A recent promotion by the Denny's restaurant chain - the giving away of breakfast for free, raises some interesting valuation questions: what is the expected future value of a promotions that involve free 'gifts' and how do firms successfully sustain repeat business? Read the article here.
Now obviously the two questions are related. The immediate costs of the free breakfasts are associated with an intangible asset that we can call "customer loyalty". Now we know as accountants that this asset is not capitalized and we would question any attempt to measure this asset due to uncertainty. Clearly it would appear that a gimmick like this could be easily replicated by other restaurant chains, so it is less likely to give rise to any sustainable competitive advantage. Would you return to a restaurant that (willingly) gave you a free meal? does getting something 'free' give you some kind of irrationally happy feeling that makes you want to return to where you got something free? Even though you know that you won't get something free there again?
Another approach may be to look at their ROE generating ability in terms of the DuPont decomposition. In general, I'd imagine most of us would agree that Denny's is going to be profitable as a low margin high turnover company, and based on the google finance numbers for profit margin, this certainly appears to be the case.
Is this promotion consistent with their strategy? How does this strategy have to affect their turnover and/or margins in order to be effective? what do you think the overall affect on value is likely to be?
Denny's superbowl promotion was an interesting marketing strategy. The margins in the chain restaurants would be pretty thin to begin with so the cost of each meal given away would take multiple meals to recoup the costs.
ReplyDeleteOne valuation aspect that may be to assess the ability of management. In the case of Denny's they look like they are willing to take major risks in that they overpaid for a commercial spot and then have to recoup so much money lost to free meals.
Interestingly Arby's just finished a similar campain in trying to get people acquainted with their new Roasted Burger. If you bought a drink, they would let you have a burger for free. Pepsi is sponsoring it so likely the cost of the burger is partially subsidized by the high margin brought in by the drinks. That is a better strategy I think.