty five plus. The recovery is coming from twenty five to thirty four.
Right.
So profile of you know, the staffing, I think it has changed significantly since twenty nineteen. How does that going to play in? Well, you know, we've seen brands make significant investments in you know, technology, drive through speed of service.
I think with this younger labor force, the focus.
On operations is going to be really critical, right because at the end of the day, as prices are going up, and I was saying this before, how are we going to make this a better experience for the customer? Right?
And that change in labor and that profile means that, you.
Know, we've got a different a different set of experiences for the staff that are coming in that I think have to be addressed. Does that make sense?
Yeah, of course, We're seeing a lot of companies move on that side. You know, Starbucks is probably the biggest one, but you know Chipotle as well, Like you know, happy employees in turn, you know, create happy guests, right, and so making their jobs easier is definitely a huge point of emphasis for the companies that we cover.
And we've seen you know, we're seeing right now that you know, the the wage growth is basically in many cases outpacing the inflation that we're seeing right so net net, the sort of real disposable income for that, you know that labor force is actually positive right now, and that's that's I think really important as we're considering, you know, how we go into staffing in twenty twenty four.
Yeah, and I didn't see anything in your note, so you may not have an answer to this question, but do you have any insight into staffing at late night? You know, we've pointed that out as an opportunity in twenty twenty three for some of our companies, Jack in the Box being the primary one, but also you know, Wendy's and McDonald's, these companies that were having real difficulties staffing at that day part last year, we saw maybe
some room for improvement. And do you have any insight into that part of the day?
Yeah, absolutely so. A lot of the research that we do when we're working with brands like you're mentioning is understanding what the right hours of operation are. Okay, the benefit of being a big brand is you can look and benchmark across you know, potentially thousands of stores to answer a really important question, which is should I be open an hour more, do I have the right amount of hours? Or should I be open less? Right? And
so I think answering that question is really critical. And what we see in the industry is that typically across a brand, it's not uniform. Now, Jack maybe a little bit different with twenty four hours, but other brands, right and QSR, some are open to eleven, some are open to twelve, some are open to one. We're seeing a huge amount of opportunity dialing that in right, because that's going to be that game between labor, labor and sales.
So these large brands should really be leveraging all of this experimental data that exists, right, restaurants being opened different times that can be used to really dial in, you know, the revenue against the labor that it takes.
Great. Let's shift gears a little bit. Talk to me about strategic pricing. You know, how important is it right now to manage prices, price, product and promotions locally.
Yeah, we've definitely seen a trend away from national price point promotions, and for very good reason. You know, when a brand runs something for five dollars, let's say some type of value associated with five dollars that hits Alabama completely differently than California, right. And I understand why brands want franchisees to be on those price points, right. I mean, that's a.
Very powerful part of the marketing initiative.
But I also understand franchisees that are saying, listen, these promotions really don't support our unit economics, and so I think this moved to a more promotional strategy that's driven let's say, at a market level. I think it's a really, really big opportunity for brands. I think the challenge is, how are you communicating to your guests? Right, if you're leveraging a loyalty program or you're leveraging a way to communicate directly with your guests. That to me is the
huge opportunity in twenty twenty four. There's so much technology out there now that allows allows brands to say, mark this is the right promotion for you, right to come into the restaurant and from there, right, moving the needle to drive frequency for me or potentially the add ons and things like that. Yeah, that's where I think that the game is going to be, you know, going forward.
Yeah, so how has that impacted your pricing models over the last few years?
So as we think about our how our models have evolved, you know, over the last couple of years, one of the things that we've had to do is add a lot more variables into the model or our models in order to isolate what is actually price versus what is
all the other stuff that's taking place. Right, So that's that's been a big change for us, and it's actually really forcing us to evolve our models much more quickly than we did let's say ten years ago, right, you know, I'd say the second thing is, as we're looking at pricing models, we really have to account for competition now, right, And it's very easy for brands to say, oh, I'm going to compare this item to that item. Right. What I'm most interested in when I'm looking at competition is
really total basket associated with with what the customer is spending. So, you know, what we worry about is that we touch too many products that one customer buys and none of the products that other customers are buying, right, And finding that distribution is really critical, and that's why you have to go down to the basket level to understand it. But it can also be why we see price changes in lunch and then not price changes at dinner. Right.
There's there's a lot of different interplay we can be looking at. Do customers who shop at shop for lunch go to dinner or not. In some brands, we see it's their their their lunch customers and dinner customers, and that allows us to take two very different pricing strategies. In many cases they really overlap, and that makes it more challenging to account for making sure that you don't
have some customers that are being hit really hard. The simple example, right, is if you touch a burger and a fry, and a and a and a beverage at the same time, right, versus touching a burger, a chicken sandwich, and you know, some kind of vegetarian item. Right. It's a simplistic example, but it adds up. Right, when you put five percent into the system, it could be that some customers are expiring twenty percent. Right, So understanding the
makeup of the checks has really become important. I'd say. The last thing is that pricing has to support the initiatives of the brand. Okay, that's going to be marketing initiatives. So when we're recommending a price change, we have to know what's happening in three months, six months, twelve months, right, And does the cadence of the price change support the initiatives that are going into place? I think that's really
really critical. Same thing with operations. One of the things that we've been hearing as brands are looking at speed of service is that there are certain items that we actually don't want to promote. Right. There are items sometimes where we say, oh, we could lower price on this and drive higher margins or something, and the answer is no, we can't sell more of that.
It slows down, the slows down the drive through.
Right. So all of these factors I think need to come into play as you consider a strategy for six months, twelve months, eighteen months.
Okay. Cole and we touched on this a little bit about you know, kind of customers pushing back on the breakfast price increases this year. But you know, I guess my question is on an overall level. Are we starting to see more pushback, you know, on the price increases? Is that part of why we're seeing you know, results kind of slow here in August and September?
Yeah, I think so. I mean with the numbers that are being posted right there, I think we all expect some kind of threshold is being hit, right, or is going to be hit. The interesting thing is that brands are going to have to take more price next year. Right when we look at let's say the producer price index, right, there's no indication that the cost of goods sold they're going to go down, right. We know that wage increases are going to be taking place. So how do restaurants
deal with that? From my perspective, it really comes down to running a great restaurant, right. We sort of lose that sort of sight as we think of you know, QSR sometimes. But the truth is a great run restaurant where you increase the value of the experience of the customer, will give brands the runway to take price. Now what could that be. It could be getting more people through the drive through. It could be changing the packaging, right,
it could be changing the menu board. There's so many different ways that brands can buy themselves the opportunity for price. Where we've seen brands fail is when they say, you know what, I want to change segments, So I'm going to raise my prices twenty percent, but I'm not going to prove anything for the customer.
Right those brands, it doesn't stick.
It's the same reason why we would say if a brand, if they renovated a restaurant, that is the time to take price. Right, You've changed the value for the customer, changed the experience, and bought yourself. That opportunity sense.
Yeah, it does. It's and it's really interesting. But you know, our contention is that we could be on the early stages of a commodity bull market, and historically those last seventeen years. Man, so you might be busy for the next decade or so.
Well.
You know, it's funny because a lot of the recommendations that we make are really around Listen, you've gone far enough on this. So either we have to re engineer a product, or we have to change the packaging. Something has to change because customers are not going to give you credit anymore for this level of price for this specific product. So yeah, it's going to be a game changer, I think.
Yeah, and it's going to be interesting the next twelve months. Right, most of my companies are talking about letting a lot of price roll off.
You know.
I guess to your point you made at the top about kind of taking away and see approach, right, Like the gap between inflation in the restaurant versus a grocery store, you know, has really wide in this year, and so yeah, so uh, you know the price is going to roll off this year. But with commodity prices, you know, oil at hitting ninety five dollars, commodity prices continuing to go up. Yeah, to your point, you know, next year might be a
year to raise prices. But you know, what I've learned in this business is that the top line is where you probably gain your most margin expansion, Right, It's really about just getting more customers through the door and increasing your sales. Right. So if sale, if they can't can't figure out a way to at least keep traffic flat and boost the same store sales, it's gonna be tough to to cover these higher costs.
Well, you know, I honestly I think we're talking about isn't growing traffic as we're talking about stealing share. Okay, this is this is a year of stealing share because you know, we're not necessarily gonna I don't think that the restaurant industry is going to drive higher frequently see right as a whole. Sure, some brands can be successful to drive frequency and drive spread, but I think at you know, at a high level, what brands are going to be focused on is stealing share now in terms
of price for next year. I think, you know, brands obviously need to be cautious. They need to be looking at what everyone's doing. They need to be looking at what the environment is. But what they should not be
doing is putting the brakes on price. Okay, we've seen, you know, for many years one of the biggest mistakes that brands make is they go, Okay, it's twenty twenty four, we're not going to take any price, right, Q three rolls around or something like that, right, And the thought is we're going to make it up, and your customers
aren't giving you any credit for that. They don't remember that you haven't taken price for nine months, right, And so that slow and steady approach and coming up with the right cadence in the context of the promotions and the menu development strategy super critical next year because there's no catch up on price. Yeah. And you've mention losing guests.
Yeah, for sure. And you mentioned that that QSR customers have been more accepting on the price increases than full service. I mean it makes sense that the checks are lower and is part of that the qsr's ability to attract more higher high income consumers since the start of the pandemic.
Yeah, I think that's fair.
And we've seen a lot of We've seen a lot of.
Things over the years about the assumptions associated with high income owners. Right. One of the assumptions is, you know, we'll often hear is, oh, my high income customers are not sensitive and my low incocome customers are price sensitive. Right, And it can actually be the exact opposite. Right. If you're a low income customer and you want to go out and eat, it's possible the QSR is your only option. Right.
But if you're a casual dining customer or you're a higher income customer and you go, holy cow, I just spent twenty five dollars for two people at a QSR restaurant, I might I just will go to casual dining. They have the purchasing power to do that, right, And so that's why, you know, I'm really interested to see what's gonna happen with casual dining because I think, I think as these prices go up, I think they can steal some share from QSR, at least with the right customers.
Yeah, and so I guess on the on the opposite side of the spectrum, you know, we're starting to see more discounts. You know, to your point, nobody wants to be the first, first one out there doing it, but we're starting to see more discounts. Is that going to be an increasingly large part of the strategy to steal share over the next twelve to eighteen months.
Yeah, I can tell you that, even though you're we're not sort of seeing that first mover yet, I can tell you that people are testing. Okay, So I think the expectation is that there's going to be a value play, right, and I think brands understand that and they're to be ready for that. You know. My thought, you know, is that we use the word value in a very broad way, right, and I think we really need to talk about price value, and we need to talk about abundant value, right, and
price value I think hits a certain customer type. I think abundant value hits another customer type. And what brands need to do is find the balance between those two. And some brands may need to do only one of those and other brands do need to have something to
address both segments. Yeah, that makes sense. I mean, at the end of the day, we've seen brands put out you know, five six, seven dollars promotions, right with the thought that, oh, now I'm going to trade up someone who's coming in spending two three four dollars, And the answer is no, No, that customer comes in and is going to spend that amount of money. The idea that you would move them or change customer behavior that significantly, I think is unrealistic.
Yeah, especially with gasoline approaching four dollars again, right, that customer is on a very tight budget.
Exactly.
We've seen an interesting shift in consumer spending. You know, it looks like high income consumers are now pulling back a bit this year. Fine dining seam Star sales have been down for six months straight. And you know, I'm aware that that's also B to B spending in there, but also, high end retail sales have started to slow. You know, what can QSR chains do to continue to capitalize on a trade down from those customers?
So I guess one point i'd make is that I don't know that the data of fine dining sort of losing out is very consistent because on our side, when I look at some of the clients that we're working with, I don't think we're seeing that exact statement, right, So I think that there's I think there's some differences across the industry that are at play. Yeah, I mean, I think it really comes down to understanding the need state
of that customer. Right, what are they what are they solving for when they go to qs R versus casual dining?
Is it purely that it's convenience driven.
Or are there other factors? Because if it's not convenience driven, if it's maybe experience driven or product driven, or you know, any other factor. Until we really understand that, I don't know that that a brand is going to be able to attract that customer. Now, if you talk about a fast casual customer versus QSR, I think that's where the game is going to be, right, You know, how can
you steal steal share there. I mean if you go to if you go to a QSR brand and say, oh wow, this is expensive, and then you go to you know, Fast casual and go this is expensive. You know, what I see on the Fast casual side is a lot more managing of portions than I do on the
QSR stade right again, and that plays into value. Right, So if it's abundant value that I'm going to get from QSR that I no longer get from Fast Casual, right because they're using thirty percent less protein, the plate got smaller, right, I think that's going to be where QSR can lean into.
Yeah, it's interesting you say that. I made a comment to my son the other day. When he orders Chipotle and we pick it up or have it delivered as burrito is a lot smaller than when he actually goes to the store and has it made in front of.
Oh that's interesting. Yeah, that's super interesting.
Yeah, all right, let's get let's get into dynamic pricing a little bit. Obviously that's a hot topic. I just read an article that there was some pushback in a UK pub that raised the price of their pints by a euro during busy times. So is dynamic pricing and inevitability in the restaurant industry, and how can restaurants do it without pissing off their customers?
So I guess I have strong opinions on this subject, and that is that I in no way think this is inevitable, and we've seen a lot of cases of why that's not going to happen. To me, it's driven by the idea that hoping that you can retrain the customer in an existing restaurant is a stretch, right, and we've seen a lot of example. You just gave an example about that. Look in New York when we try to build tipping into the prices, right, this is going
to be the new prices pushback. I just don't think for an existing brand that they're going to be able to do it. The opportunity is going to be for the new brands that come in start with dynamic pricing and make that a part of the entire experience. Okay, now, let's say you have to do dynamic pricing. There's only one model in my mind, and that is full price and discounting. Full price and discounting. In the absence of that approach, I think brands are they're just going to
piss off their customers. Okay, Now if you're.
If you want me to look for where I think.
The opportunities are, Okay, If I had to do dynamic pricing, right, I would really look at, let's say, delivery charges. Okay, So I wouldn't necessarily have significant difference in prices of food, right, or I wouldn't dynamically change those, but I would change the delivery price. Why because the customer has been trained that surge is associated with the movement, right, It's not
associated with the product. It's apposiated with me going from here to there or my burger coming from there to me.
Right.
So that would be the place I would want to play in, is the delivery price. But in terms of the actual price, Hey, it's busy now, so you're gonna pay more. Yeah, that might work in restaurant and hotels. I just don't think we're there.
Yeah, I I trust your opinion. It's it's interesting when I talk to pricing experts like yourself. You know, that's that's the answer I tend to get, you know, but there's there's a lot of people really trying to push this forward. But you know, Yeah, I agree to your point. I think it's going to be very difficult to retrain customers.
Yeah, and that's why the best ways with a new concept, right, a new concept that leverages that and makes it a positive for the customer right right now, it's really I see it as a negative to the customer. Right if you told me, Hey, this restaurant that I really want to go to, it cost me fifty dollars to make a reservation. Okay, that I can kind of buy that, right, But just the idea that they're busy, so it costs
me more. It's just a hard pill to swallow. And when you say it out loud, it gets to be even harder to swallow. For sure, what I'm saying, like on paper, it makes a lot of sense. Sure the numbers look great for sure. Man.
Well listen, man, that was fun. It was great catching up up. Where can the audience go to find out more about RMS?
Yeah, so if you go to www. Dot revenuemanage dot com. Okay, you find everything about us, our approach to pricing, our approach to managing profitability, and understanding financials. It's all it's all there.
Yeah, good stuff. You work with a great team over there. Yeah. Thanks again, big thanks to the audience for tuning in. If you liked the episode, please subscribe and leave a review. Check back in a couple of weeks for a discussion with Justin Rosenberg, the founder and CEO of Honey Grow