Menu Innovations | July 2011 | By Daniel P. Smith

The Case for Cheap Eats

Page 2

Although many other franchisee groups have gone public with claims of imposed value offerings reducing margins and profits, many quick-service brands continue to assert that cheap eats spark restaurant traffic.

“Franchisors and operators have been at odds, but the truth likely lies in the middle. If you can start creating incremental traffic, then the operating leverage inherent in the restaurant business will help generate more profit,” Lombardi says, adding that operators often underestimate the magnetism of value offerings.

If given the option to participate in a value menu, many operators would jump at the chance to pass, Lombardi says. It’s a case of be careful what you wish for, though, as the lack of cheap eats threatens to alienate the price-sensitive consumer segment important to the quick-service world.

“If others have value offerings and you don’t, odds are you’ll be taking less money to the bank a year from now,” Lombardi says.

How Cheap Is Too Cheap?

Rafi Mohammed, a pricing consultant and author of The 1% Windfall: How Successful Companies Use Price to Profit and Grow, adopts a contrarian viewpoint when it comes to cheap eats. During the recession, Mohammed witnessed what many did: consumers trading down from casual dining to quick service.

“I’d question the wisdom of dollar menus, especially at a time when people are naturally moving to your brand,” Mohammed says. “But people got nervous during the recession and started to discount. I’d argue they probably went too far and set the floor too low.”

For many quick serves, however, value items remain a case of sink or swim, says Aisling Balfe, a retail analyst with London-based Planet Retail, a leading provider of global retailing and foodservice information.

“Even if they were not seeing very big returns from these value offerings, without them, customer traffic would undoubtedly have fallen,” Balfe says, specifically noting Arby’s struggles given its late appearance in the discount space.

While Intellaprice’s Kerr says it’s easy to invoke the “never compete on price” mantra, she understands restaurant brands battling in a competitive landscape reacting with lower prices. If the deals create buzz, then business benefits, but few win if operators endure a net loss of profit or train customers to be price sensitive.

The risk, Kerr says, is that value “offerings limit marketing creativity and dilute the definition of value to one that translates to low price.”

Lombardi adopts an even more practical, mathematical rationale.

“Too cheap is when franchisees are losing actual dollars and cents,” he says. “That simply doesn’t make sense for anybody.”

In the constant push for affordability, margins can fall alongside product quality, Balfe says. She contends that anything less than $1 is unlikely to result in much profitability.

“There is always a risk in discounting that you go lower and lower in price in order to remain competitive and then do yourself a disservice by having to compromise on product quality,” Balfe says.

While Mohammed says that some brands need cheap items to entice price-conscious consumers—“It’s just the space they play in,” he says—he advises companies to consider the brand’s value and health in both the short and long term before introducing cheap food.

“Brands need to think about how aggressively offering $1 deals impacts or even devalues the brand and product,” Mohammed says. “There’s a lot of price-sensitive people looking for a deal and if you offer it, they’ll come, but with that I ask: Are you getting the profit you need and limiting cannibalization?”

The before-you-go-cheap considerations run deeper.

A Closer Look

A look at the cheapest items offered at the nation’s top five quick serves reveals two strategies: creating scaled-down versions of traditional menu choices and offering simple snacks.

McDonald’s Dollar Menu

Sausage Burrito

Sausage McMuffin

McDouble

McChicken

Side Salad

Burger King’s Value Menu

Whopper Jr.

Spicy Chick’N Crisp Sandwich

Chicken Tenders

Cheesy Bacon BK Wrapper

BK Breakfast Muffin Sandwich

Wendy’s

Double Stack ($.99)

Crispy Chicken Sandwich ($.99)

5-Piece Spicy Chicken Nuggets ($.99)

Jr. Bacon Cheeseburger ($1.29)

Chicken Go Wrap ($1.59)

Subway’s $5 Footlongs

Meatball Marinara

B.L.T.

Spicy Italian

Cold Cut Combo

Black Forest Ham

Starbucks

Pike Place Roast ($1.95)

Caffe Misto ($2.55)

Iced Coffee ($2.45)

Shaken Iced Tazo Tea ($2.15)

Starbucks Tribute Blend ($2.15)

Pages