Changing beverage habits and sales erosion

Some long gestating changes to American behavior have taken root in 2016. The beverage category looks much different today than it did 15 years ago. Sales of giants Coca-Cola and Pepsi (and their endless list of owned brands) have been flagging. Though they have found innovative ways to gain bumps in sales, it appears that new habits may be leaving those brands behind. The CPG space has already reflected these new behaviors which are now impacting the dining space.

According to NPD Group, soft drinks are still the number one consumed beverage on-premise. Coffee ranked number two. It appears that tap water is cutting into the purchases of both of these. But bottled water is the fastest growing segment of beverages purchased with meals. Orders of tap water indicate cost sensitivity, but increased sales of bottled demonstrates people making a choice. They are choosing fewer soft drinks.

Government programs raising costs won’t help. Sugared beverage taxes increase costs for both customers and restaurant operators. Tax programs have expanded to five more cities this month. State programs like these take aim at cost sensitivity to change habits towards sugary soft drinks, but may have further reaching consequences.

Sugar isn’t the only problem. This summer, it was reported that alcohol sales have dropped for the third straight year. The Beverage Information Group reported that sales had dipped again in volume though revenue remained mostly flat. This reflects a move to more premium or craft alcoholic beverages.

The introduction of the Coca-Cola Freestyle machine differentiated restaurants and spurred drink sales for a while. But this has faded.

Assuming this trend continues, a move away from premium beverages would be another hit to same store sales. That becomes even more important when you layer on research from Upserve. They analyzed thousands of checks from their POS system. Guests who ordered alcoholic beverages are more likely to order dessert. About 75% of tickets with alcoholic beverages also included dessert. Red wine had the highest correlation to a dessert item. This tells us that as average check drops from lower alcoholic beverage sales, desserts and other items will drop as well.

Obviously, fewer drinks ordered immediately reduces average check. People choosing tap water take revenue away from restaurants. So understanding why is important. Guests have never had more options for beverages. It will be difficult for restaurants to both stand out and to predict the favorite of every guest.

The introduction of the Coca-Cola Freestyle machine differentiated restaurants and spurred drink sales for a while. But this has faded. New approaches are needed. For most brands, beverages are an afterthought. The time is right for innovation with beverages.

Go small.

This might be the time to test offering craft beverage makers exclusively. We sell what guests want. They are buying less of big brands. Test programs bringing small producers to your guests. The drawback is finding partners to match your brand footprint, and meet your demand. Obviously, Pepsi and Coke have distribution covered no matter where your restaurants are. This might be an opportunity to work with new distributors to uncover brands on a regional basis. Using small or local partners also aligns with the trend of anti-global consumerism.

Explore drink LTOs.

If your concept allows for it, consider rotating your beverage options. Dedicate one of your pours to a revolving drink on a limited basis. This will create some interest in the drink menu and vary experiences for returning guests. This is an important part of the experience curve. Pricing these attractively will also spur interest and get guests back in the habit of ordering that beverage.

BYO Beverage.

One way to counter the swing-and-a-miss of choosing the wrong small beverage brands is to create your own brand. Guests are already there, they will be receptive to trial if you can make your drinks compelling. Try flavor combinations that really compliment your food menu, even specific items. Make drink options that are fixed or recommended parts of combinations. This is another way to extend your brand and differentiate from competitors.

Finally, train your staff to offer a drink with each transaction. Whether it’s a server at the table or someone at the register. Just asking if guests would like a drink is often enough to remind them that they actually do.

Waning brand loyalty means the experience curve matters

Dozens of new restaurant chains launched this year, each changing the expectation of consumers just a bit more. With more competition, it should come as no surprise that loyalty is down, or at least that brand loyalty does not mean what it once did. People take advantage of choice and offers as their budgets continue to be tight. Understanding the experience curve can help brands stem the waning tide of brand loyalty.

Is brand loyalty down? In some categories worse than others. Facebook shared a study they conducted to identify the differences between “Brand Loyalists” and “Repeat Purchasers.” Interestingly, they were able to divide up the two groups by the descriptive words they used about their favorite brands. Loyalists, it seems, use experiential words. Words like fun, friendly, clean, innovative.

New is better than known.

What is causing the change in loyalty? In a recent article in Forbes, the author ties it back to macro shifts in culture itself. Loyalty has dissolved across many parts of life, and now brands suffer as a result. An interesting read for sure. The most relevant driver listed there is “‘New’ is better than ‘Known’.” It isn’t backed by any statistics, but is inherently understandable.

For each new restaurant concept, there is a trial. People want an experience they recognize or can quickly grasp, but they do not want the same old experience. This is a shift in the experience paradigm. Quick service operations came to dominance in the 70’s and especially the 80’s by standardizing everything about their experience. Fast casuals have exploited some of those standards for better or worse. Guests are familiar with waiting in line for a hamburger at Five Guys from QSR experiences. But the true open kitchen and communication style of the staff tells guests immediately that this is going to be different.

Facebook, brand loyalty, experience, QSR, fast casual, experience curve
Brand loyalists use more experiential terms to describe their favorite brands (in orange), according to Facebook.

McDonald’s has been tinkering with their experience, to find ways to align with Fast Casuals. And some new ways to stand out. Make no mistake, McDonald’s understands they will never identify a new permanent model for experience. What they are testing is more likely how much change consumers need to feel in each experience? How similar does each visit need to be to feel familiar in a positive way? How different does each visit need to be to feel new?

There are typically three phases to the crest and fall of brands in this space. At Food & Restaurant Marketing, we call this the ‘experience curve.’

Trial phase

A guests first visits are critical to building repeat traffic and word of mouth. To survive this initial phase the restaurant has to fall in the middle of the experience curve outlined above. Some things should be familiar, some things new, zero things bad. Of course, this all presumes delicious food, well prepared.

For fast casual pizza concepts like Pie Five or Fired Pie, this is the layout of a traditional pizza restaurant. A walk-up counter that feels familiar, and visible toppings as people have become accustomed to at Subway or Chipotle. But the idea of choosing those toppings for a pizza is the twist; something new.

Comfort and exploration

In this phase, guests get more bold as they understand the concept. They have their ‘usual’ favorite items. They explore the menu and try to find new ways to enjoy the restaurant. New ways to make it their own. This might come as soon as a third visit. The guests begin to look for variations of the standard menu, or perhaps for ‘secret’ items a few more visits in.

Guest will begin probing the staff and often online for tips during this phase. This behavior is the maturation of the brand experience. But also, can lead to the next phase.

Cresting popularity

This phase may not begin for a long time. It is dependent on the ways people are able to experience and change the concept to their whims. When guests run out of new items to try, or ways to mix them up, frequency of visits begins to decline. Word of mouth slows.

The key is in extending the comfort and exploration phase by mixing up the menu and tweaking the experience. Add in new elements and take out tired ones to keep the experience fresh. Guests will reward brands who understand the experience curve.

People won’t care how you deliver the food.

There has been a lot of hype about food delivery over the past quarter. Longer, but it seems to be concentrated hype right now. Leading delivery brand, Postmates got a big investment, celebrity chef David Chang’s delivery service is growing. Brands are creating services and partnerships to optimize the way they deliver. UberEats is rolling out across the country. Jonathan Maze is pondering whether to-go and delivery is the savior of casual dining. The hue and cry for drone delivery is growing louder every day.

There is a battle raging to deliver consumers their food. And according to new research by Mintel, everybody is winning. 9 of 10 say delivery services make life more convenient. What does that tell you? People weren’t clamoring for a new way to get their pizza delivered. The high school kid dropping it off for a small tip worked just fine. The ask from consumers is for more restaurants and cuisines to be available by delivery. Unless you live in a handful of metros, that wasn’t a reality until this burst of services came on the scene.

65% of respondents said going to a restaurant was more fun than ordering in.

Don’t misunderstand the trend. Delivery is not the replacement for dining out. Delivery is the addition of an occasion without leaving home. Part of this is the same trend that was driving fast casual to overtake casual dining. Speed and convenience are king. Cater to my cravings and make it faster when I need it to be. In the same Mintel study, 65% of respondents said going to a restaurant was more fun than ordering in. Guess what – just about that same amount (63%) said delivery is more convenient than dining out. Surprise!

People aren’t saying they’re loyal to brands that deliver (though there is a subculture of people living solely off of Postmates and Seamless). These services may be new, but the problem is old. People are simply telling us that they are still looking for convenience.

There’s some people at the confluence of the restaurant industry and the tech industry who are looking at this as a disruption to restaurants. It’s actually the extraction of value that cuts margins for operators. Margins that are already thin and getting thinner with commodity prices, new types of competitors and laws adding salary pressure.

Brands will need to study the cost of any service they partner with to deliver their product. If there is an added service cost to the consumer, how does it affect the value proposition of the brand? Does your snack menu suddenly compete with entree prices elsewhere?

Beyond price, how does the service bring the food? Does it arrive in the same condition as when it left the kitchen? Long term, this can damage loyalty and erode occasions. There is a reason pizza is a traditional top-delivered food. It travels extremely well.

In the end, it doesn’t matter which pizza chain cracks drone delivery first. For a short while, people will order Domino’s by tweeting a pizza slice and drone emojis for the novelty. If it’s incrementally faster, drone delivery will survive. If it’s not any faster, they’ll go back to the old fashioned way – and just tweet the pizza slice emoji.

Eventually, there will be a shakeout. Delivery services will fold and consolidate. But restaurants that play it smart will remain. “Innovations” in delivery are a fad, unless they work.