An Applebee’s Answer to Higher Food Prices

Many of us could stand to eat less.

That is not a pithy recitation, but a hard fact.  Studies conducted by the USDA (among several other groups) consistently find that most of us consume an extra 500 to 700 calories per day (or about 25 to 30 percent extra based on an average diet).  The health implications are obvious, far-reaching, and well documented.

Clearly, we did not get there overnight. Since the end of Word War II, advances in agricultural technology have (largely) meant the end to boom and bust food commodity availability. Today, like no other time in history and like few other places on the globe, food in the United States is plentiful, good, and cheap.

And therein lies the problem. As many of us struggle with portion control and a healthier relationship with food, we are likely to get some economic assistance.

Put simply, the price of food—nationally as well as globally—is going up. Fast. According to the World Bank, the price of rice (a global staple) has increased 183 percent. Corn and wheat are at record highs. The Commerce Department's seasonally adjusted compounded rate of inflation for food products in the United States passed 5.3 percent (more than every other category except energy) and shows no signs of letting up.

In general, while food consumption is largely immune to minor fluctuations in price, at some point on the demand curve economics tells us that persistent price pressure will push consumption down.

As observers in the market, where are we likely to see the trend first? Discretionary restaurant spending would be a logical guess - especially spending at mid-tier restaurants where you find chains like Applebee's, T.G.I. Friday's, Ruby Tuesday's, and Olive Garden.

These mid-market chains face tremendous price pressure. Fast food squeezes them from the bottom. A new generic chain crowds into their middle market nearly every month. Raw economic reality pushes down from the top. Food input costs slice into margins. These chains have nowhere to go.

Until now, their answer has been pretty trite: To provide more value, simply increase the portion size.  Filling the plate with additional food was cheap, and if it made people feel like they were getting a better value, all the better. Restaurants could always make up the lost margin on drink sales (both hard and soft), so no need to worry.

But that old crutch has become untenable.

Given the eventuality of higher input costs, downward price pressures, and shrinking margins, restaurants in this segment have a couple of options.

The first is simple: test the elasticity of the demand curve and raise prices. This strategy involves educating customers about the rising price of food inputs and then passing along the higher prices. It is a short-term answer at best. Customers will not tolerate this kind of whining for long; they expect a better answer.

And they are getting one.

Applebee's has taken a different approach. Instead of fighting the good fight and trying to beg its customers to accept its sad state of affairs, it has fallen back on its strongest asset: The Applebee's brand.

Think about it for a second. Is Applebee's really about food? I would argue no. Rather, the company built its brand around getting together with friends and having fun. Food is the catalyst, but not the core. That brand strength allows Applebee's the flexibility to attempt something very different: Making people feel good about getting less to eat.

A radical solution, yes, but necessary if you think about it. If people stop coming (or find some other place to connect with others and have a good time because eating out costs too much), your local Applebee's is finished. They understand that. The company is using our collective anxiety over our waistlines to its advantage in this situation, rather than its detriment. The biggest innovations at Applebee's in the last five years have little to do with food quality (although that is not completely lost; they have taken the "Target approach" and introduced celebrity chef menu items), but rather with portion size and strategic alliances.

Several items now come in scaled-down versions (at only slightly scaled down prices). Vegetables, fruits, and quasi-cultural items dot the menu alongside chicken wings and mozzarella sticks. Additionally, Applebee's had the foresight to forge a partnership with Weight Watchers International, offering Point-counters on several ready-made options (quite tasty, by the way, and worth trying even if you don't subscribe to the program).

Applebee's understands that at the core of its brand are good feelings. If you feel like a sweaty hog after eating at its restaurant, you may not come back, no matter how much fun you had. If, on the other hand, you feel like you are doing something good for your body, that will amplify the brand association you were already getting spending time with family and friends in a relaxed atmosphere.

Certainly, Applebee's is not alone here. Its competitors are trying quickly to catch up. But as the industry leader, Applebee's knows its future is on the line and has astutely leveraged its brand position.

They say necessity was the mother of invention. For Applebee's, I think scarcity and economics work just as well.