Battle for diners eats into profits

By SARAH BRIDGE FOR THE MAIL ON SUNDAY
Updated: 05:58 EST, 8 February 2009

View
comments

Getting a seat at a restaurant should be easier during harsh economic times, but instead it seems to have become more difficult in some places as the big chains resort to a range of multi-million pound giveaways in a price war aimed at luring customers back through their doors.

Offer: Chains are offering discounts to bring in the punters

But the promotional stunts - including reduced prices, two-for-one deals and free wine - could backfire because the massive cost is threatening to leave profits as flat as a pancake.

Chains such as Wagamama, PizzaExpress, Pizza Hut and Strada are attracting thousands of extra customers every week with discount offers, many of which are being downloaded from the internet in record numbers.

Restaurant analyst Peter Backman of food industry research specialist Horizon said: 'Many of the major restaurants are using special offers to compete between themselves, as well as with supermarket promotions, but some of them could be losing money hand over fist. The impact on your business could be huge. It could potentially wipe out your profits.'

As restaurants have high fixed costs and margins are tight, it did not take much to go from making money to losing it, he said.

'We estimate that discounting could hit turnover by five or ten per cent, which could take away profitability. Giving away free food is not a way to make money,' he said.

Stephen Broome, leisure and restaurant director at financial services firm PricewaterhouseCoopers, estimates that 40% of the restaurant industry - which equates to most of the major mid-market brands - is discounting food at a value running into hundreds of millions of pounds.

He said that to maintain margins, restaurants had to work hard at selling extras such as wine, side orders and desserts.

A report from PwC revealed that restaurants have been harder hit than any other part of the hospitality sector, accounting for 45% of all insolvencies in the quarter before Christmas.

Last year there was a 32% rise in the number of restaurants going bust compared with 2007 and for many chains it is a case of discount or die. 'In the last recession it was the restaurants that did promotions that maintained revenue levels or even grew,' said Broome.

'They might suffer a drop in margins or profits, but what else can you do when consumers have lost confidence? Vouchers are not going to drive greater volumes of people to eat out, but it's better for you if you get the customers rather than them going to your rival down the road.'

Money saving tips - Discount vouchers

Find out all the latest deals, discount vouchers and codes...

Duncan Jennings, founder of vouchercodes.co.uk, which lists discount offers from online businesses, said restaurant vouchers were one of its most downloaded items.

'It's been phenomenally successful,' he said. 'We have 62 different chains with thousands of restaurants across the UK on the site.

'Consumers don't want to stop eating out, but they are a lot more price conscious and vouchers have been a real marketing phenomenon over the past year.'

Pizza Hut UK serves 1.2m people every week and the chain offers discount vouchers as well as in store promotions, which have seen customer numbers rise.

Chief executive Alastair Murdoch said: 'January is always very tough and we've got to drive our turnover. Pizza Express is doing a lot of discounting with its buy one get one free deals, but it must be significantly hurting their margins. It's just not sustainable.'

Murdoch said Pizza Hut was aiming 'to move away' from offering discounts.

Miles Quest of the Restaurant Association warned that restaurants that relied heavily on promotions might find it difficult to ask for higher prices when consumers return to the High Street in greater numbers.

He said: 'It's always a problem to get prices back up once the downturn passes if people are used to paying less for their food.'