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From: Food Quality & Safety magazine, February/March 2006

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Don’t let Promotions and Limited Time Offers Leave a Bad Taste in the Mouths of Your Customers

by Andrew Balon

Promotions and limited time offers are key components of many restaurant chains’ strategies to grow sales and capture consumer mindshare. They increase brand awareness, drive incremental sales to existing customers, attract new customers and are often built around products that are more profitable than regular menu items. As most restaurant operators know, however, successfully managing promotions and limited time offers can be extremely challenging and involve a significant degree of risk.

So why are these programs so difficult to manage? At the heart of the problem is a lack of visibility into product movement and inventory levels in the supply chain. This often leads to costly stock-outs, overstocks and last minute product repositioning that negatively impact all parties involved - the operator, franchisees, manufacturers, distributors, and most importantly, the customer.

Compounding the immediate economic impact of stock-outs and overstocks are the longer-term risks to the quality and consistency of operator brands. Stock-outs can lead to two types of quality issues.

First, there is a quality of service issue. Restaurants can’t afford to turn away a good customer or turn off a new customer who came in specifically for that promotion. When a customer is unable to purchase a promotional menu item - that they may have made a special trip for - the experience can leave a negative impression in the customer’s mind and may even be perceived as false advertising. In the long run, stock-outs may also affect future patronage of the store; either by the same consumer or by others influenced by negative word-of-mouth.

Second, stock-outs can lead to supply chain quality issues. There is tremendous pressure at the restaurant to satisfy demand for popular promotions. This pressure can lead to several scenarios, all of which can impact the quality and consistency of the product and ultimately the operator’s brand:

  • In order to maximize the yield for a product when they are at risk for a stock-out, restaurants may try to make the product go farther by cutting down on the portion size or not including certain ingredients.
  • When there is a stock-out and the distributor substitutes the nearest equivalent, concerns arise about getting the same quality product they specified in their contract. Will it taste the same and meet the rigorous standards set out in the product development phase? Also, does the substitute product meet the same health standards of the contracted product?
  • There is even less control in a situation where a stock-out occurs and the unit goes out on its own to a local supplier to get a substitute. Once again concerns arise about whether the product is consistent with the quality standards required by that restaurant company.

Customers rely on their favorite restaurants for a consistent experience, a key driver of brand loyalty. They expect burgers to taste the same from restaurant to restaurant and when stock-outs lead to changes in the recipe formulation, it can leave customers with negative impressions that reduce brand loyalty. Similarly, when restaurants hoard products to protect against a stock-out, but then end up with an overstock, they may stretch expiration dates or increasing portion size - a customer who then eats at another restaurant and gets the correct portion may feel cheated.

Admittedly, there are varying degrees of significance for stock-outs depending on the item – whether it’s a highly visible feature item such as a protein, or something less critical such as a candy topping. For example, if you run a limited time offer on chicken tenders, stock-outs are not an option - quickly finding an appropriate substitute for something as important as chicken can be challenging and create a host of quality and health issues.

Unfortunately, even with a talented staff dedicated to matching supply and consumer demand, preventing stock-outs and overstocks is extremely difficult. The creation of accurate forecasts based on restaurant commitments is critical. However, collecting and rationalizing this information is error prone and time consuming, adversely impacting the forecasts around which operators and their supply chain partners plan promotions. During a promotion or limited time offer, ensuring supply meets demand is a task that requires collaboration amongst all of the parties in the supply chain – a difficult proposition in the foodservice industry in general, further complicated by the fact that until recently there was no effective means of supporting this collaboration. Operators and manufacturers need timely visibility into distribution center inventory levels to effectively match supply with demand, yet distributors struggle to provide this data in a cost effective and timely manner. Lack of a standard product nomenclature further complicates the issue – it’s impossible to address inventory issues in a timely manner when everyone is speaking a different language. By the time an inventory-related problem is identified, it may be too late to do anything about it.

Technology, however, is changing this dynamic. Collaborative solutions that ensure the right information reaches the right people at the right time ensure franchisees, operators, distributors, and manufacturers can make the right decisions to maximize the profitability of promotions and limited time offers and improve the consistency of product and service quality.

For a solution to be effective, it must aggregate daily inventory-levels of proprietary products across the operator’s distributor network. As inventory issues must be addressed near real time to mitigate the impact of potential problems, the daily collection of inventory level data is a mandatory aspect of a technology solution. For this same reason, another key attribute of such a system is that it must automatically standardize and translate the disparate data into meaningful information, eliminating the need for manual mapping of the data. Equally important, once the data has been standardized and translated, is that the information be presented in such a way that users can “manage by exception,” eliminating the need to pour through voluminous reports to identify an issue. Ideally, the technology should allow operators to establish inventory level thresholds and receive alerts when product levels exceed or fall below predetermined values. The solution should also allow them to work directly with distributors and manufacturers to update delivery volumes, reroute product supply, or take other actions necessary to head off costly problems.

Operators, such as International Dairy Queen, Subway’s Independent Purchasing Cooperative (IPC) and Unified Purchasing Group of Canada, maker of YUM! Brands, are leading the way to effective promotion management by leveraging technology to perform accurate promotion planning, monitor and manage inventory levels during promotions, and perform effective post-promotion analysis that improves future efforts.

Within six months of using a management solution, International Dairy Queen eliminated stock-outs of promotional products, dramatically reduced administrative costs, and realized substantial savings by reducing product obsolescence. IPC Subway has been able to enhance the profitability of promotions and limited time offers and shift their focus from managing fire drills to proactively working with their distributors and manufacturers to get the most value from their programs.

Leading foodservice companies understand both the upside and downside of promotions and limited time offers, and the importance of effectively managing these key programs. Technology is allowing these companies to increase profitability and drive brand loyalty without sacrificing product or service quality.

Jeff Smith, vice president of marketing for Instill Corp. (Redwood City, Calif.), can be reached at 650-551-5740 or jeff.smith@instill.com.

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