Are Discounts and Freebies Doing Franchise Owners More Harm Than Good?

Posted by: Nick Leiber on August 04, 2009

This is a post by guest blogger Don Sniegowski, the founding editor of the daily franchise news site BlueMauMau.

donsniegowski.jpg

McDonald’s just wrapped up its weeks-long campaign of offering free mocha on Mondays as an introduction to its new line of high value coffee at low prices. One of the largest franchise chains in the world, it used the free Mocha Monday strategy to help pull market share away from competitors Dunkin’ Donuts, Starbucks, and other chains.

But what do these price wars mean to the average franchise owner-operator? Franchisors typically take as their royalty a fixed percentage from a franchise’s top-line revenues—whether or not the franchisee is making a profit. It is franchise owners who take the brunt of the burden of lowered profits, or often, losses, for discounted products.

Franchise owners can become quite upset when they are faced with one discount after another. One Quiznos franchisee anonymously complained that he had not received a single reimbursement on a series of heavily discounted toasted sub sandwiches, saying “This company never saw a discount it didn’t like. Those great discounts are financed solely by the franchisees.”

Brands such as Burger King, McDonald’s, Quiznos, Subway, Popeyes, and KFC have recently found themselves working to restore the delicate balance between the franchisor’s need to drive traffic and the franchisee’s need to protect margins.

Darren Tristano, Executive Vice President at Technomic, Inc., a consulting and research firm for the restaurant industry, understands the heavy toll the discounts are having on franchise owner-operators. But he admonishes franchisees to be more understanding.

“Discounting and low price promotions are designed to appeal to ‘value seekers’ and drive traffic to restaurants. It is the responsibility at the unit level to up-sell and increase the check average through upgrades, limited-time offers, and specialty beverages and desserts. Today, restaurateurs should be focused on driving patrons through the doors any way possible!”

But in a recent Marketplace interview, psychology and business professor Kit Yarrow of Golden Gate University asserts that consumers have reached a point in which discount strategies are now so typical that they are no longer bringing in more customers. Worse yet, she says consumers are expecting the lowered prices to remain.

Listen to the interview below.

Tristano affirms that observation. “Consumers have gone from discounting to now expecting low prices with high value every day,” he says. “It’s going to be difficult to pull consumers back to the old norm.”

But Professor Yarrow says that offering free products still works for bringing in lots of customers. The big question is, will it increase market share in the long term?

Nelson Marchioli, Denny’s CEO, was enthusiastic at the end of the day of the chain’s free Grand Slam breakfast promotion back in February, saying, “We were hoping to reconnect with millions of Americans today … and we did. This Free Slam Day has exceeded our expectations in every way.”

Did Denny’s increase its repeat customer base through free breakfasts? The company was asked, but no reply was received by the time this blog was posted. Update: Denny’s did reply via email but its response went into my spam folder. Here is the response from John Dillon, Denny’s vice president of marketing, who says that February’s free offer did indeed grow its customer base. “We brought in 2 million guests into our restaurants that day, many of which hadn’t been to Denny’s for a number of years,” Dillon writes. “Our research showed 97% of guests that day were extremely or very happy with their experience, and an incredible 95% said they would return.”

Dillon emphasizes why this particular free give-away meal was successful: “Brands can’t just slap events like this together. We had a strategy, we had a big stage, we had strong execution, and importantly we had incredible partnership with our franchise partners. The key with promotions like our Grand Slam Giveaway are to do them for the right strategic reasons, not just to do them. In our case, we were really the first to do something like this - a totally FREE, full meal giveaway - on this grand of a stage, the Super Bowl. We had something to say, we had an aggressive offer, we communicated and partnered with our franchisees to work through all the questions and make it even better. We listened and responded to a lot of franchisee feedback both before, during and after the event, and we were prepared for anything that happened.”

What are results of McDonald’s free mocha campaign? A corporate spokesperson says that the burger giant has seen incredible buzz, as judged through postings on social media sites like Twitter. “Although we don’t release sales data,” the spokesperson says, “we believe sampling is a great way to give our customers a taste of the new McCafé coffees.”

Denny’s now seems to be avoiding discounting and free menu items. Instead it is focusing on less expensive, smaller portions, such as the Moons over My Hammy breakfast, downsized meatloaf, and All Nighter snacks starting at $2.99.

Caution in discounting is the word, not only because it can devastate franchise owners, but it also can hurt the brand.

Says Steve McKee, president of McKee Wallwork Cleveland Advertising, author of When Growth Stalls, and longtime BusinessWeek columnist: “Generally speaking, discounting is like a drug—it makes you feel great at first, but before you know it you’re hooked and can’t get by without a fix. And the buzz is harder to achieve every time you do it.”

Don Sniegowski is the founder and editor of Blue MauMau, a daily business news site for franchise buyers and owner-operators. Previously, he led global field operations and franchise development for a quick-print franchising firm. Sniegowski also helped lead global publishing efforts for trade publisher Global Sources Media and led Asia-Pacific retail and operations for Franklin Covey.

Reader Comments

Barbara Jorgensen

August 5, 2009 06:48 PM

I believe discounting will bring alot of new people. Due to the recession there are alot of people seeking discounts or a freebie. I just saw a young lady on You tube telling people how to look for freebies and discounts and make it a way of living doing so.
Everyone loves a good deal. When you are the business owner it could hurt your bottom line. The problem is people expect to pay the lower prices all the time.
I know when we had a fitness business the biggest mistake we did was offer a discount if they paid for a year. I believe it hurt us in the long run. Half the club paid the discounted price. It is better to have people pay month to month for a year than a one time payment.
I also have experience in the hospitality business and whenever we discounted something people got upset when it went back to normal prices.
I believe the only way to insure consistancy is great customer service and making each customer feel important. The truth is each customer that walks through the front door is important.

Domenick Celentano

August 6, 2009 08:50 AM

Its not just frahcisees... it is the entire retail sector that is grappling with this...


The big issue for consumers today is affordability. So rather than looking at giveaways or price reductions, smart brands are trying to develop offerings that are affordable. Consumer shopping habits are changing and maybe for the most part, permanently. If pricing can be positioned as affordable, brand erosion should be minimal.

Information Resources Inc. has done several studies on affordability and they are available for download at their site...
http://us.infores.com/Insights/ArticleDetail/tabid/117/ItemID/868/View/Details/Default.aspx


We may find that the consumer will view value differently and those that address this will prosper.

Regarding giveaways... that is really sampling.

PromoWorks recently released a study of in-store sampling. Although it was retail focused, I beleive the same applies to foodservice. Here is the top line... it has tremdendous short and long term effects! An excerpt...


In-store sampling drives additional repeat purchase. The average cumulative first repeat purchase for sampled products was +11% and +6% for the brand franchise over a 20 week period.

In-store sampling drives sales for existing products and line extensions. The sales lift for the existing product sampled was +177% for day of event and +57% after a 20 week period. The sales lift for the line extension product sampled was +919% for day of event and +107% after a 20 week period.

In-store sampling drives brand franchise trial and sales. The sampling was found to have a significant impact for the parent brand of the sampled products with +107% average sales lift on the day of event and +21% average sales lift after a 20 week period. The average cumulative trial for the brand franchise was +19% over a 20 week period.

Your readers can find the entire story plus a link to the research at:

http://www.promoworks.com/downloads/09_PromoWorks_ISMI_Research_Report_Final.pdf

Domenick Celentano
Silberman College of Business
Fairleigh Dickinson University

michael webster

August 6, 2009 09:57 AM

If you look at the promoworks data collection, you will see that they are tracking through loyalty cards and not POS data.

So, the effect is confined to already loyal shoppers and not the people who were attracted to the discounts.

Discounting may fail, when a similar loyalty program may work.

Becky Duncan, Graduate Student, Fairleigh Dickinson University

August 6, 2009 02:15 PM

I think in the current retail world with Wal-Mart in the lead, companies are forced to meet the new expectations consumers have grown used to with the "Always low prices" "Every Day Value" slogans thrown at us left and right. Low prices are simply expected nowadays, great economy or bad economy.

In regards to the McDonald's promotion of the coffee and Denny's free meal - I think this is a great idea for American based companies to regain traction with consumers vs foreign competitors. Also, while some consumers may have "grown up" with these companies, and haven't been back in a while, offering a promotion like this will get consumers back in the door, that may otherwise not have come back. Maybe once they experience the "new and improved" version of these companies instead of their memory of what it used to be like, they'll go back.

Domenick Celentano

August 7, 2009 09:29 AM

PromoWorks used frequent shopper data since that was the most empirical data available... it is not a huge leap to assume that the behavior they tracked filtered into the non loyalty shopper crowd. Many supermarkets have a vast % of their customers on loyalty cards... so I still stand by the data.

Consumers are redefining value and affordability. If businessed try to buck that trend... they will either fail or will not scale beyond where they are today.

Walmar, Target, Trader Joes... they are hear to stay for a while... so small to medium size businesses had better figure out how to address their business model for survival or growth.


Domenick Celentano
Silberman College of Business
Fairleigh Dickinson University

Post a comment

 

About

What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

BW Mall - Sponsored Links

Buy a link now!