Competition | February 2010 | By Sam Oches

The Value Equation

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.

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.”

“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.

Cardwell’s chain is also a player in the value-menu market, but at a price point that Subway and others are finding is a magic number in the recession: $5. Boston Market has 11 menu items on its $5 value menu.

Werner says that especially in the wake of the $5 footlong deal from Subway, brands have been flocking to the $5 price point. Domino’s released its $4.99 Oven Roasted Subs, Arby’s added $5.01 Combos for five of its sandwiches, and KFC rolled out $5 Fill-Up and Madden NFL box LTO options. Quiznos even challenged the $5 price point with its own $4 Torpedo sandwiches.

But the $5 price point, says Subway’s Pace, is nothing without chains putting their money where their mouth is.

“One of the keys to our success is that everybody else, after we launched $5 footlongs, basically said, ‘We have stuff for $5, too,’” he says. “And I don’t think consumers reacted all that well to that, because it wasn’t presented in a way where they talked about how their stuff was high quality.”

Though chains have pushed prices lower and added new options to their value menus, quality remains a key factor in perception of value. Nobody is going to buy a 99-cent burger that doesn’t taste like a burger.

“Value is function divided by price or cost,” Werner says. “Function for us is basically food quality. And the higher the value score, the better the food quality is at that given price point.”

A balance of quality and price has led some companies, like CKE, to offer premium options for lower prices, but to avoid calling it a “value menu” or charging only $1.

“Our positioning has been built around premium quality,” says CKE’s Haley. “Because we’ve spent a lot of time and effort building that positioning, our concern is that if we were to suddenly revert to offering low-quality, 99-cent fare, then we would undo a lot of the work that we’ve done, and would potentially confuse our positioning in some people’s minds.”

Some chains have avoided lower prices altogether and have let the quality of their concept do the talking throughout the recession.

“Value is function divided by price or cost. Function for us is basically food quality”

“Our focus on value is much more focused on providing a quality experience, quality product, and great service, and continuing to do that at a price point that people say … the combination of the experience and the food and the service all for that price point is a really good value,” says Rick Vanzura, chief operating officer of Panera Bread. “The customer is looking for a different value equation from us.”

Mohammed says that not only are customers interested in eating better food, but that today, in the latter half of the recession, they may be willing to pay more for it. He says many are suffering from “frugal fatigue.”

“Consumers will come and pay you more than that low price if you have a package of components that they feel tastes good,” he says. “As we’re emerging from this recession, you still have to have a recession option, but my point is to realize that customers may be willing to open up their wallets more, and if you want to make more profit, you have to find ways to serve these customers.”

Quantity

The notion that more food equals more value certainly comes into play at more than one chain. KFC, for example, directly challenged Subway’s $5 footlong deal with its $5 boxed meals that include an entrée, a side, and a drink.

“A $5 price point is one that consumers gravitate toward, and whenever they see an offer at KFC where they can get a full meal for that price versus just a sandwich is a pretty compelling offer,” says KFC spokesman Rick Maynard.

Wendy’s opted for a bigger package of value as well when it announced its Deluxe Value Meals LTO in November. For $2.99, customers could get the Crispy Chicken sandwich or Double Jr. Cheeseburger along with a small drink and small fries.

Boston Market’s Cardwell agrees that a low price isn’t necessarily going to bring customers charging through the doors.

“We’re finding that simply having $5 deals isn’t enough to turn people’s heads,” Cardwell says. “The ones that are popular have side dishes bundled in, drinks bundles in.”

But Werner says that quantity as value involves only more components, not more food. For the portion sizes that quick serves offer, he says the segment is playing a different quantity ballgame than casual-dining chains.

“There’s not a perception that you’re going to take something home after you’ve already eaten at the store,” Werner says. “Probably a rare exception do people come back and say, ‘Wow, that super-size fry is just a little too small for my liking.’”

Flexibility

The last aspect of value that consumers are increasingly wanting is the ability to be flexible with menu options. In other words, offering each of the components of combo deals at low prices and letting the customer decide what he thinks is a good deal.

“Guests for us at least have loud and clear told us what is not value,” Cardwell says. “It’s not always price. A lot of times it’s the ability to pick and choose the right quantity of food for the occasion.”

In December, Boston Market unpackaged its individual meals, which originally included a protein with two side dishes for $7–$8. Now it’s offering a protein for $5 and the ability to add up to three side dishes for $1 each.

“With a lot of research behind us we’ve found that for some people it’s too much food, and for some people it’s not enough,” Cardwell says. “But the guest feeds back to us that the value is much greater because they’re in much greater control over whether to get a little bit of food or a lot of food.”