evolution of dollar menu

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Executive Summary


In early 10, Wendys introduced a mini-menu of super value items costing less than $1 and so did Burger King, as well as a host of other restaurants like Taco Bell, Pizza Hut, and Kentucky Fried Chicken. Late in 10, McDonalds, the worlds largest fast-food chain, was forced to respond and decided to mark down several of its menu items to well below $1 in a desperate effort to win back customers that it lost to competitors because of their lower prices. The move intensified an already brutal price war in the industry.


While demand continues to grow, so does competition, and a shakeout in the fast-food industry is in the making with only the big chains probably surviving. Increased competition and lower profit margins at home are also driving the large fast-food chains to expand abroad, where competition is weaker and profit margins are higher.


Free market condition is continuous with McDonalds, Wendy’s and Burger King. For these restaurant owners, this boils down to a growing competitive fervor with increased awareness of the factors that affect the demand for meals at restaurants, including demographic conditions, location, income levels, and prices. The cost of products used is the basis for pricing strategy. The fast food burger market is a well defined (and dominant) segment of the general fast food market. You have to be big and good.


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Introduction


Competition occurs when there is freedom of entry into a market and there are alternative sellers in the market. It places pressure on producers to operate efficiently and cater to the preferences of consumers. If either McDonalds, Burger King or Wendy’s fails to provide an attractively priced sandwich with a smile, people will immediately turn and to the restaurant that is most accommodating.


Ray Kroc mortgaged his home and invested his entire life savings to become the exclusive distributor of a five-spindled milk shake maker called the Multimixer. Hearing about the McDonalds hamburger stand in California running eight Multimixers at a time, he packed up his car and headed West. It was 154. Seizing the day, he pitched the idea of opening up several restaurants to the brothers Dick and Mac McDonald, convinced that he could sell eight of his Multimixers to each and every one. Ray Kroc opened the Des Plaines restaurant in 155. First days revenues-$66.1! (McDonalds Corporate Information)


With the opening of a single restaurant that only served hamburgers, milkshakes, and soda in Miami in 154, James W. McLamore and David Edgerton began what is now Burger King Corporation. Three years later, they introduced the Whopper® sandwich, and the rest is history. Burgers and shakes were 18 cents each. The Whopper, which appears in 157, sold for 7 cents. (Burger King, Diversity, Moving Forward Our History)


Wendys Restaurant was the dream of a man named Dave Thomas who wanted to build a better hamburger. His dream became a reality in Columbus, Ohio in 16, when the first Wendy’s Old Fashioned Hamburgers restaurant, named after one of his daughters, Melinda Lou, nicknamed “Wendy”. More than five million customers are served each day in Wendy’s restaurants. (The history of Wendy’s Restaurant))


Supply and Demand


A competitive market is one in which there are many buyers and sellers so that no one can have an impact on the market through his or her individual actions. Research shows that the fast food industry, with annual revenue of about 4.5-billion, has grown in terms of store numbers by an average 40% in the past five years. (SA chains feel the bite of burger wars). McDonalds, Burger King and Wendys, rank 1-- in national study of drive-through restaurants. (Delivering the Fast Food Goods). Supply and demand set the equilibrium price for goods offered. People want quick and convenient meals; they do not want to spend a lot of time preparing meals, traveling to pick up meals, or waiting for meals in restaurants. As a result, consumers rely on fast food. Knowing this, fast food providers are coming up with new ways to market their products that save time for consumers. The economy is becoming increasing service oriented. The food service industry that offers the highest levels of convenience will continuously be rewarded with strong sales growth.


The demand for fast food hamburgers is the sum of the demand for McDonalds, Wendys and Burger King. Anything that increases the tastes and preferences of consumers for the product will increase the quantity demanded at each price. The actual king of the market for fast hamburgers is the consumer. Decisions to buy or not to buy, shapes the market and determines the range of qualities and prices of goods and services. There are many factors that change the demand for the product.


-Tastes and Preferences- Anything that increases the tastes and preferences of consumers for the product will increase the quantity demanded at each price. This would shift the demand curve to the right.


-Consumer Incomes- Higher levels of income increase market demand for any product. Products at times may experience decreases in demand when income rises. These are called inferior goods. The overwhelming case, however, is the former, the case where income increases cause demand increases.


-Prices of other products-The general level of prices rises.


-There is less real income to spend, where real income is defined as income divided by the price level. This would normally lower demand.


-The price of a substitute rises- If prices of chicken increase at KFC and even at McDonalds and other beef purveyors. The demand for hamburgers is expected to rise in this case as individuals substitute beef for chicken


-The price of a compliment rises- A compliment to a hamburger might be cheese, french fries or sodas. If those prices rise we would expect a decrease in demand at each price


Price Elasticity


An important characteristic of demand is the relationship among market price, quantity demand and consumer expenditure. McDonalds introduced an ambitious marketing strategy - Campaign 55 - to commemorate the chains founding in 155 by Ray Kroc. The strategy introduced the My Size Meal that included a Big Mac (or other featured sandwich) at a reduced price (from $1.0 to $.55) when purchased with any size drink and fries at their regular price. Originally, the company also planned to guarantee service in 55 seconds or less, but this part of the campaign was dropped because most of the ,750 franchise owners vigorously protested having to provide the faster service. Customers appeared to have difficulty evaluating the savings of the My Size meals over ordering the items individually or in Extra Value meals.


Burger King, with 1.% of the fast food market, and Wendys, with 11%, have become more aggressive in pricing and have improved food taste and quality to win McDonalds customers. McDonalds share of the fast food market fell from 4.% to 41.%, largely due to competition from Wendys and Burger King. Since the number of fast food restaurants grows at 7-8% per year but the number of fast food consumers grows at little over 1% per year, gains for one company come at the expense to others. It is estimated that the U.S. has about 5,000 more fast food restaurants than is needed to satisfy demand.


Perfect Competition


McDonald’s, Burger King, and Wendys compete, but the goods are not perfect substitutes. McDonalds can raise prices and not lose all their sales. Its a good time to be hungry for burgers and french fries. Fast-food burger chains are duking it out in a price war, and the only one winning is the consumer.


Looking to offer something new and exciting to its dwindling customer base and to get a leg up on the heated competition, McDonalds announced Dime Menu at all of its restaurants around the country. (McDonalds Offers New Dime Menu). Everything on this extensive menu will be value priced at ten cents.


Wendys cornered the market on people who want to spend a dollar on a fast food item. McDonalds and Burger King now hope to lure consumers with the value items, then nudge them to trade up once they get there. These are not one-time promotions. They are permanent menu items.


Burger King introduced 11 menu items � from burgers to salads � that will sell for cents each. Burger King is also placed its popular bacon cheeseburger on its budget menu. Under this scenario, consumers will be able to get a burger, fries and a soda for less than $.00.


The chains -cent value menu includes its grilled sourdough burger, an order of two tacos or a five-piece order of its Chicken Tenders. There are even three -cent milkshakes. This value menu could spell the end for often-confusing promotional discount programs that come and go, like -cent Whoppers.


McDonalds is gearing up to introduce a similar $1 menu, including its Big N Tasty burger and McChicken sandwiches. The new Dollar Menu will give customers more of a reason to come to McDonalds


Wendys made its -cent value menu a fixture. It has ten cent items every day. Its -cent items include chili, Frosty and the Jr. Bacon Cheeseburger.


Consumers know a bargain when they smell it. Why pay $1. for a Whopper at Burger King when, for $1, they can bag a Big N Tasty from McDonalds? The heightened competitive pressures are coming from McDonalds. Its Burger King thats really been hurt. Wendys is feeling the heat. Wendys biggest headache isnt precipitation. Its that everyone else � especially Ronald McDonald � is copying its success formula. When it rains, it pours


To generate sales, McDonalds and Burger King have cut prices, a tactic that erodes profit margins. Large-scale discounting tend to definitely hurt fast-food chains. Discounting damages the best brands at McDonalds and Burger King. McDonalds and Burger King are basically giving food away with the -cent menus. When you advertise and promote to convince people that all you are is a discount brand, thats what they think youre about. You dont make much of a profit. . . . If you think the Whopper is the best burger, why would you tell anyone that it is only worth cents?


Future competition will continue to change. Americas love affair with fast food has already hit a rocky patch. Nutritionists warn us about trans-fats and super-sizing our way to obesity. The consumer demand now that fast-food industry make serving nutritious foods a priority in our culture. So what will Americans want to see on the McMenu of the future? Burger King unveiled the BK Veggie Burger, the first major non-meat offering in the companys history. McDonalds is switching to cooking oil that reduces saturated fats and trans-fatty acids, it says, without sacrificing taste. And Wendys has rolled out a new line of salads like the Mandarin Chicken and the Chicken BLT, each with packets of optional ingredients to give the customer the ability to custom-fit the amount of fat and calories. For now, let the customer decide


The Cost of Production


The food component of a fast-food meal accounts for only 0 percent of its cost. If it takes $1 to sell a bag of French fries for $1.5, the fries themselves cost only 0 cents. Add 50 percent more fries, raise the price by a quarter, and the production cost goes up a dime. But since most of the overhead remains unchanged, the larger size means 15 cents more profit. Helping the chains wage their price war are slightly cheaper beef prices. Wholesale beef prices have declined about 8 percent, to roughly $108 per 100 pounds, according to the U.S. Department of Agriculture.


After years of leading the industry in innovation as well as market share, McDonalds has recently been a me-too player as competitors set the pace. The Big N Tasty burger will be a centerpiece of the value menu; it costs 48 cents to make the -cent sandwich. Whether McDonalds is actually giving much away is open to question. The 55-cent Big Mac - a quarter of its current price - is only valid when purchased with french fries and a drink, high-profit items which help recoup the investment. Added up, the special offer represents a combo meal only 0 cents lower than currently offered. After reaching the 100 billion mark a few years ago, McDonalds stopped counting the total number of burgers it had sold in its 4-year history. McDonalds makes twelve burgers at one time. They are hand seared after 0 seconds on the grill, turned at 60 seconds, and pulled at 100. In 1, the Big Mac celebrated its 5th anniversary - enough had been sold to go round the world 5 1/ times. Sales havent budged since 1, but costs keep rising. When McDonalds began advertising its $1 menu featuring the Big N Tasty burger, the popular item cost $1.07 to make which sells for $.5 unless a customer asks for the $1 promotion price. No wonder profit margins are no more than half of what they were.


At Burger King you can Size it your way; that is, you can have a medium, large or king-sized value meal with incremental increases in the fries and soft drink. By ordering the value meal, as opposed to ordering each item separately, youll save 78¢ per increment (medium to large; large to king-size). No matter how fast burgers are prepared once they are cooked, the rate-limiting step is the cooking itself. One burger at a time comes off of the chain broiler at the rate of eight per minute, maximum. The machine paces the process. (Again, in slow times this is not entirely accurate because at these points in the day, BK keeps an inventory of already cooked patties in a steam tray at the end of the broiler. That is why BK sometimes has to microwave its burgers.). As long as you can do your part of the assembly process in 7.5 seconds per burger (adding pickles and onions in 7 seconds is easy even if youre not very motivated, thats all that is required. If you get excited and love your work, and can do it faster, so what? You still have to wait for the machine to spit out the next patty. This means that Burger King saves money on wages and hiring expense.


Typical menu-pricing schemes include a fixed markup over food cost, a markup over total cost, and pricing to meet a gross margin requirement. The importance of knowing demand in setting prices determines an effective pricing strategy and how well any restaurant understand it’s customers responses to change.


Monopolistic Competition


Monopolistic competition shares with competitive firms the assumptions of many sellers and buyers, freedom of entry and exit, and perfect information. It differs from the competitive model because these firms are facing downward sloping demand curves because they have managed to differentiate their own output and are not selling a homogeneous product. McDonalds, Burger King and Wendys have been competing with each other for a long time, trying to find ways of differentiating themselves. Each one wants to keep its current customers and attract some business away from competitors even though they all have dollar menu’s, value meals and sell hamburgers. When we drive down a busy highway, a wide selection of fast-food are available, all vying for your attention � and your stomach!


McDonald’s differentiate itself by appealing to kids and capitalizing with “Ronald and Friends. If children enjoy their experience on the web and at the restaurants, they may say, I want to go to McDonalds not I want a hamburger.


Burger King’s differentiation includes slogans that say, It just tastes better”, Flame-Broiled...Great Tastes, and. Have it Your Way. The restaurants are committed to providing the highest quality products for you to choose from so that you really can HAVE IT YOUR WAY®. You can always get your flame broiled WHOPPER® Sandwich made your way.


Wendy’s differentiation comes in it’s product being good, home-cooking fresh, genuine food. Taste the difference fresh makes is their slogan. The company emphasizes the quality of its ingredients, such as these descriptions of the ¼ lb. single Made from 100% pure beef thats fresh, never frozen and a variety of fresh toppings, like whole onion rings instead of the sliced kind and a leaf of lettuce instead of the shredded stuff. Wendy’s is also a friendly, personal, family-style restaurant, and not just a place to eat.


When McDonalds opens in a neighborhood, it is no accident that Wendys and Burger King often follow, and they end up dividing up the market and leaving each with fewer customers. Entry will lower the demand and MR curves and this process will continue until profits have been eliminated. These companies face a downward-sloped demand curve because of substitution between one another. Curves will be flatter (more elastic) than the market demand curve. A price increase in McDonalds will cause consumers to substitute even though hamburgers will cause some consumers to substitute away to Burger Kings or Wendys hamburgers, but, since BK and Wendys are still in the same industry, it doesnt effect the market Quantity demanded.





References


1. Managerial Economics in a Global Economy


http//www.swcollege.com/econ/salvatore/webchap.html


. The history of Wendy’s Restaurant


http//dede.essortment.com/wendysrestauran_rlii.htm


. WenOhio, Inc


http//www.wenohio.com/wen/history.asp


4. Burger King, Diversity, Moving Forward Our History


http//www.burgerking.com/Community/Diversity/history.html


5. McDonalds Corporate Information


http//www.mcdonalds.com/corporate/info/history/


6. McDonalds Offers New Dime Menu


http//www.usedwigs.com/weekly_40.html


7. USA Today


McDonald Tries Imported Beef


http//www.usatoday.com/money/retail/00-04-0-mcdonalds-beef.htm


8. Imperfect Competition


http//www.uri.edu/artsci/ecn/mead/INT1/Mic/Overview/Over.Imperfect.html





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