Value Line is regarded as the best independent research available. More than just recommendations, Value Line provides the rationale behind its picks for greater understanding.
- Don D., California
Product innovation is an important part of any maturing business, although it is particularly relevant to the highly competitive dining industry. Restaurants strive to boost traffic and increase market share by seizing the attention of the customer base. In this regard, it is imperative for dining establishments to constantly update or change their menus to drive consumer interest. Many restaurant operators attribute their long-term success to continued innovation, while poor product selection and lack of originality have led to the demise of others.
Although almost all restaurants use new menu items to aid growth, the process is most notably used in the quick service restaurant industry. Companies that have a national market presence stand to benefit the most from the release of new products. Brands such as McDonald's (MCD) and Subway use food innovation as a substantial part of the advertising process. This includes the introduction of entirely new product lines, as with McDonald's McCafe, the company's higher-end coffee offering. In contrast, Subway has added features, such as deli meats and toasting options, to focus attention on its existing sandwich line. YUM Brands (YUM) commonly uses energetic promotions to drive sales. Taco Bell is well known for its ads involving a variety of new spicy food items, such as with the Volcano Menu. Also, KFC has sparked interest with chicken-based items, such as the KFC Double Down.
There are many steps involved in the process of adding or updating products to a menu. Advertising, pricing, and cross selling all play a role in making a new food item a success. However, most will say that the main driver of a successful offering is the quality of the product. Many new items have gotten off to a good start, only to see interest subsequently decline due to poor consumer reaction to the taste of the product. There are ways to determine how a food item or new menu format will be received on the market beforehand. Surveys and focus groups can be useful in determining whether to greenlight a new offering.
The marketing process is also a key component. The introduction of a new product is typically coupled with an extensive advertising campaign. Promotions usually involve substantial cross selling to drive consumer interest for a restaurant’s core items. In many cases, new products are appetizers and side dishes used to complement more traditional entrées. This has been the case with Domino's (DPZ), which promotes items such as breadsticks and pasta bowls to attract more pizza customers. Restaurant operators tend to use discounting techniques to entice new customers and generate more recurring sales. Many companies also use seasonal promotions as a way to bolster customer traffic. IHOP (DIN) will typically run a promotion for a limited period and then repeat the process.
Product innovation, when successful, can give a company an edge over its competitors. This, in turn, leads others to duplicate a particular strategy. This was seen among the burger chains with the addition of the value menu, which offers items priced in the $1 to $2 range. In the late 1990’s, Burger King (BKC) was the first among its peers to introduce the concept of adding modified food items priced at 99 cents. The success of Burger King led others, including McDonald's and Wendy's (WEN), to adopt a similar strategy. The value menu has now become a vital staple in the fast food industry, with most of the well-known chains employing some version of this tactic.
Fast food restaurants use product innovation to drive customer traffic in times of economic softness, as well as, differentiate themselves from competitors. While this can be a particularly effective strategy, it comes with significant overhead. Companies must weigh the benefits of additional customers with the added advertising and development costs associated with delivering a new product. In some cases, the short-term buzz generated from a new product may not be worth the effort.