Authors: David Fuller, Jen Henry, Katharine Mattox, Duncan Miller, and Ankit Sood
By mastering revenue growth management—ensuring that pricing, promotions, and menu offerings are all working together—US restaurants can serve up profitable growth, as the authors explain. David Fuller is an associate partner in McKinsey’s Chicago office; Jen Henry is a partner in the Charlotte office; Katharine Mattox is a partner in the Atlanta office, where Duncan Miller is a senior partner; and Ankit Sood is an associate partner in the Stamford, Connecticut, office. The authors wish to thank Will Almquist, Zeit Cai, John Moran, Shruti Shukla, and Gage Wells for their contributions to this article.
American restaurant executives are bracing for another challenging year. While some supply challenges and immediate inflationary pressures have abated, many leaders anticipate hefty annual increases in labor and input costs over the next five years. Restaurants also continue to endure pressure to meet evolving consumer demands in an increasingly competitive environment.1
Despite the importance of RGM, many restaurant brands fail to adequately invest in it. In a 2022 survey by McKinsey, more than 70 percent of restaurant executives acknowledge that they have limited the scope of their RGM efforts because of resource or capability constraints. Even companies that devote ample time and resources to RGM often define the concept too narrowly, failing to take advantage of key levers and thus missing out on RGM’s full potential.
This article describes the range of benefits that restaurants can capture through a holistic RGM approach and then explains how to execute an integrated, long-term RGM strategy.
Building and rebounding: What’s next for the industry
The past few years have been hard ones for the restaurant industry. From pandemic-related shutdowns to supply chain shortages to once-in-a-generation inflation, restaurant leaders have had a lot on their plates. This year, however, food service has bounced back to pre-COVID-19 levels and grown its overall share of food and beverage consumption, consumer sentiment has rebounded, and the scrambling required in 2022 to manage inflation has lessened to some extent. During this challenging period, many brands have strengthened themselves by creating new omnichannel models to engage their consumers, developing more resilient supply chains, and crafting menus aimed at meeting consumer demand while limiting operational complexity.
Our research (see below, “Surveying commercial excellence in restaurants”) suggests that over the next few years, restaurants will continue to encounter new and mounting challenges, including burgeoning four-wall pressures across labor and input costs, changing channel mixes, and evolving consumer demands—coupled with an intensified pattern of consumers trading down. It will be critical for brands to step away from reactive measures and instead focus on building strategies to win in an increasingly competitive and complex environment. As leaders assess their commercial strategies, RGM will be a vital tool for safeguarding restaurant performance.
Surveying commercial excellence in restaurants
The Commercial Excellence Benchmarking (CEB) Survey has been conducted at least every other year since 1978 across a range of consumer-facing brands. In 2022, this proprietary survey was extended to restaurant brands. The 2022 Commercial Excellence in Restaurants Survey was fielded between July and August 2022 and includes insights from more than 20 brands across categories and sectors.
Understanding the value of an integrated RGM strategy
To keep pace with rising costs, many restaurant brands raised their prices over the past two years. These price increases may have protected some balance sheets, but it’s unclear how much higher prices can rise without driving away consumers. If financial pressure on consumers intensifies, raising prices will become an even chancier strategy.
Leading restaurant brands are looking beyond simple price hikes. Instead, they’re adopting a more holistic approach through disciplined revenue growth management. These brands choreograph decision making across elements such as price, promotional offerings, and menu compositions, enabling components to work together to boost sales. This coordination can help restaurant companies respond to near-term margin squeezes while protecting and even improving long-term brand health.
A piecemeal approach won’t yield maximum returns. RGM strategies should be integrated and based on multiyear plans with a broad group of levers working in harmony. Strategies should make use of the full range of RGM actions, including new-product introductions and channel-specific pricing. In our survey of restaurant executives, however, many respondents indicate that their brands define the scope of RGM narrowly (Exhibit 1).
Less than 20 percent of respondents indicate that their restaurant brands are making use of the full RGM tool kit, and only 30 percent say they are incorporating RGM into a multiyear plan. We typically see brands receive a 3 to 5 percent initial sales lift from deploying basic RGM tactics and analytics, but brands that opt for a fully integrated RGM approach powered by advanced analytics can lift sales by 6 to 10 percent over a two- or three-year horizon.
These four areas provide enormous opportunity for RGM gains, yet they are also areas where we’ve often seen restaurant brands fail to adequately integrate RGM elements: menu offerings, price architecture, value offers, and franchisee execution.
Menu offerings aligned with strategy
The supply-chain-driven shortages associated with the COVID-19 pandemic provided strong evidence that menu choices can have broad-reaching effects. When shortages of ingredients forced many restaurant brands to simplify menus and menu items, these measures often improved efficiency and profitability. But companies shouldn’t wait for extreme circumstances to make these sorts of changes (and realize similar gains). Quarterly reviews through an RGM lens can help brands optimize the mix of menu items and ensure proper coverage across different day parts.
Menu decisions should be in concert with a broader RGM strategy. Important factors to consider include the role of each menu item (is the chicken sandwich, say, a traffic driver, a loyalty builder, or an upsell option?), demand elasticity, operational complexity, and white spaces that represent opportunities to introduce new products or pricing tiers (Exhibit 2). Some brands will make specific culinary decisions—for example, limiting unique SKUs or reducing premium ingredients in favor of classic ones—to maintain sticky price points for core traffic-driving items. If consumer experience and satisfaction can be maintained, this approach can simultaneously protect value perception and margins. RGM teams should be involved at the beginning of any menu-planning initiatives and remain involved through execution and, later, the evaluation of results.
Proactive price architecture
For brands with limited RGM capabilities, pricing is a reactive endeavor: finance outlines the “ask” and the RGM team is tasked with execution. Leading brands embrace more advanced price-setting strategies based on a nuanced mix of the considerations used for adjusting menu architecture (Exhibit 2). Is an item being priced with an eye toward increasing store traffic or creating bigger individual tickets? Can a price contribute to competitive differentiation? How can operational metrics—for example, the cost and complexity of preparing an item—inform pricing?
By finding optimal pricing gaps between tiers of menu items (from value up to premium), brands can encourage consumers to trade up and discourage them from trading down. A restaurant might decide, for instance, to limit or halt price increases on the lowest-priced items to preserve customers’ perceptions of value while raising prices on premium items if analytics reveal that demand for those items is indeed less elastic.
Pricing can also be adjusted to account for variables such as sales channels and store locations. We analyzed prices at top quick-service restaurant chains from May to August 2022 and found that many brands varied their price increases depending on the geographic market—for instance, with higher increases in Los Angeles than in Birmingham. Some brands go a step further, executing different pricing actions tailored to each of their store clusters (groupings of stores based on a variety of competitive, consumer, and store-level data).
In addition, price and promotional strategies should be designed in parallel but often are not. A case in point: while about 65 percent of respondents to our survey say limited-time offers can play a critical role in increasing near-term transactions, only about one-third say their brands consider how the pricing of these offers will fit into their overall price architecture.
Profitable, individualized value offers
Brands frequently err by designing value offers with only near-term store traffic in mind. This can result in simplistic, steeply discounted off-menu offers (such as buy-one-get-one and freebie coupons) that are both unprofitable and difficult to move on from. Another consequence is that on-menu offers often fail to communicate the value they did in the past. Offers should instead be rigorously tested against the consumer value proposition (which entails asking how much credit the brand is receiving in the consumer’s eyes) and assessed through a broader RGM lens. In this way, value is deployed in the highest-ROI manner possible and integrated into a more holistic, longer-term strategy.
As customer-level data—extracted in part from digital marketing and loyalty programs—improves and as transactions increasingly move through digital channels, an RGM team can design promotions that are personalized. Each customer can be offered a different, tailored deal that encourages specific behavior: a lapsed customer might be returned to the fold or a brand loyalist might be convinced to try a new category of items. Offers can be iterated over time, improving efficiency and ROI.
Communication for better franchisee execution
Franchised brands often struggle to execute harmonized RGM approaches across their systems. Pricing strategies are likely to vary from one franchisee to the next. As brands attempt to create perceptions of affordability and value in the minds of financially pressured customers, it will become increasingly important to align franchisees around a shared pricing strategy.
It helps to be transparent in talking to franchisees about the reason behind a decision. Sharing insights and learnings can reinforce franchisees’ belief in the soundness of a strategy. This can work in both directions: over the past year, we’ve seen many franchisee groups address difficult macroeconomic circumstances by taking actions such as unwinding promotions ahead of the normal cadence or enacting price increases ahead of their parent brands. Brands can improve system-level value creation by establishing more frequent communications—for example, town halls or pricing forums—during which franchisees report on tactics that have worked in their stores.
Getting RGM right
Leading restaurant brands maximize the value of their RGM strategies by out-executing peers across several dimensions. Here’s what they do particularly well:
Use advanced analytics and broader sources of insight to understand consumer behavior. Leading brands make extensive use of third-party information—including zip-code-level demographics, weather data, and social-media sentiment indicators—while taking steps to ensure they understand competitor pricing and consumer behavior across all channels. This gives them an edge over the many companies that don’t comprehensively collect and analyze data. Half of the restaurant executives responding to our survey say their brands do not collect price data on competitors or collect such data only on an ad hoc basis for specific items. Very few brands consistently use advanced analytics to inform projected scenarios. For example, about 10 percent of the brands in our survey research net price elasticities to determine how price changes across a portfolio of items might change sales flows, and less than 50 percent review consumer credit card data.
Evaluate and adjust RGM strategy more often and in more detail. The best-performing brands, unlike most of their peers, conduct regular reviews of menu offerings and price architecture. About 40 percent of respondents have not evaluated menus on an item-level basis in the last two years, and 60 percent evaluate overall pricing no more than biannually. Meanwhile, 45 percent of respondents indicate they either don’t assign specific menu roles to items or have very few items with defined roles. Leading brands clearly articulate roles for each menu item, engage in frequent reviews (monthly or better), and get granular when evaluating the details of menu changes, price-setting decisions, and promotional offerings.
Form a dedicated RGM team that includes data scientists. Only 45 percent of restaurant executives say their restaurant brands have created a dedicated RGM team. Most instead have RGM specialists report to finance, marketing, or data and analytics groups—which can pose problems for cross-functional engagement. Only 36 percent of brands assign data scientists to RGM analysis, ensuring they don’t miss out on important quantitative insights.
Leaders contemplating the implementation of a more robust RGM strategy should first ask themselves a few important questions: What are the biggest opportunities for value creation that RGM can be applied to? What is the brand’s tangible ambition (perhaps a specific EBITDA goal), and how will RGM help the brand get there? What existing organizational strengths must be protected at all costs, even if it means eschewing some RGM-related tactics?
Every brand’s RGM journey will look different, depending on starting points and brand requirements. But across journeys, the actions we have outlined—building a robust fact base and advanced analytical capabilities to better understand consumers and competitors, evaluating and adjusting strategies with greater frequency and granularity, and identifying talent (including data scientists) to help achieve the full potential of an RGM approach—can help brands get going.
1. Data in this article, except where otherwise noted, derives from McKinsey’s July 2022 Commercial Excellence in Restaurants Survey.
2. “Cooking up extraordinary growth for restaurants during a downturn,” McKinsey, January 12, 2023.
The Professional Pricing Society is the leading worldwide pricing idea marketplace where new and seasoned business professionals from all industries come together for learning, training, and networking while gaining actionable insights, new and refined skillsets, and earning pricing credentials.
Want to stay up-to-date on all things pricing? Subscribe to the PPS Mailing List and get FREE weekly updates on everything from Whitepapers to Podcasts and everything else! Hit the subscribe button below.
Need more details? We are here to assist you. Contact us by phone, email, or via our social media channels.
This site provides access to archived articles from the Pricing Advisor newsletter, the Journal of Professional Pricing, our pricing blog, pricing research reports, and other resources for pricing professionals.