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Forecasting Part II: Brand expansion strategies

While premium-focused Arby's is exploring a value strategy, value leader Taco Bell is looking at higher quality products. Which strategy will work?

March 11, 2010

Arby's and Taco Bell are introducing strategies at opposite ends of the pricing bar bell. Yesterday, we examined how the sandwich icon's move to add a value menu could add menu value — if executed right. Today, we look at how Taco Bell, a value leader, will fare adding premium-priced products.

It is far easier to achieve incremental profitability via new premium products that are extensions of your core competencies (e.g. tacos) than the establishment of a value menu category where the shift in menu mix becomes skewed toward less profitable menu selections.

Taco Bell's suggestion that these new premium menu additions will improve its marketing as a more healthful dining destination has immeasurable value. However, the power of Taco Bell's future line-up of premium products is to improve profitability — which is definitely measurable and likely substantial.

Taco Bell's $2.79 Pacific Shrimp Taco price point is easily 80 cents higher than Chicken or Steak Taco equivalents (using California prices) and significantly higher than the very filling $0.79/$0.89/$0.99 Value Menu offerings. The Pacific Shrimp Taco introduction guarantees increases in average guest check without any significant risk of transaction declines.

Any trade-up from Chicken or Steak Taco to the Pacific Shrimp Taco represents an estimated 55-60 cents in incremental profitability (assuming 30 percent food costs). Even slight deviations to this assumption still represents significant increases in penny margin. There are very few, if any, menu mix shifts to Pacific Shrimp Taco that will not yield incremental profitability.

Of course, the profitability from any additional transactions is completely incremental.

On the down side, the $2.79 price point might be higher than the guest's post-purchase value assessment. It was for me ($3.03 with tax). In other words, the Pacific Shrimp Taco's menu value may not be entirely efficient (e.g., the desired equilibrium between operator profitability and guest value might be tilted in Taco Bell's favor).

However, the risks of a $2.79 price point damaging consumers' perception of Taco Bell's brand value is small, if not non-existent. This might be the 'umbrella' benefit of Taco Bell being the nearly undisputed leader in overall QSR value. Additionally, the LTO Pacific Shrimp Taco has a short life cycle, which mitigates any lasting damage that a wrongly priced permanent menu item might create.

Taco Bell's plans to increase its focus on premium new menu items that are extensions of their core competencies will likely lead to significant increases in profitability, particularly when the economy eventually spins into a sustained positive direction.

Taco Bell's premium product forecast: A well-timed strategic and executional HIT.