When Dollar Tree in the US has to increase its prices to more than a dollar for the first time in its 34-year history and Ikea announces it is to increase its prices by an average of 9% across all its stores in 2022, then you know inflation is running amok.
Just to ram home the point, Dolf van den Brink, chief executive of Heineken, recently stated inflation was “off the charts” and in his 24 years in the business, he’d “never seen anything like it, not even close”. Heineken has duly pushed up prices, with an increase of 8.8% in the company’s price mix metric over the six months to the end of December. This measure rather opaquely also includes the effect of consumers choosing more expensive drinks. Meanwhile, more reliably, the Office for National Statistics found input prices for UK alcohol makers rose at an annual rate of 7% in January, the fastest pace in a decade.
With costs running out of control across the board, consumers are sensibly cutting back on their household spending in order to pay their utilities (if their supplier has not gone bust). Fewer than 10% of people surveyed by KPMG expect to increase their spending, and among the remaining 90%, eating out is the primary target for their cutbacks.
It’s not just homeowners and utility bill payers in the firing line, because the young also have a target on their backs. The Intergenerational Foundation found the disposable incomes of the typical 27-year-old graduate is expected to fall by nearly 30% over the next four years as the cost-of-living crisis unfolds.
This clearly puts hospitality operators in rather a quandary. One route is to preserve some margin by pushing up prices, but this risks deterring customers from visiting. Alternatively, they can hold their nerve by maintaining prices and appearing more competitive against rivals who might have bumped up their pricing. The latter option, it is hoped, will drive frequency.
This is rapidly becoming the new most important metric in hospitality. For Simon Emeny, chief executive of Fuller’s, the firm’s strategy is to give customers as few obstacles as possible to them visiting the company’s pubs, so price increases are being resisted. He also states there is no way he is cutting back on the opening hours of his boozers.
Glenn Edwards, managing director of Leon Restaurants, is also focused on frequency as an inflation-busting metric, saying: “We’re focusing on transaction frequency and not value. We want to avoid price increases…we’re working on a value proposition for growth.” The tool he is using is the newly launched Leon Club app, which motivates users to visit the restaurants more often by promoting them onto multiple tiers of rewards.
Many other operators across hospitality and retail have launched loyalty programmes to boost frequency rates – with both McDonald’s and Asda recently introducing them for the first time in their histories. Others with existing schemes have been enhancing the proposition.
Emeny also reveals he is open to potentially introducing that other great driver of frequency – a subscription scheme – but only when Fuller’s major digital transformation project is more advanced. Others have already pressed the button, with Pret A Manger the most notable player, having achieved incredible success. US operators including Subway, Taco Bell, Sweetgreen and Chipotle have all gone down the subscription route, so it seems obvious more of these propositions will emerge in the UK as frequency becomes increasingly critical.
This metric (as well the glorious recurring revenues of annual membership fees) is at the heart of private clubs. It is maybe no surprise that amid covid-19 and inflation, there has been an explosion in membership-based clubs opening over recent months. They include Club 64, Martinez, Pavilion, The Fitzdares Club and Nikita. Meanwhile, the clubbing behemoth Soho House just keeps on adding venues to its roster, with the newest member of its portfolio being Brixton Studio.
Against the backdrop of an easing out of covid-19 and an inflationary tinder box, it would certainly be sensible for every hospitality business to focus increased attention on the mechanics that bump up frequency rates. Those that don’t will likely find breakfast, lunch and dinner being eaten by their customers at rivals’ venues.
Glynn Davis, editor of Retail Insider
This piece was originally published on Propel Info where Glynn Davis writes a regular Friday opinion piece. Retail Insider would like to thank Propel for allowing the reproduction of this column.