Lessons from the American automobile industry OR how to increase traffic and go broke

Implications: Cost of energy, commodities, labor, healthcare and capital continue to rise.  After watching the automobile industry discount itself into near ruin, companies should weigh carefully price wars that may stimulate traffic but push marginal units below profitability.

Analysis: Seven years ago the restaurant business was in high cotton, customers had money and were glad to spend it, and like a perfect storm cheese, wheat, beef, pork, paper, and soybean oil prices were low, very low.  It didn't matter that inflation adjusted real income had declined, home prices were rising and people were secure in spending their new found wealth.  Restaurant owners were happy, chains were growing, ticket averages climbed.

So it seemed logical that deeper discounting would increase traffic in the competative pizza segment, with food costs down there was still a profit to be made.  Dominos led the charge, effectively re-establishing the value of their product at $5.00.  Once set this perception proved hard to shake.  As commodity prices rose (starting with dairy's climb to historic levels) panic set in.  First they tried 7-7-7 but customers didn't buy.  Back to 555.  What next?

Then Q2 of 2007 and the housing bubble burst, consumer spending tightened over night.  This year dairy and wheat prices have spiked driven by demand from the growing middle class in China and India.

What is amazing is that Dominos has dropped the bar another notch, now selling three 10" pizzas for $4.00 each to counter Pizza Hut's adoption of their strategy of pushing $5.00 pies. 

Granted a smaller pizza has less cheese and wheat, and lower food costs, but the real damage here is that their ticket averages are falling.   If you can't maintain a decent ticket, your fixed costs eat anything left after you pay food and labor.  

This is a failed strategy if you plan on surviving long term, just look at Detroit.  Deep discounts caused a crisis in the auto industry (and the only light at the end of the tunnel is that growing middle class in China that wants big cars made more affordable by a weak dollar).

There are ways to create value without dropping price and reducing ticket, attend to the fundamentals of restaurant operation....Quality Service Cleanliness. 

The question now is, when they wake up will they be able to charge a fair price for their goods, I mean, aren't they the guys that sell $4.00 pizzas?