April 18, 2015

Higher prices coming soon

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We’re going to change our prices Monday. I doubt many of you are psyched to read that. And it’s not exactly a fun thing to announce.

But this is part of what it means to be a healthy company. I think we’re taking a thoughtful approach and I hope you will all be supportive.

Here’s some of the thinking that’s gone into this change. We haven’t changed our sandwich price in almost 3 years and I think we’re due for a change.

PROPOSED CHANGES
The average is around 7%, not adjusted for mix. I believe the mix adjusted changes will be around 9% overall increase. Note that increase is not distributed evenly.  Sandwiches will change from $6.00 to $6.54. Trucks will start selling at same price as restaurants (currently trucks sandwich price ranges from $4.67 to $5.61). There will be changes to some other menu items (e.g., breakfast sandwich will increase from $3.00 to $3.74).

I’m timing this to come before HFI opens, because if I were a new customer of a new restaurant I really wouldn’t understand if prices changed a couple weeks in, even if they were 3 years over due…

NECESSITY FOR CHANGE
I believe we will have trouble hitting our targets for profitability and sales improvement without a change to prices.

I believe our customers are willing to pay more for what we deliver.

I think that in the marketplace in general there is increased focus by customers on quality of delivered product/ experience and away from price concerns. That is to say I think people are more likely to “pay what it costs” for an experience they really want and less likely to skimp when it comes to a fantastic product or experience. Increasing prices will allow us to focus more resources on improving our product and experience.

BREAK THE DOLLAR
We have adhered to a dollar-based pricing to date. I love the simplicity of this, and early on a big part of our message to customers was around price, we wanted everybody to know how affordable we were.

This pricing approach led to very infrequent but large price changes (3 year intervals, 10% + when they hit). I think that this approach will be hard to maintain over time.

I don’t want to ditch simplicity. I think it’s important to this community that is Clover, customer and employees alike. I propose we make the following changes:
– We focus on rounding post-tax (favorable to restaurants, means no coin changers, we piloted this on trucks last summer)
– We round to quarter (rounding to dollar too restrictive to pricing)
– We price by item (although groups of items, e.g., sandwiches, will still have consistent pricing)

KEEP PRICING BANDS TIGHT
I think we want to keep the pricing brand tight. While some competitors price across broad bands explicitly (Panera) and others do it implicitly (Chipotle, with add ons), I think we want to keep our sandwich and drink pricing tight for now. While others are trying to extract maximum value from customers with some low priced offerings for those that cannot afford more alongside very high priced offerings, I don’t think this is the model Clover should follow.

I think this for 2 reasons:
– We want customers to try to breadth of our menu, a goal that is not served by tiered pricing
– Our brand feels straightforward and simple to our customers, and I’d like to keep it that way.

CLOVER VS. COMPETITORS
It’s hard to know exactly, but I expect this price increase will increase our average ticket and sales by a factor similar to the mix-adjusted increase.

We expect our average ticket will still be well below Chipotle ($11.56 for 2013) but above our industry average (around $8). I think that’s a fine place for us to be at this point. I would like us to get to an average ticket that is 80% of Chipotle’s (which would put us at around $9.50 average at Chipotle’s current pricing). But I don’t want to do this overnight.

REINVEST
We’ve already seen 4 rounds of wage increases since the last price increase. I expect there will be more, and that’s one of the things we will fund with the increase.

There are additional resources/ infrastructure we are building that price increases will support.

We will be able to continue to improve our ingredient quality. Chris has made some amazing changes over the past few years and compared to 3 years ago when we made our last price increase our ingredient quality is much much better. We’re buying significantly more organic (was approx. 35%, now more like 45%) , and significantly more from local suppliers (est. from 60% to 80%).

So I hope you all still love us after this switch. I think we’ll be a better company come Monday, and I hope we continue to get better and better.

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