Limited-time deep discounts and giveaways have become commonplace for the quick-service segment over the last 18 months. A few companies, including American Dairy Queen Corp. and Sonic Corp. have added value menus for the first time. Now, Dairy Queen is halving the price of its drinks at participating stores in a Happy Hour promotion similar to Sonic's.
Since July, Dairy Queen operators nationwide have had the option of offering the promotion, which includes half-price soft drinks, shakes and Arctic Rush frozen beverages from 2 – 4 p.m. weekdays. Some operators have elected to include Moolattes frozen blended coffees and Orange Julius brand smoothies and fruit drinks.
Lane Schmiesing, vice president, brand marketing, for Dairy Queen, said the program provided impressive results during its test phase last winter. Stores offering the afternoon half-price drinks saw a boost "in incremental traffic during the relatively underutilized daypart."
And that traffic is leading to more food sales.
"A preponderance of consumers are ordering some kind of food with the beverage, and it really depends on the occasion," Schmiesing said. For example, customers have begun to come for a late lunch or early dinner. Others are buying items such as hotdogs and chicken wraps for a mid-afternoon snack.
Schmiesing that the company is not tracking the number of markets using the program and is no longer studying results. But during the test, beverage sales were definitely up during the promotion window.
"It was very significant during that daypart as a percentage of sales," he said. "Obviously, we recognize that that's a relatively low broad dollar number, but it was a very significant double-digit increase in traffic and quantity sold during those hours."
Lower average check
As optimistic as Dairy Queen is about the Happy Hour promotion — especially with more operators likely to add it during the slower cold months — the company would do well to keep an eye on Sonic, which has had mised results with its program.
Over the last year, Sonic has heavily promoted its national Happy Hour program, which offers half-price drinks and slushes from 2 – 4 p.m. daily. Clifford Hudson, Sonic chairman and CEO, told investors on the company's recent quarterly earnings call that the promotion did bring in more traffic — allowing the company to report flat year-over-year results. He was pleased with those results, especially since many QSRs were seeing a decline in traffic.
According to The NPD Group, QSRs overall experienced a 3 percent decline in traffic for the three months ended in August. Total beverage sales at QSRs were down 1 percent for the quarter vs. last year.
Unfortunately, the increase in traffic was from price-sensitive customers interested mainly in the half-priced drinks or the company's value menu or other special-priced promotions. That led to a drop in same-store sales. For the company's fourth quarter ended Aug. 31, comps were down 4.5 percent.
Steve West, an analyst with Stifel Nicolaus, said the problems with Sonic's Happy Hour are that many customers have come only for drinks and their afternoon visits cannibalized dinner sales. "They continue to erode their check average more than what the increased traffic was bringing in," he said.
Dairy Queen's Schmiesing said the stores offering the Happy Hour program did not experience a negative impact on dinner sales from 4 p.m. on. "We've seen dinner sales grow as we've seen people come in towards the later end (of the time period) and end up making a meal out of it."
Overall beverage pricing trends
Leslie Kerr keeps her eye on the restaurant industry's beverage pricing as president of Boston-based Intellaprice, a firm that specializes in pricing, profitability, and marketing analysis. She said that QSRs adding happy hour is a clever promotion, especially since it's a concept not traditionally associated with fast food.
Other operators are tapping into the trend as well. Some Arby's markets have offered evening drink specials after 7 p.m. this year. Various bloggers have mentioned Dunkin' Donuts afternoon Happy Hour deals in a few markets as well.
But bringing in more customers just for a drink discount is not enough.
"The goal for the operators is to build enough traffic that it compensates for a loss in ticket," Kerr said.
Operators also should take the opportunity to drive trial and attract new customers. "The key there is once you drive trial, can you retain that and can you continue to operate at that same run rate of traffic that was new to your store?" she said.
QSRs have focused on luring value-sensitive customers during the recession. And half-price drink specials certainly are attractive, but deals that only draw the price-conscious customer won't bring long-term benefits. "That customer might not come back once the special's over," she said.
Still, discounting beverages has become a trend for QSRs. Kerr said she was surprised at how prices have fluctuated over the last year. While overall drink prices go up over time as a result of inflation, in the past year, prices have dropped at a number of chains.
For example, McDonald's operators have offered limited-time $1 drink specials on iced tea and on soft drinks in various markets in the past. During the past year, many markets extended those $1 specials.
Kerr said the chain currently has all its coffees available for $1 in the Boston market, which is the home market for donut and coffee chain Dunkin' Donuts.
"It's clearly to take sales and customers away from Dunkin' Donuts," she said. "They're going after them. And the question remains can they make it stick. It's never ideal to compete on price (alone)."