Menu Innovations | July 2011 | By Daniel P. Smith

The Case for Cheap Eats

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Lombardi advises brands to consider customer acceptance and how a value offering will impact existing menu items and purchase patterns. But he urges restaurant companies to study the economics for the operator’s ROI and to engender franchisee support.

“Smart franchisors understand unit economics and know this business is either a win-win or a lose-lose,” Lombardi says.

Likewise, Kerr, who worked on pricing and strategy at Dunkin’ Donuts and Baskin-Robbins, urges restaurant companies to examine a value item’s purpose on the menu, how it fits into the product portfolio, and an exit strategy should the item’s margins shrink.

“Think about this holistically,” she says. “Don’t worry about the economics of just the loss-leader item, but think about how this drives traffic, total ticket, and guest satisfaction.”

Cheap Food Strategies, Best Practices

Among the top five quick-service brands (McDonald’s, Subway, Burger King, Wendy’s, and Starbucks), clear commonalities arise from a review of each brand’s cheapest menu items.

Most cheap eats are basic builds, such as the McDonald’s Sausage Biscuit or Starbucks Iced Coffee; many other items, though popular with guests, are not the most sought-after items.

Many value-inspired offerings are snack-like items, such as Wendy’s Chicken Go Wrap or Burger King’s Chicken Tenders, ideal for today’s on-the-go lifestyles and even seizing on the nutritional halo effect.

In some cases, the cheap eats were created specifically for a value menu and engineered with costs in mind. Consider McDonald’s: Rather than continue slim margins on its double cheeseburger, the Golden Arches debuted the McDouble (two patties of beef and one slice of cheese) in 2008.

Led by Subway’s $5 Footlongs, some cheap eats carry a high value perception. While the Connecticut-based franchisor has reported significant success with its $5 Footlongs and the simple, direct messaging, Subway could be devaluing its existing products, Mohammed says.

“Once the recession is over and that Footlong goes back to $6.50, how will the customers react?” he asks.

In contrast, Mohammed points to Quiznos, which didn’t reduce prices or devalue the brand’s signature products, but introduced new items at lower price points.

“In this way,” Mohammed says of Quiznos, “the brand didn’t devalue where the profit is. They created new items that work for them.”

Jason Robson, executive vice president of marketing at Quiznos, says the company created the new menu items because, “Customers had a need for items at a price point that they could afford to go eat every day.”

The brand introduced Torpedos, a 13-inch sandwich on thin ciabatta bread, and Bullets, an 8-inch version, in 2009, as well as a “Choose 2” platform in 2010 in which customers could choose two entrées for $5.50.

“Everyone doesn’t want to bring a brown bag to lunch every day, and we wanted to make sure we had offerings that were comparable to Quiznos’ brand but, at the same time, offered an alternative to brown-bagging it at lunch,” Robson says.

To avoid sacrificing quality for the sake of lower prices, Quiznos paid special attention to taste and value.

“You can’t bring in a product that is completely outside of where Quiznos brand attributes are and what Quiznos’ expectations are,” Robson says.

At Starbucks, which has long battled the perception of being a high-priced brand, the menu has been rounded out with more economical options. For example, there’s the brand’s 2008 introduction of the Pike Place roast, which became an economical choice for loyal customers.

Companies such as McDonald’s and Burger King, which are veterans of the discount game, have faced the reverse challenge and brought premium items to their menus. Kerr, in fact, contends that McDonald’s recent success stands on the shoulders of its new product introductions, namely the McCafé line of drinks not found on the value menu.

“This is that barbell strategy people have been talking about: the product portfolio that features a combination approach of value items and premium offerings,” Kerr says. “It’s about creating an opportunity to sell customers other products in addition to the low-margin item.”

Indeed, giving consumers choice is one of the value menu’s intrinsic benefits, as is the potential add-on to an existing sale given a value item’s friendly price point.

“It is likely that value items will draw customers in, even if they ultimately choose to purchase a more expensive item,” Balfe says. “People may also select a value item as an addition to a more premium item—in effect to balance the cost out.”

For restaurants considering new value-priced options and seeking to create a balance between profit and perception, analysts cite two proven methods: limited-time offers and couponing.

Limited-time offers work particularly well at low price points as they encourage visits without the long-term negative impacts of an everyday value menu. LTOs can also include dine-in-only deals, thereby heightening the likelihood that customers will purchase higher-margin items, such as a drink, during their visit.

A classic “hurdle strategy,” coupons similarly work well with cheap food, particularly in the long-term. Coupons can increase traffic, introduce new customers to the brand, and encourage existing customers to try new products.

“Couponing is a golden oldie, but an effective way of measuring just how many price-sensitive consumers you have,” Mohammed says.

With cheap food here to stay, the challenge to brands and operators alike is finding the balance between consumer responsiveness, price, and profit.

“Once these value items got put on the menu, they were here to stay,” Kerr says. “Now, so many brands are trying to find that right mix, because it can’t simply be a case of having value items strictly for value’s sake.”

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