copyright 2010, L. Kerr

Yesterday, Nation’s Restaurant News’ Ron Ruggless reported that P.F. Chang’s Bistro will institute a “modest” price increase to offset some significant profit decreases. This is a good time to reinforce some points about pricing decisions and critical information needs.

Let’s start with the P.F. Chang’s first quarter data from the article:

  • Sales are down 2.7%
  • Average check is down 3.5%
  • Traffic is up .8%
  • Profit is down 35%
  • The price increases are projected to be 1% to 2%

Conversely, here is Pei Wei Asian Diner data:

  • Same store sales are up 2.2%
  • Average check is up .7%
  • Traffic is up 1.5%

As P.F. Chang’s Co-CEO, Bert Vivian, says in the article, labor costs have risen and while the company would prefer to wait until traffic has risen more to increase prices, it has decided to take this step now.

I have to ask: how does P.F. Chang’s know that higher prices, which are intended to offset higher costs, will work? Certainly, if traffic stays flat or increases, with all other things being equal, then the tactic should work. But no traffic change is a big assumption. While a 1% to 2% increase is certainly justifiable – and I commend Chang’s on selecting a palatable figure – the crucial issue is whether traffic and ticket will remain the same or not based on the increase? If they change, then it’s important to estimate by how much.

It’s rare for companies to know the exact impact a price change will have – and that’s the rub. The best ways to determine this figure for projections are to conduct a test, or conduct research. To test the new pricing, the company can change prices among a group of stores and compare operating results to a control group of stores. To research the issue, it can survey consumers – typically via web-based conjoint analysis or discrete choice modeling – to determine their guests’ price sensitivity and the effects that new prices will have on total revenue.

It’s not guaranteed that raising prices – especially in tough times – will raise revenue and profit. We can certainly hope for this, but unless P.F. Chang’s has done the research and analysis, it has to make a guess. The reality is that many companies are in the same position. Price tests take months, and obtaining price sensitivity data requires resources. Therefore, taking action and measuring results is often the most feasible path.

Two important notes: (1) tests and research do their best to help estimate price-change impact, and are the closest we can get to the real thing. (2) I have no information about P.F. Chang’s internal analysis and I do not mean to suggest that the company has not done its homework. The news merely presents an opportunity for me to illustrate a point about best practices.

It’s interesting to note that the figures Ruggless includes point to price sensitivity: P.F. Chang’s, the more expensive concept, is experiencing sales declines, while fast casual Pei Wei is showing sales increases, and higher traffic gains. This suggests that consumers are reacting more positively to the value offering (see previous blog, Pei Wei Means Big Value). Indeed, P.F. Chang’s happy hour, which features noticeable discounts, is credited with increasing traffic by 7%.

Given the inverse relationship of price to demand, the performance P.F. Chang’s has been experiencing seems logical, and the planned price increase – while small – may be illogical. It’ll be interesting to follow this, and I, like those at P.F. Chang’s, and my industry colleagues – would like nothing better to see an upswing soon, as part of a larger picture of good news.

Pei Wei Means Big Value

March 4, 2010

Photo: L. Kerr

At long last, I got to try Pei Wei, the Asian Diner little sister of P.F. Chang’s, and it far exceeded my expectations. Pei Wei exemplifies the value equation with a great customer experience at a very fair price. Most commonly, the restaurant value equation is Experience/Price = Value, but I’ve rearranged the components for Pei Wei to this: Tasty Food + Reasonable Prices + Pleasing Portions + Great Service + Nice Environment = VALUE.

I was in Dallas for a 12:30 meeting so planned to eat around 11, which was fine with my east coast stomach. I knew there’d be a million restaurants to choose from, and was thrilled to see Pei Wei pop up on my GPS (I’d be lost without that thing). Not knowing much about the concept other than that it’s small and growing, and it’s fun to pronounce, I pointed my car in Pei Wei’s direction. I wanted to eat healthy and I had a yen for Asian, if you will, but little did I know there was so much more waiting for me.

Arriving at about 11:10, I assumed I would be okay on time, and their fast casual service model worked perfectly. I saw several tables already seated, and followed the instructions to order before sitting. Perfect, no delays there. The menu is easy to read – there are digital flat screens posted, and an Asian Chopped Chicken Salad was $6.95. Figuring it would be on the smaller side, I decided to order an appetizer – Chicken Lettuce Wraps for $6.25. Then I decided to make it a feast, and added Dan Dan Noodles for $6.75. I figured I’d treat it like Asian tapas, a smattering of tastes for myself. I knew I was ordering more than I needed, but just how much more, I couldn’t tell, aligning my expectations for the portion with the prices posted. This was definitely enough for 2, and might have been sufficient for 3 people. So while the quantity wasn’t exactly appropriate, I exercised some rare will power! After all, I had a blog to write, and 2 items would have been skimpy. My bill was $21.60. I’ll say it again – my bill for 3 items was under $22.

I sat down, pulled out some reading, and soon I had my lettuce cups – they seemed identical to those at P.F. Chang’s ($7.95 on their menu). Unlike some fast casual concepts, Pei Wei brings you your food rather than having you pick it up yourself. I tried not to fill up on the wraps, and then came my noodles, which were great. On their own they would be enough for a full meal, so I eased off on them, begrudgingly. Last came my salad, which was delicious. Salad snob that I am, I could not find fault with this one at all. It was very nicely presented and the portion was excellent, with plenty of chicken. And the dressing was great, with a pleasing consistency and just-right coverage (I should have been a salad critic). It would have been enough all by itself, which shocked me at that price point. I can’t remember the last time I got one for lunch at what I thought was a fair price. At my favorite Boston lunch haunts, the range is $7.50 to $9 for a much less exotic version at a quick serve establishment, and more like $12 to $14 at full-service locales. My $22 meal would have easily been enough to two, and in fact, on a recent lunch at P.F. Chang’s, a similar order of 1 appetizer and 2 lunch entrées came to just under $28.

By 11:30 the place continued to fill up and I watched a constant stream of runners hustling to deliver food and clean tables as I ate, surrounded by too much food. When I left at noon it was full on busy, and I passed a table being greeted by a manager, who asked how the party’s meal was and if she could refill their waters. This had all the makings of full service but was actually a limited service model at noticeably reduced prices – amazing. I do have one recommendation for the restaurant: could you work on the temperature in your ladies room? It was noticeably warmer than the dining room.

Pei Wei’s website notes that it is a faster, more casual version of P.F. Chang’s, and that all menu items are under $10. Combine the delicious, well-presented food with the nicely-themed environment, the quick service, the clean establishment, the portions, and the pricing, and this is a winner. Too bad I can’t get there more easily. Way to go, Pei Wei!