Are Discounts and Freebies Doing Franchise Owners More Harm Than Good?

This is a post by guest blogger Don Sniegowski, the founding editor of the daily franchise news site BlueMauMau.

McDonald’s just wrapped up its weeks-long campaign of offering free mocha on Mondays as an introduction to its new line of high value coffee at low prices. One of the largest franchise chains in the world, it used the free Mocha Monday strategy to help pull market share away from competitors Dunkin’ Donuts, Starbucks, and other chains.

But what do these price wars mean to the average franchise owner-operator? Franchisors typically take as their royalty a fixed percentage from a franchise’s top-line revenues—whether or not the franchisee is making a profit. It is franchise owners who take the brunt of the burden of lowered profits, or often, losses, for discounted products.

Franchise owners can become quite upset when they are faced with one discount after another. One Quiznos franchisee anonymously that he had not received a single reimbursement on a series of heavily discounted toasted sub sandwiches, saying “This company never saw a discount it didn’t like. Those great discounts are financed solely by the franchisees.”

Brands such as Burger King, McDonald’s, Quiznos, Subway, Popeyes, and KFC have recently found themselves between the franchisor’s need to drive traffic and the franchisee’s need to protect margins.

Darren Tristano, Executive Vice President at Technomic, Inc., a consulting and research firm for the restaurant industry, understands the heavy toll the discounts are having on franchise owner-operators. But he admonishes franchisees to be more understanding.

“Discounting and low price promotions are designed to appeal to ‘value seekers’ and drive traffic to restaurants. It is the responsibility at the unit level to up-sell and increase the check average through upgrades, limited-time offers, and specialty beverages and desserts. Today, restaurateurs should be focused on driving patrons through the doors any way possible!”

But in a recent Marketplace interview, psychology and business professor Kit Yarrow of Golden Gate University asserts that consumers have reached a point in which discount strategies are now so typical that they are no longer bringing in . Worse yet, she says consumers are expecting the lowered prices to remain.

Listen to the interview below.

Tristano affirms that observation. “Consumers have gone from discounting to now expecting low prices with high value every day,” he says. “It’s going to be difficult to pull consumers back to the old norm.”

But Professor Yarrow says that offering free products still works for bringing in lots of customers. The big question is, will it increase market share in the long term?

Nelson Marchioli, Denny’s CEO, was enthusiastic at the end of the day of the chain’s free Grand Slam breakfast promotion back in February, saying, “We were hoping to reconnect with millions of Americans today … and we did. This Free Slam Day has exceeded our expectations in every way.”

Did Denny’s increase its repeat customer base through free breakfasts? The company was asked, but no reply was received by the time this blog was posted. Update: Denny’s did reply via email but its response went into my spam folder. Here is the response from John Dillon, Denny’s vice president of marketing, who says that February’s free offer did indeed grow its customer base. “We brought in 2 million guests into our restaurants that day, many of which hadn’t been to Denny’s for a number of years,” Dillon writes. “Our research showed 97% of guests that day were extremely or very happy with their experience, and an incredible 95% said they would return.”

Dillon emphasizes why this particular free give-away meal was successful: “Brands can’t just slap events like this together. We had a strategy, we had a big stage, we had strong execution, and importantly we had incredible partnership with our franchise partners. The key with promotions like our Grand Slam Giveaway are to do them for the right strategic reasons, not just to do them. In our case, we were really the first to do something like this - a totally FREE, full meal giveaway - on this grand of a stage, the Super Bowl. We had something to say, we had an aggressive offer, we communicated and partnered with our franchisees to work through all the questions and make it even better. We listened and responded to a lot of franchisee feedback both before, during and after the event, and we were prepared for anything that happened.”

What are results of McDonald’s free mocha campaign? A corporate spokesperson says that the burger giant has seen incredible buzz, as judged through postings on social media sites like Twitter. “Although we don’t release sales data,” the spokesperson says, “we believe sampling is a great way to give our customers a taste of the new McCafé coffees.”

Denny’s now seems to be avoiding discounting and free menu items. Instead it is focusing on less expensive, smaller portions, such as the Moons over My Hammy breakfast, downsized meatloaf, and All Nighter snacks starting at $2.99.

Caution in discounting is the word, not only because it can devastate franchise owners, but it also can hurt the brand.

Says Steve McKee, president of McKee Wallwork Cleveland Advertising, author of When Growth Stalls, and longtime BusinessWeek columnist: “Generally speaking, discounting is like a drug—it makes you feel great at first, but before you know it you’re hooked and can’t get by without a fix. And the buzz is harder to achieve every time you do it.”

Don Sniegowski is the founder and editor of Blue MauMau, a daily business news site for franchise buyers and owner-operators. Previously, he led global field operations and franchise development for a quick-print franchising firm. Sniegowski also helped lead global publishing efforts for trade publisher Global Sources Media and led Asia-Pacific retail and operations for Franklin Covey.

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