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Discount vouchers risk cannibalising profit

Consumers are increasingly focused on ‘value’ for money. The challenge is to wean consumers off coupons, according to an analysis of the restaurant and managed pub industry by Deloitte, the business advisory firm.

The analysis shows that discount vouchers and promotional offers have been helping to shore up trade for some companies during difficult times. However, strategies that have proved successful in the downturn could still present challenges for the industry as it seeks to take advantage of improved economic conditions.

Consumers have become much more aware of, and responsive to, promotional initiatives such as discounting, coupons and value offers (‘two for one’ meals, etc), with consequent margin erosion.

Glyn Bunting, partner in the Hospitality & Leisure team at Deloitte, said: “Operators need to use such promotions wisely, to ensure that their initiatives genuinely increase sale rather than cannibalising profit margins on business they would have anyway. As the economy begins to emerge from the recession, a key challenge for operators will be to wean consumers off these discount deals. The deals clearly help to buoy up trade whilst customers focus on ‘value for money’, but continuous discounting tends to undermine long term value creation from brand building.”

The UK has suffered its worst economic slowdown in decades, and job losses, financial insecurities, turmoil across the world’s banking sector and the credit squeeze have dealt many sectors of the economy a severe blow. In addition, the licensed retail trade has also been dealing with the impact of the smoking ban, introduced two years ago.

Glyn added: “Although there have been hundreds of pub closures across the UK, pubs and restaurants that have improved their product offering have done much better than the dire predictions put forward by analysts when the smoking ban was introduced in 2007.  Deloitte analysis of like-for-like sales shows noticeable shrinkage in 2009 for the quoted pubs sector, particularly relative to the quoted restaurants sector, but with both sectors forecast to return to like-for-like sales growth by 2011.  Dining out and socialising may well be near the top of the list of activities people cut back on when times are hard, but they are the first to come back on the agenda when there is more disposable income.”

Glyn added: “The key challenges facing all businesses in the sector are how to adapt to changing lifestyles and shifts in consumer demand, how to appeal to a new generation of customer and how to bring the smoker back.”

In the current economic climate, consumers are focused on the ‘value’ of the offering, creating challenging conditions in which to grow like-for-like revenues. In the long term, however, operators will want to build a brand that stands for more than simply ‘being cheap’. Price has to be competitive, but operators still need to have a good offering and manage their operations well.  The impact of the recession on the High Street, however, means that it is now easier and cheaper for operators to get space there, to complement ‘destination leisure’ venues such as retail and leisure parks.

Jon Lake, Director in the Hospitality & Leisure team at Deloitte, concluded: “Although few things are recession-proof, we do know that people still want to eat and drink out regularly, to socialise and to celebrate. Those outlets that can offer a differentiated drinking and dining experience combined with real value for money will continue to show sustainable growth but, in the short term, it is likely that growth will be attributable to a combination of new site openings, the maturing of recently opened sites and the closure of underperforming sites.”


1 September 2009 - Felicity Murray