Competition | February 2010 | By Sam Oches
The Value Equation
In March of 2008, Subway launched a value deal nationwide that already had explosive success in a number of the chain’s South Florida stores. The introduction of the $5 footlong deal across the U.S. was intended to be an answer to the $1 value menus of industry standard-bearers such as McDonald’s and Wendy’s and a new direction for the brand in the wake of its advertising success with Jared Fogle.
Subway could never have predicted that the $5 footlong deal would turn the restaurant industry on its head. Nor could the company have known that it would help to redefine a term that was no longer just a word atop a menuboard, but a deal-breaking catchphrase of the tough economic times: value.
Indeed, “value” has understandably become the buzzword of the recession for restaurants, thrusting quick-service chains like Subway to the fore of the battleground for penny-pinching customers. But the maniacal push by restaurants for lower prices and recession-busting menu items—which has included chains like KFC, Dairy Queen, and Sonic rolling out value menus during the recession—has left the true definition of “value” blurred.
“I think for a long time everybody thought that in the quick-service restaurant space, value had to be $1, and you could only do stuff for $1,” says Tony Pace, senior vice president and chief marketing officer of the Subway Franchisee Advertising Fund Trust. “I think that what we’ve been able to do with $5 footlongs is show that price is obviously a very important part of the equation, but so is what you’re offering.”
From the time Taco Bell introduced its value menu in 1988 and Wendy’s rolled out its Super Value Menu in 1989, up to when McDonald’s launched its Dollar Menu in 2002, value in quick service defined itself as being a $1—or close to it—price point. With the recession delivering new deal-seeking consumers to the segment, though, brands like Subway are finding that value has become something much more multidimensional.
Rafi Mohammed, a pricing expert and author of the book The Art of Pricing, agrees with Pace that value is not merely a matter of being inexpensive.
“I think that the word is misused, and when people talk about value, they think about it in terms of giving people the lowest price,” Mohammed says. “From a consumer’s standpoint, it’s about an evaluation between what they get and what the price is.”
Across the spectrum of the quick-service industry, different chains have different ideas of what they consider to be the definition of “value.” But when adding up various opinions of major industry players, it is clear that the value equation seems to be comprised of no fewer than four components: price, quality, quantity, and flexibility.
Surely no discussion of value can be considered without assuming that price is a factor. Value menus of chains typically hug the $1 threshold: Taco Bell’s Why Pay More! menu includes 10 items for 99 cents or less, McDonald’s Dollar Menu has eight for $1, and Burger King’s BK Value Menu—with the latest addition of its Double Cheeseburger—has 10 for $1.
Signs point to the fact that the recession forced many consumers to look solely at cost when considering dine-out options. A fall 2009 study by global business advisory firm AlixPartners showed that consumers in Q4 of 2009 expected to pay on average $11.49 when dining out, which was down 20 percent from the same study conducted in March of that year.
“It starts with the price point,” says Adam Werner, co-author of the study on customers’ perception of value.
“If our data would suggest anything, people are going to expect lower prices certainly in the next six to nine months going forward,” he says.
According to Brad Haley, executive vice president of marketing at CKE Restaurants, two groups of customers existed in the pre-recession world: those who wanted the lowest price they could get, and those who wanted bang for their buck.
“In the post-recession world, I think we’ve lost some of the latter group and gained in some of the former group,” he says.
Even though this is the case, Haley says that CKE chose to stay away from value menus even during the recession and instead offer more premium items.
“We’ve promoted what I’ll call mid-tier priced products that fall into maybe the $2.50 range,” he says. “At that price point we can deliver a high-quality burger, which I think seems to fit well with the new price-value threshold for people. Pre-recession, customers might have easily spent more than $3, in some cases more than $4, for what they consider a great burger. But in today’s world that’s kind of taken a step down.”
Of course, too low of a price can hurt the bottom line, and in turn upset those who stand to profit from the value’s public interest: franchisees. Burger King found this out the hard way when it added its Double Cheeseburger to the value menu in October. The $1 price for the burger turned out to be cheaper than what it cost for franchisees to make and market it, and the National Franchisee Association, which represents more than 80 percent of U.S. Burger King franchisees, filed a lawsuit against the chain.
“I think any time you’re speaking for 85 percent of your system with a price point but not addressing the profit factor, you have to be sensitive,” says Lane Cardwell, CEO of Boston Market.
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