Article
How soda pricing is affecting QSR sales
Coca-Cola study finds increases in price have affected total check average.
June 28, 2009
Quick-service operators have long believed fountain beverages were insensitive to price increases. But a study commissioned last summer by Coca-Cola FoodService finds that is no longer the case.
Historically one of the most profitable items on the menu, fountain drinks have taken a hit as consumers have taken notice of the continuing price hikes — and made steps to manage their check, the study found. Coca-Cola FoodService, the restaurant and hospitality industry division for the beverage company, commissioned the study to learn what was behind the slow but steady decline of fountain beverage purchases at QSRs over the last few years. First, the company's strategy development team looked at industry data and found that consumers were apparently no longer satisfied with the drinks' value proposition. For example, from 2005 to mid-2008, fountain beverage prices increased 20 percent while the combined average menu price for fountain drinks, burgers and fries went up only 17 percent. In contrast, the average customer check went up 7 percent in that time. "That rang a bell with us," said Chris Startt, senior manager of strategy development for Coca-Cola. The company "realized consumers are taking steps to manage their check." Startt said that in 2008 the declining value proposition was compounded by the economic recession. As the fountain price exceeded the price point they had in mind, consumers increasingly cut beverages from their order. Some went elsewhere for their beverages while others opted for tap water.
The price hikes occurred, he said, as operators reacted to the increase in the price of syrup. But instead of increasing drink prices solely to account for the increase in syrup costs, operators tended to add the percentage hike across the total drink price.
For example, if the cost of syrup went up 5 percent, instead of isolating that component and factoring it into the price, they implemented it across the board.
"It really resulted over that same period in margin expansion or maybe some opportunistic pricing," Startt said.
Consumer choices
To show its QSR customers that those price increases were affecting their total ticket average, Coca-Cola commissioned pricing research experts the Harrison Group to provide third-party data.
Harrison Group collected the data by menu category rather than for all QSRs to show how consumers reacted to fountain prices in each segment.
The researchers began with the burger segment and asked 3,000 participants who had visited a quick-service burger restaurant in the previous two weeks to complete an online survey. The survey used a simulated menu board to track participants' choices.
Startt said the research dispelled the long-held belief of fountain drinks' inelasticity, which refers to a 1 percent price increase resulting in a less than 1 percent reduction in total servings. While fountain drinks by themselves are fairly inelastic, when taken as part of a meal order, the study found the beverage price does affect consumers' total check average.
"Really the message is you can't look at just fountain," he said. "You have to look at what happens to your total menu and how consumers make adjustments on the number of food items they're going to buy because of what you do to their fountain (price)."
Research application
Coca-Cola used the data from the study to create a desktop simulator to allow its marketing team to demonstrate the impact of fountain price changes on total ticket averages.
For example, the simulator found that decreasing fountain beverage prices by 20 cents for all cup sizes resulted in an increase in total check average. It also showed how adding a value-sized cup as well as a jumbo cup could meet the needs of two customer types and improve sales.
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"The value of that is that it allows them to test pricing scenarios on their menu before they go out and trial something," Startt said. "We're looking to ID a few testable value propositions for our customers."
Coca-Cola also researched fountain beverage pricing effects on the QSR sandwich segment and found similar results. Fountain drinks in that segment are particularly affected by the popular $5 foot long price point, which sets a barrier in the consumer's mind, he said. Consumers tend to think, he said, "(If) I can get a full meal for $5, it makes it difficult to add anything onto that, which would include a beverage. It makes it very difficult to combo something."
Opportunity to learn
Startt said the research is a valuable resource for its QSR customers but it is not infallible. For one, the research participants were wholly aware they were completing an online exercise. Yet the information they provided still allows operators to "understand how those choices impact the bottom line."
The research also tested consumers' reaction to bottled and canned drinks as well as smoothies. But participants responded so strongly to their presence on the menu, the researchers saw those results as skewed, based on the low penetration of those drinks in the QSR segment, Startt said.
David Morris, senior analyst for restaurant industry research firm Mintel, said ignoring the impact of specialty beverages on fountain purchases may paint an incomplete picture. But there is no doubt about the continued strength of fountain drinks. For example, the company's most recent research found that diet soda is still the most purchased beverage in QSR.
Coca-Cola's research on fountain drinks can provide operators much needed information, Morris said. The opportunity to study why consumers are opting out of drink purchases is addressing an important topic, as is the chance to experiment with the effect of combo and fountain promotions.
"Fountain drinks are still an extremely significant source of revenue not withstanding the inroads that some of these newer beverage types have made in terms of usage," Morris said. "It's not as if they're going to disappear in six months. The presence of fountain drinks is something that's going to continue."
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