Why restaurants advertise

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Advertising to increase traffic

In the last part of this series, we learned that traffic and the amount of the checks drive same-store sales. To drive traffic, restaurants run several advertising campaigns throughout the year. In the chart below, we see advertising as a percentage of sales for some of the famous chains under each format of the restaurant industry.

Ad Expenses 2014-11-21

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Advertising spends

According to the above chart, the average spent on advertising expense in 2013 was about 2% of revenues. A few of the above names can also be found in the exchange-traded fund (or ETF) Consumer Discretionary Select Sector Standard and Poors depositary receipt (or SPDR) (XLY). 

Fast-food restaurants spent the most on advertising as a percentage of sales during fiscal year 2013. In dollar terms, McDonald’s (MCD) spent $808 million on advertising through radio and television. This also includes companies that spend on sports events such as Olympic sponsorships or a spot in the Super Bowl. Yum! Brands spent $608 million during the same period.

The average ad spends for a family restaurant was 2.5% of sales. Bob Evans (BOBE) spent $36 million in 2013, and Cracker Barrel (CBRL) spent $59 million.

The average ad spends for casual restaurants was 1.7% of sales. Darden (DRI) spent $252 million in 2013, and Brinker (EAT) spent $92 million.

The average ad spends for fast-casual restaurants was 1.4% of sales. Panera (PNRA) spent $55 million in 2013, and Chipotle Mexican Grill (CMG) spent $44 million.

Why advertise?

Why are restaurant companies advertising when these brands have been around for so long (60 years for McDonald’s)? Advertising serves two purposes. Restaurant retailers advertise for brand recall and to showcase new products on the menu.

Menu is the core of a restaurant’s business. Let’s look next at some of the menu innovations restaurants are using to attract customers and increase same-store sales.

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