Article
QSRs bank on value menus
How the U.S. dollar has a great deal of purchasing power on the QSR menu.
April 7, 2008
On every newscast, in every daily paper, the alarm is sounding. The once-strong U.S. dollar is floundering against the euro and other foreign currencies, signaling an economic downturn and slowing consumer spending.
Though the struggling dollar won't go too far at the gas station or in Europe, it still has a great deal of purchasing power in one venue: the QSR value menu. One greenback can buy a Stack Attack at Wendy's, an Enormous Omelet Sandwich at Burger King or a Double Cheeseburger at McDonald's.
Chains offer value meals to appeal to customers with less disposable income — those who are looking for more value and have less money to spend. And the number of those customers could be growing, as fewer dollars are left over after the typical consumer pays bills, visits the grocery and fills up at the gas pump.
Value menus also enable restaurants to differentiate their menus by tiers, said Darren Tristano, executive vice president of Chicago-based Technomic Information Services. For example, McDonald's three-tier menu — with premium, standard and value options — enables customers to upgrade or downgrade as mood, taste or finances dictate.
"It gives three different levels for consumers to be able to look at and say, ‘Well, if I want a standard meal for $5, I can do this. If I just want a burger and a pop and fries, I can get it off the value menu and spend under $3. Or I can go up to an Angus burger or a premium salad,'" Tristano said.
Burger King has successfully employed a similar strategy. With the introduction of its BK Value Meal in February 2006, followed by its Breakfast Value Menu one year later, the items account for 12 percent to 13 percent of sales.
"Guests found the value menus to be a great addition to our overall menu mix," said Burger King spokesman Keva Silversmith. "It also improved consumer perception of Burger King's value for the money."
Furthermore, Burger King's "barbell" strategy of offering both value and premium products has been the most successful product mix in terms of reaching all types of consumers and driving traffic to restaurants, Silversmith said.
In the past, side items and one- or two-patty burgers made up the majority of value meals. But recently more chains have added snacks, desserts and parfaits, Tristano says. Another boost has been the influx of chicken items, such as Burger King's Spicy Chick'n Crisp Sandwich and Wendy's Crispy Chicken Sandwich.
"Chicken has raised the bar and elevated (the value menu) at a lot of the restaurants," Tristano said. "The grilled chicken sandwich has been kind of at a high point. But now we're starting to see this fried, breaded chicken sandwich that's coming on the menus and hitting at about 99 cents."
Franchisee fallout?
But do lower costs for consumers mean lower profits for franchisees?
Former Burger King franchisees Luan and Elizabeth Sadik say that was the case for them. The brother-and-sister team operated five Burger Kings in Manhattan and claim that the value menus sent two of their stores, with high overhead because of the locations, into debt. According to an Advertising Age article, the two claim the value menu cost them about $100,000 a year.
Burger King views the allegation differently.
"We believe the franchisee used the value menu as a pretext to breach his contractual obligations," Silversmith said. "We have no evidence the value menu hurt his profitability."
In fact, the two stores had not been profitable since 2001, years before the introduction of the value menu, according to Advertising Age.
While the lower price point found on a value menu may deteriorate the percentage of profit margin, Tristano said the ultimate reason for a value menu is to remain competitive and drive traffic into the restaurant.
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"If you're able to drive traffic, you're ultimately going to get more customers and on an incremental basis it should be more profitable for you," he said.
By drawing in those customers, if fixed costs remain constant, that variable, incremental profit should go to an operator's bottom line, Tristano added. "You're not losing money when you're selling something on the value menu, but you're not making a lot."
A profitability issue could arise if current customers begin buying off the value menu instead of the standard one.
"So if the person coming in at the $5.50 check average now is spending $3, you might be making 50 cents, but you're not making $1.50," Tristano said. "All of the sudden, you're diluting your profit by offering these to customers who are already coming through the door."
Burger King contends that the value menu hasn't hurt the profitability of any of its restaurants; instead, the cheaper products have helped.
"The value menu has driven traffic and overall profitability since its launch," Silversmith said. He added that the company provides a mechanism for franchisees to seek an exemption from the value menu.
As consumers look for more ways to tighten their belts and endure the tougher economic conditions, Tristano expects the industry will see more chains adding value menus, as well as chains adding more items to their existing value menus.
He also sees a shift in the pricing beginning to take place.
"They could be anywhere from 99 cents to $1.29," Tristano said. "When you talk about a value menu, what used to be a dollar menu is now a little bit more."
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