Recent quarterly results from Papa John’s and Chili’s reveal the plight of chains that are struggling to avoid diluting their brands by discounting their core menu in order to drive traffic from a weakening consumer. Papa John’s same-store sales turned slightly negative during the quarter as the chain implemented a +8% to +9% menu price increase (which was needed to help partially offset all-time high commodity & labor inflation). To better address value, Papa John’s recently launched its $6.99 Papa Pairings offer. However, as guests must purchase 2 items from this platform, it is actually producing a higher average check.
Chili’s was able to generate a +3.4% same-store-sales increase by pushing through a +7.4% menu price increase (complemented by a reduction in discounting) which more than offset a -6.6% traffic decline. This chain is working hard to improve its operational execution and resultant guest experience while communicating that cash-strapped customers can find great deals without sacrificing quality by reinforcing the brand’s “unbeatable value”.
Notably, Chili’s restaurant operating margin declined by -5% y/y during the quarter while Papa John’s declined by -3% y/y and this highlights the reason these chains have no choice but to resist discounting. The relevant question remains whether consumers who are increasingly cash-strapped can be convinced to pay more for higher quality levels? In any case, the chains are hoping that lower commodity costs will eventually translate into “margin harvesting” to make up for current deficits.