Late to the Table

OF THE TOP 130 restaurant chains in the United States only seven, or 5%, have loyalty programs. “I've always known it's not a big number,” says Tim Cusick, founder and president of the BrandStand Group, “but it's shocking that it's so small.” So why do 95% of these chains — from Applebee's to Zaxby's — not have loyalty programs?

Typically, industries with high purchase frequency and stiff competition — like airlines, hotels and grocery chains — adopt loyalty programs. For grocery chains, participation is at 65%; for medium-size and larger hotel chains, 85%; for the major airlines, 100%. Restaurants fit the bill — high-frequency patronage and stiff competition. (There were 858,000 restaurant establishments in the United States in 2004, up 14,000 from 2002.)

Because loyalty programs are measurable, many independent restaurants have been able to demonstrate success. For the Fifth Group Restaurants of Atlanta, for example, members spend 17% more than before they joined the program. Spectrum Foods' Table One program in San Francisco increased average sales among their 15 restaurants by 10%. And The Palm's 837 Club is garnering terrific return on investment. “Eighteen percent of members say they hold private parties at Lawry's, which they never did before becoming members, because of the points generated,” says Karen Zaniker, who handles marketing for Lawry's Restaurant in Pasadena, CA. And customer demand is documented: In a quantitative 2004 study by the National Restaurant Association, 50% of table-service customers said they'd be more likely to patronize a restaurant that had a loyalty program. So why the low adoption rate?

FINANCIAL BARRIERS

Little loyalty program experience crosses over into the restaurant industry from other fields, since most restaurant marketing executives tend to have grown up in the business. Chances of loyalty program adoption are slim for those without hands-on experience with the ins and outs of such endeavors. Further working against adoption is that loyalty programs are, by definition, a long-term investment. Conversely, familiar, short-term marketing expenditures — even very large ones for print and television advertising — inspire no fear.

Loyalty best practices determine a rewards program's return on investment by analysis of program economics. This is based on a chain's set of financials, including generation of an affordable rewards structure, analysis of profit margins and projection of increased revenue. So, other than an occasional seminar, the main source of a marketing executive's exposure to the reassurance of a positive ROI would be through loyalty vendors. But too many of these aren't focusing on a restaurant's business, but on pushing technology solutions.

Without evidence to the contrary, “They're just going to say it's just not worth the effort or expense,” says Ron Santibanez, president of Qualified Solutions Consulting, a Moreno Valley, CA firm with many small restaurant clients.

Another concern is the widespread perception that loyalty programs' up-front cost is large, even though there might be a good possibility of a decent ROI. Says Santibanez: “It's an investment in time, but moneywise, it can be done inexpensively.”

Benihana has shown, with its successful Emperor's Club loyalty program, that one can start small and scale up as the program proves itself. Not only that, says vice president for marketing Kevin Aoki, “We focus on the restaurants that really need the program first.”

Another financial fear is the perception that loyalty programs are nothing more than discount schemes. Zaniker explains the purpose in other terms: “It's to increase frequency, spending, the likelihood to recommend and reduce attrition over the long term.”

Some loyalty programs have no discounts at all, focusing on so-called “soft” rewards — recognizing guests on arrival, guaranteed reservations, preferred seating and the like — costing nothing but carrying high value for guests. As John Clapps, consultant at agency Brand24, points out: “It's an emotional rather than a physical benefit. I think it's not what the people are getting in terms of hard goods, but that you know them and appreciate that they've been there.”

For publicly owned chains, the fear of having a large number of points on their books that are subtracted from revenue numbers is a deterrent. But loyalty programs can be structured with expirations or “soft” high-value/low-cost rewards that mitigate this kind of exposure.

ADDING TO EVERYONE'S PLATE

Marketing executives often have their hands full enough as it is, so their initial reaction to considering a loyalty program is “Oh my God! Not something else to do!”

“If I hear something like that,” reacts Benihana's Aoki, “I ask, ‘Do you want to know your customers better?’ Obviously, if you're in the restaurant business, you need to get to know your customers, and you can't do it better than a program like this. As marketers, we should continuously see what's new out there, and if it works well with the system it should be considered.”

Because loyalty programs are inherently multifunctional, marketing has to ask operations and IT to add more to their plates. Gaining cooperation across functions requires extra effort. After all, you don't have to get operations to approve your TV commercial. But wait staff and local management are critical of loyalty programs. IT doesn't approve your print ad. But they've got to manage your loyalty program's customer database. And you need top management support. Says Melissa Wilson, principal at Technomic, a research and consulting firm serving the restaurant industry, “Loyalty programs have to be embraced through all layers of the organization.”

Then there's the issue of time. Loyalty programs are long term. But some 67% of the top 130 chains are public companies, driven by the short-term demands of quarterly results. Add to this the general prevalence of short-term thinking in marketing. “A lot of marketing folks are very much event-driven,” says Jim Vanderholm, president of restaurant CRM services firm Paradigm Solutions. “They look at everything as a six-month project. And this isn't.”

In many cases, loyalty program experiments fail because restaurant marketers — notably McDonald's — treat them like short-term promotions. Since 1997 the fast-food giant has test-marketed a dozen loyalty programs, from the McExtra Card to McRewards to McBingo to McDeals. None has gained traction, despite the use of technology (like Exxon Mobil's Speedpass) that doesn't slow down transactions.

A primary objective of loyalty programs is retention. But this is at odds with the major chains' marketing focus on acquisition. “It takes forward thinking. And companies just figured if they kept marketing on the front end, it didn't matter who was leaving on the back end,” says Marilyn Coffey, vice president of marketing services at Fishbowl, a CRM supplier to restaurants.

Finally, there's size. Proportionally, more small restaurant firms have adopted frequent-diner programs than the large chains, from Café Club in California to Bartolotta's in Wisconsin to Maverick Southern Kitchens in South Carolina. Besides more layers of management to plow through at the big companies, large size equals distance from the action. Small size equals a daily demand to put people in seats, with no layers of management in the way.

WHY NOT RESTAURANTS?

Hotels take reservations. Airlines take reservations. Restaurants take reservations.

But only the first two industries are awash in loyalty programs. What gives with restaurants?

An illustrative story is told by Brian Lambert, loyalty programs manager at Rock Bottom Restaurants in Louisville, CO. “Fishbowls are a big thing. You go in and drop your business card in the fishbowl. Usually the restaurant manager goes in there, gives away the free lunch, and then throws the rest of the cards away.”

For restaurants, names are perishable. Reservations are recorded on paper, then thrown away. Hotels and airlines have had to capture names, because the reservations were dynamic; travel plans would change, often several times. And millions of people were calling weeks or months in advance. The information had to be saved. To track this meant it was necessary to have a place to store all these names and contact information. Hence, databases. And to feed the databases, computerized reservation systems. It constitutes a giant step for restaurants to tackle such technology.

Restaurant point-of-sales systems are another tech drag. While airlines have no franchisees and hotels only some, many restaurant chains count most of their outlets as franchised. Because restaurants are local, there's no need for uniform POS systems. Hence heavily franchised restaurant chains are peppered with incompatible POS systems.

So how did Benihana, Hard Rock Café, Pizza Hut, Qdoba, Quiznos, Subway and TGI Friday's buck the tide? Nagwa Pfingston, account director at Hawkeye/FFWD — the agency running Pizza Hut's award-winning VIP (“Very Into Pizza”) loyalty program — says, “Designed correctly, loyalty programs can drive long-term sales growth through greater frequency and changes in customer behavior. Some organizations don't have the patience to wait and see that return come to fruition.”

Once a loyalty program is set up, an organization doesn't want to dash customers' expectations. So there has to be a commitment to designing and executing the program well, and to providing ongoing, sufficient resources to support it. And, for the marketing exec who's willing to take a chance, it means committing to a project whose ultimate payoff will occur when he or she is no longer with the company, given the average CMO's tenure of just 18 months.

DOING IT RIGHT

An organization's first step in deciding whether to begin a loyalty effort is to be sure it's basing its judgment on the program's business purpose rather than its physical accouterments.

The purpose of a loyalty program is not points or rewards or plastic cards or discounts. These are just means to an end. It's rather to discover who the restaurant's customers are, and to track their behavior, find out their preferences, cater to those preferences and keep two-way communication going. The result should be an ever-stronger relationship with customers that increases frequency, per-check revenue, marketing efficiency and competitive advantage.

“My first recommendation,” says Lawry's Zaniker, “whether it's a single-unit operator or a large restaurant chain, is that if they don't know who their guests are they ought to darn well find out, and be using that data.”

Aaron Noveshen, founder of The Culinary Edge in San Francisco, sums it up: “If you're going to do a loyalty program you've got to do it right. The value proposition has to be there and you have to take the high road to be successful.”

Rock Bottom's Lambert chimes in: “Make sure you cost it out correctly. Take the time necessary to make the program work. No matter what you start, it's not going to run itself. People aren't going to drive it for you — you need to drive it yourself. And you've got to make sure you have the time and energy to put in to make that happen.”