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Discount craze poses a problem for businesses

December 06, 2010|By Karen Robinson-Jacobs

Reporting from Dallas — At Texas Land & Cattle Steak House, the plan was simple: During the slack months of February and March, the chain would field a limited-time offer: two entrees and a shared appetizer for $25.

Nine months later, the deal is still on the table. And it will most likely be there next year too, because consumers aren't anxious to let go.

"Ten to 15% of our total sales mix is people that are buying two for $25," said Howard Terry, vice president of marketing for the casual dining chain owned by Dallas-based Lone Star Funds. "It was so popular we couldn't take it away."

With margins strained by months of deep discounts, consumer-centric businesses are looking to wean the public off the deals that kept them coming during the recession.

They concede it won't be easy or quick.

The key challenge, experts said, is to get consumers focused less on rock-bottom prices and more on value.

"Consumers are going to be more conscious of how they spend their money, and they're going to spend it where they think they get the most value," said Wyman Roberts, president of Chili's Grill & Bar, which has a two-for-$20 special.

"There are other ways to provide value than just price," he said. "That's what we're focused on. At the same time, we understand it's tough out there. We've still got to be competitive with pricing."

During the protracted downturn, discounting became a mainstay for nearly every industry that depends on consumer dollars. Retailers continue to cut prices as they ramp up for the post-recession holiday season.

But some in the hospitality sector, fearful of further margin erosion, have said enough is enough.

In an analysts' conference recently, Jim Reid-Anderson, chief executive of Grand Prairie, Texas-based Six Flags Entertainment Corp., likened deep discounting to "a drug" and said, "We are carefully reducing our dependence on high discounts to drive attendance."

He said the company, which operates Magic Mountain in Valencia, would focus on adding rides and attractions to draw crowds.

At a recent hotel industry conference, Thomas Corcoran Jr., chairman of real estate trust FelCor Lodging Trust Inc., acknowledged that consumers love discounts. "The problem is," he said, "the hotel has got to be able to make money."

At the annual meeting in October of Brinker International Inc., the parent of Chili's, Roberts said Chili's saw a drop in traffic this summer when it replaced a sweeter deal — a shared appetizer, two entrees and a shared dessert for $20 — with the current offer, which leaves out dessert.

"But we also saw a significant improvement in earnings," Roberts said. "The margins that we were able to realize based on a different promotional mix flowed through" to the bottom line.

"It's [finding] that balance of what's the right thing for the guest … and what's the right thing from a business perspective," he said.

During the downturn, the balance tipped decidedly in favor of consumers, who had retreated to their equity-starved homes, coming out only for bargain-basement prices.

"We've never seen a traffic decline of this magnitude, for this prolonged period of time, in all of the years of tracking," said Bonnie Riggs, an analyst with NPD Group, a research firm that has studied the restaurant industry since 1976.

Per-capita restaurant visits fell 6% between the year that ended August 2008 and the year that ended August 2010, she said. "We saw declines on top of declines."

Deals kept the industry from suffering even steeper traffic declines, Riggs said. "Just about everyone did it. They had to."

Among hotels, some of the deepest discounts were practically invisible to most consumers — done through "opaque sites" such as Priceline.com. Even the buyer doesn't know which hotel is offering the discount until the room is paid for.

As hoteliers try to boost rates that fell 9% last year, fewer of those deals now exist, said Tim Sullivan, president of the North Texas Hotel Assn.

"The big difference is the availability of the super-low discounts," said Sullivan, contrasting late 2009, which often saw discounts of 25%, with today's typical 15% price break. "I think the market is stabilizing."

Hoteliers feel better about pulling back discounts as business travel picks up and occupancy rates improve.

To pare discounts, hoteliers needed agreement from some of the industry's most important constituents: meeting and corporate travel planners. Business and group travel accounts for more than 80% of sales in Dallas-Fort Worth, according to PKF Consulting, which tracks the hotel industry.

"The people that are managing the travel programs for corporations completely understand the situation that we are all in right now," said Sullivan, a Marriott vice president. "It's a hard conversation, but it's a good conversation."

Not every discount burned the bottom line.

The $25 Texas Land & Cattle offer is "a deal we can live with," Terry said. "We wouldn't want to discount it if we were losing money."

Robinson-Jacobs writes for the Dallas Morning News/McClatchy.

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