Lost in the headlines that last week’s legislative resolution to the “fiscal cliff” would permanently freeze income tax rates for households earning less than $450,000 is the fact that a two-year-old payroll tax holiday expired, which operators worry could mean less spending at restaurants.
Yet while many restaurants roll out cyclical promotions related to value, operators said the response to the 2-percent increase in the payroll tax in 2013 should not be a price-focused marketing blitz but renewed efforts to inspire loyalty through customer service.
Late on New Year’s Day, President Obama signed into law the American Taxpayer Relief Act, which permanently extended the income tax rates signed into law in 2001 and 2003. However, the bill did not extend the temporary cut of the payroll tax deducted from wage earners’ paychecks to fund Social Security, resulting in that tax rate rising from 4.2 percent to 6.2 percent.
For every $50,000 an American taxpayer earns up to the threshold of $113,700, an additional $1,000 will be withheld for taxes, compared with the past two years.
Consultant Aftan Romanczak, president of Renaissance Consulting LLC in Cumming, Ga., noted that some customer demographics with higher incomes likely would not feel the effects of the payroll tax increase as much, since the taxable wage limit for Social Security taxes is capped at $113,700. “But if you’re in fast food or casual dining,” and thus draw core customers from the demographic of households making less than six-figure incomes per year, “I’d worry,” he added.
“This is going to hit every restaurant in the world,” Romanczak said. “Most of these midsize chains, the Applebee’s of the world, can’t get cheap enough anymore. It’s like trying to turn around a battleship in a pond. By the time they adjust their offers and pricing, people have moved on and changed their habits.”
He said he fears some restaurants will struggle to fend off a “domino effect” in which lower consumer traffic and spending leads to cutting employees’ hours, resulting in a lower quality of service. Above all, restaurants need to maintain or even elevate the guest experience to manage through customers’ post-fiscal-cliff transition period.
“It’s important to keep people loyal to you by taking care of them in times like this, and if you do, you have them for life,” Romanczak said. “But if you’re not sensitive to what they’re going through, it’s easy for them to never come back to you.”
Several operators agreed that the hit to customers’ discretionary income puts the onus on their brands to focus more intently on the guest experience far more than it necessitates changes in marketing.
Brent Alvord, president of Memphis, Tenn.-based Lenny’s Sub Shop, said people probably would find their first paychecks of 2013 “eye-opening,” but that would not create a marketing opportunity for coupons or deep discounts. Guests may start looking for more value at restaurants, he said, but 150-unit Lenny’s would provide that the way it always has: creating perceptions of high quality and value by slicing meat in front of guests, putting half a pound of meat on every sandwich, and making subs to order.
“The payroll tax component of this deal doesn’t change our strategy or our dynamics,” Alvord said. “It just makes us ensure we’re even more focused and on top of our game. We need customers to fall in love with us when they walk through our door.”
Mooyah Burgers, Fries & Shakes, the Dallas-based chain of 48 restaurants, similarly would respond to guests having less money in their pocket by taking better care of them, said Alexis Barnett Gillette, director of marketing. Mooyah will emphasize its family-friendly environment, ingredient quality and relative value, she said.
“We’re continuing to be proactive and remaining consistent, versus taking a reactive approach where you’re inclined to suddenly offer something different, raise prices or coupon aggressively,” Barnett Gillette said. “During times like this, we’ll put the most effort toward that 20 percent of guests who are our highest users, and if we increase their loyalty we’ll be successful.”
Several Mooyah franchisees have put together a new combo meal at lunchtime to get customers in and out for less than $10 and are marketing a large order of fries that can be split among a family of four, but that is an incremental pivot rather than a dramatic swing toward value, she said.
“I think every restaurant in this competitive space has to fight for their share in a good economy or a bad economy,” she said. “We want to weed out all the other noise out there and make sure that, when anybody is thinking about burgers, they think about Mooyah.”
From certainty to stability
Lenny’s president Alvord noted that restaurants likely would not call too much attention in their marketing to the payroll tax increase because the expiration of the tax holiday means the months of negotiations over tax policy are over. Certainty should eventually lead to stability, he said.
“What sparks major changes in spending behavior is fear,” Alvord said. “People tightened up quick four years ago when Lehman Brothers collapsed. Fear of the unknown breeds more contraction than having something that’s known.”
Had Congress not reached a fiscal-cliff deal over tax rates, consumers’ discretionary income for restaurants would have been affected far worse, he said. Alvord also speculated that, once consumers readjust their budgets through the year, they'll eventually make room for restaurant meals once again.
“It was ridiculous that, as of Dec. 30, nobody knew what their paychecks were going to look like,” he said. “They didn’t know how to plan during each month for groceries and dinner out. At least by defining that, even if we don’t like it, at least we know.”