In what should be good news for its patrons, Jack in the Box is planning to offer later this year deep discounts on lower priced menu items in the face of growing competition from its fast food rivals.
In an earnings call Wednesday, CEO Lenny Comma said that it has no choice but to start discounting more heavily than has been their practice over the years.
Where the San Diego chain has normally promoted value for budget-conscious customers by offering bundles of sandwiches, fries and soft drinks, it will now start lowering prices on individual menu items, he said.
“I think that you’ll see us pivot to at least some single item promotions in the back half of the year, simply because we’re sort of being dragged into that space by all the competitors, including those that have a higher average check in our space,” Comma said. “Even they are delving into the single item discounts. So I think we’re not going to be able to prevent that from happening.”
He cautioned, though, that Jack in the Box has to be careful to not discount too much and for too long a time or it runs the risk of damaging the brand.
“We don’t want to put ourselves in a position where we simply devalue our brand by essentially turning ourselves in to a perpetual discounter and training the consumer that they should no longer come to us for mid- and top-tier product,” he said. “That’s been our bread and butter over the long term and we will continue to invest there.”
Comma didn’t mention what menu items in particular would be targeted for lower pricing. He noted that recent examples of the company’s more conventional promotional offerings was its Jumbo Meal, which bundled a Jumbo Jack burger with two tacos, fries and a soft drink for $3.99.
The company also is struggling to overcome declining sales at its fast casual chain of Mexican restaurants and is looking at the possibility of unloading the once high-performing Qdoba brand.
Jack in the Box announced this week it has hired the investment banking firm Morgan Stanley to evaluate options for the under-performing Mexican food brand. Although Comma has not specifically stated that spinning off the Qdoba brand is an option being weighed, analysts say it’s clear that is a very real possibility.
“At our investor meeting last May we said that one of the factors that would cause us to reconsider our strategy with respect to Qdoba was valuation,” Comma told analysts during a Wednesday earnings call. “It has become more apparent since then that the overall valuation of the company is being impacted by having two different business models. As a result we have retained Morgan Stanley to assist the board in its evaluation of potential alternatives with respect to Qdoba as well as other ways to enhance shareholder value.”
While Qdoba has a very limited presence in Southern California, including just one outlet in San Diego — at the airport — the brand has grown to 700 locations in 47 states and Canada since Jack in the Box acquired it in 2003.
In recent quarters, it became clearer that Qdoba, once the financial darling of the company, was starting to be a drag on the overall financial performance of Jack in the Box.
During the second quarter ending April 16, same-store sales at Qdoba restaurants fell 3.2 percent, including a decline of 5.9 percent at company-owned locations, a sharp reversal from an overall 2.1 percent gain just a year earlier. By comparison, Jack in the Box same-store sales fell just 0.8 percent during the second quarter.
Looking ahead, company executives are forecasting a 1 percent growth in same-store sales within the Jack in the Box system restaurants but a decrease of as much as 2 percent at Qdoba outlets.
Given the company’s decision to reach out to Morgan Stanley for help, a sale is no doubt one route Jack in the Box could take to address investor concerns, said San Diego restaurant consultant John Gordon.
“Morgan Stanley is strictly an advisory firm that doesn’t make operational recommendations but essentially says if you want to sell it’s worth this and if you want to sell it, we can go out to our network and find a potential buyer,” Gordon said. “There is the potential no one may buy the brand.”
A little less than a year ago, Jack in the Box announced plans to relocate Qdoba offices from the Denver area to San Diego, where it could share space at its parent firm’s Kearny Mesa headquarters. Despite lagging sales, there are plans to open as many as 60 new Qdoba restaurants this fiscal year, the company noted in its current earnings release.
The move to reevaluate Qdoba comes at a time when the bloom is starting to come off the rose of a very successful fast casual market. In the fourth quarter last year, fast-casual chains’ same-store sales fell 1.1 percent on average, according to research by Nation’s Restaurant News.