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Unlocking The Secret Of The V Ratio

Restaurant Research LLC

ChainRestaurantData.com

Unlocking the Secret to the V Ratio

  • Analysts like to look at all types of ratios. Stock investors study the price-to-earnings ratio and lenders look at the debt-to-EBITDA ratio. We suggest restaurant brand managers pay close attention to what RR terms the "V Ratio" (value ratio).
  • This V Ratio is a simple calculation which uses a specific brand's most expensive item for a particular menu category (say sandwiches) as the numerator and the least expensive item in the denominator.
  • We believe consumers cannot help but assess the brand's premium value as a relative comparison to the brand's lowest price offering - the numbers are staring them right in the face when they read the menu.
  • We propose that the larger the V Ratio, the more expensive the brand's premium products will look to consumers and the higher their sales mix will weigh towards thin margin value products.
  • Conversely, brands with smaller V Ratios (coupled with price points that well represent actual perceived quality levels) should enjoy a higher sales mix of margin rich premium products.
  • We think the car manufacturers get this point. This is why GM divided the company into separate brands a long time ago. Cheaper cars were branded Chevrolet and luxury cars were branded Cadillac. Cadillac does not want to market the $12k Chevrolet "Spark" under its brand…
  • Restaurant concepts like Panera and Chipotle also get this point. A quick look at Panera's menu shows a low price point of around $6 for a turkey sandwich or $6.59 for its "You Pick Two" value offer and a high price for its sandwiches/salads of under $9.
  • Chipotle's V Ratio may be the best in the business with its burritos, bowls, tacos and salads all priced in the same general range (say $6.45 - $6.85 depending on the protein). You can add guacamole to any of these for another ~$2, but that is really just an upsell opportunity.
  • This contrasts with a typical QSR hamburger chain that sells $1 burgers on its value menu and then offers premium, signature burgers for $3.50+.
  • Our suggestion to restaurant brands? Lower your V Ratio by slowly raising your value prices (denominator) until they achieve a better parity with your premium prices. Also, be careful how you promote your low price points because while it may drive sales during times of economic weakness, it may also train your customers to think of your high margin premium products as relatively expensive.

Source: RR

Menu (46 chains) & Promotions (28 chains) Industry Report

  • Key data on chain menu composition (total item count, average check and daypart mix) conveniently organized.
  • Historical monthly chain promotional calendar highlights new products and promotions featured during the last 12 months.
  • Clients use this benchmarking data to assess competitive positioning of major chains relative to menu categories, pricing and promotional strategies.

For information on how to order the complete report, please contact us at (203) 938-4703 or pmangieri@ChainRestaurantData.com.

RR Clients

Includes major lenders, investors, major US restaurant chains, operators and industry consultants. Please check www.ChainRestaurantData.com for a partial client list and customer testimonials.

More About Us

Restaurant Research LLC leverages an extensive network of industry players as part of its annual Concept Benchmark Analysis due diligence process for 22 large US restaurant chains. Also, RR tracks store level data for all major chains with system-wide sales in excess of $1B across all major restaurant segments in order to produce 11 key Industry Data Topic reports.

Copyright 2012 Restaurant Research® LLC. All rights reserved.

Disclaimer of Liability: Although the information in this report has been obtained from sources Restaurant Research® LLC believes to be reliable, RR does not guarantee its accuracy. The views expressed herein are subject to change without notice and in no case can be considered as an offer or solicitation with regard to the purchase or sales of any securities. Restaurant Research's analyses and opinions are not a guarantee of the future performance of any company or individual franchisee. RR disclaims all liability for any misstatements or omissions that occur in the publication of this report. In making this report available, no client, advisory, fiduciary or professional relationship is implied or established. This report is intended to provide an overview of the restaurant industry, but cannot be used as a substitute for independent investigations and sound business judgment.