Shrinking Menu Trends

Acceleration of Menu Declines

  • It can be hard for operators to remove menu items once they have been added. While there are some items that may only sell a few units per day, some operators get concerned about losing even a few customers in a hyper-competitive operating environment.
  • Menu creep adds to operational complexity and marketing dilution. Make line staff are usually not efficient with the assembly of these products and there tends to be higher waste with ingredients that are particular to these products because of insufficient order frequency.
  • The trend has been to reduce core menu size over time as the bar for service levels has steadily increased and the lock-down has certainly accelerated this trend as many chains migrated to limited off-premise menus which often proved to be quite profitable given the associated labor savings.
  • The question remains how many items post-lock-down will eventually return now that the notion that profits may actually increase with a more focused menu strategy has been reinforced.

Larger Menus Could Benefit the Most from Reductions

  • The chart below provides a pretty good idea of which segments have the most room for menu item reductions.

Operational Complexity also Driven by LTOs

  • Operational complexity is not just a function of core menu creep, but also a function of promotional layers & frequency.
  • While new product news can help drive traffic, it must be balanced with efforts to simplify operations.
  • LTO overload is not only bad for employees, but like core menu creep, it also adds to marketing dilution.

Operational Complexity = Core Menu Creep + LTO Pace

  • Taken together, we can see from the chart below that the QSR segment has been doing a good job of reducing overall menu complexity.

  • Starting from a less efficient position, the FSR segment is also making good progress towards simplifying operations as evident below.

Using Stocks to Gauge Recovery

  • While we have come a long way from the bottom, there is still a long way to go and as of mid-day 6/12/20, the median restaurant stock is still -37% off its 52 week high.
  • In any case, investors who had the temerity to buy close to the bottom could have made a fortune if they held on.
  • Re-visiting 52 week highs will probably require more confidence that there will not be another lock-down and that consumers will fully recover both confidence & buying power.

Domino’s – RR Executive Summary

Domino’s is very well situated as the largest US pizza chain (#1 delivery & #2 carryout sales dollars) with a 38% domestic share among the top 4 players. Its brand positioning emphasizes leading-edge, digital ordering convenience/speed and seamless payments as opposed to “flavor-of-the-month” LTOs. The brand’s reputation as a delivery leader is reinforced by efforts to promote tech solutions to speed/improve delivery (like GPS tracking, expansion of its AnyWare order platforms & automated delivery cars). Pizza represents perhaps the best value in QSR as an affordable treat for families/larger groups with per person pricing ~$3 each and Domino’s believes that its scale fuels its value leadership. Thus, the brand’s everyday value positioning is centric with long-running everyday deals (price certainty) at $5.99 & $7.99. Affordable delivery charges are also centric and Domino’s delivery infrastructure costs are much lower than DSP platforms with its “fortressing” market fill-in strategy helping to further lower delivery costs while also improving speeds. Domino’s believes it stands to benefit when economic realities force DSP delivery subsidies to end. The chain’s fortressing strategy also helps drive incremental carryout sales by adding convenience to better address the largest segment of the pizza industry. Notably, Domino’s impressive 70% – 75% digital sale mix drives higher group checks with its check also benefiting from add-on sales enabled by its broad menu (salads, chicken, stuffed cheesy bread & desserts). Having said all this, delivery is a challenging business given increased competition from DSPs which extend the reach of new competitors (including smaller pizza chains) that previously did not offer delivery. In turn, the DSPs are driving-up delivery labor costs and creating a short-fall of delivery drivers. This creates an impetus for Domino’s to emphasize carryout, a line of business that it is less well known for (remembering Domino’s delivers core equity). In conclusion, while it is our opinion that Domino’s is doing a great job in strategy and execution, its competitive bar is certainly the highest ever with much resting on what the DSPs do about their delivery charge pricing over the long-term.

 

RR Doing It’s Part

For the last 6 years, RR has been donating 1% of its top-line to fund scholarships for kids desiring to attend private schools in Bridgeport, CT.