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Are You Training Guests to Be Cheap?

Are You Training Guests to Be Cheap?

Have you seen the latest Pizza Hut commercial? It focuses on four young guys taking advantage of the chain's Big Eat, Tiny Price Menu. Two offerings on the four-item menu are $5, while the other two are $5.99. The commercial shows the guys gleefully pigging out on stuffed pizza rolls, a calzone and pizza. Later, after one of them is presented with a check for $5, he smirks, “We just feasted for 5 bucks.” His tone suggests that they had gotten away with something. And perhaps they did.

Competition in this lousy economy is forcing chains and even independents to offer promotions that they would never have tried in the past. The winners are consumers who are getting great deals that allow them to fill up for a pittance. But in an industry that operates on the slimmest of margins, promotions like Pizza Hut's may be doing more harm than good.

According to Bob Derrington, an equity research analyst for Morgan Keegan & Co., many casual restaurant chains (including Applebee's, T.G.I. Friday's, Chili's) are offering “extremely aggressive” promotions designed to lure customers. It's led to a flea-market environment.

“Clearly, there's a risk that consumers, particularly those focused on low price points, are being trained to come to restaurants only when these promotions are offered,” he explains. “A number of big chains are willing to take that risk. They're living in the moment with the hope that down the road they'll be able to change the focus of consumers when the economy improves.”

That's no small feat. Once consumers are accustomed to paying one price for something, it's difficult to get them to pay a higher price later. Thankfully, some commodity prices have dropped since last year, which has given some chains breathing room to promote more aggressively than usual. The cost of cheese, for example, is down 50 percent from last year. Nevertheless, other costs, such as minimum wage and energy, are on the rise. As a result, same-store sales at casual dining chains in May were down nearly 7 percent from last May, and that decline will likely continue into 2010 if heavy discounting prevails, says Derrington.

Here in Cleveland, a number of independent restaurants are offering irresistable happy hour deals. Lolita, Flying Fig and Fahrenheit offer a limited $5 bar menu, while Luxe Kitchen & Lounge has 2-for-1 drinks and half-price pizzas. Seats during happy hour at these places are coveted. But, unlike the chains, deals are available only in the bar areas and last for only a few hours during weekdays. After that, prices go back up. They generate traffic and profits.

I'd like to hear from you about whether you're offering special promotions and discounts to put butts in seats during these tough times. What are you doing, and is it working? Tell me about the good, the bad and the ugly. We'll share what works and what doesn't.