Wendy's chili case
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Wendy's chili case...
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ECO 241: Pricing Strategy Case #1: Wendy’s Chili Monday, October 13, 2013 Gladys Nickerson Lin Zhang
Ques3on 1 How was Wendy’s able to achieve its ini3al success and to grow so rapidly at a 3me when the quick-‐service hamburger business appeared to be saturated?
Wendy’s was able to achieve its iniGal success and grew so rapidly at a Gme when the quick-‐service hamburger business appeared to be saturated because of Dave Thomas’ belief to create “bigger and beQer hamburgers that were cooked to order, served quickly [as he argued that current hamburgers wait Gmes were way too long], and reasonably priced.” With Wendy’s, Thomas decided to go aVer a different target segment of the “hamburger market,” namely young adults and adults. Thomas focused on hamburger quality in light of the seemingly inherent low quality of hamburgers in compeGtor quick-‐service hamburger joints, and also believed he was offering up a different product. His main focus was the hamburger. Wendy’s old-‐fashioned hamburgers were made from fresh beef that was served directly from the grill to the customer, noGng our previous point that the quality did not decrease due to it being a quick-‐service restaurant. The unique shape also differenGated a Wendy’s hamburger from its compeGtors, which added to the memorability of the paZes. To stay price compeGGve, Wendy’s decided to limit the number of menu items to four main products. However, with the three different types of paQy choices that individual customers could order, and the many condiments available, Wendy’s was sGll able to offer variety (256 possible hamburger combinaGons). So hamburger variaGon was sGll offered despite Wendy’s limited, and cost-‐ efficient, menu. G. Nickerson & L. Zhang 2
Ques3on 2 What benefits might have resulted from Wendy’s’ “limited menu” concept? What were the disadvantages of such a concept? Why was the concept eventually discon3nued? The “limited menu” concept was to promote compeGGve
pricing while sGll maintaining the ability to serve a quality product. A benefit that may have resulted from Wendy’s limited menu was not necessarily cost-‐effecGveness in the sense of direct materials (i.e. ingredients), but cost-‐effecGveness in the sense that research hours needed at the management level to allocate costs for each menu product and to price items were lower. In short, there are less administraGve costs associated with less menu items, and generally, fewer costs to take into account. Since Wendy’s already uses specialized machinery to make many of its “core four” menu items, fewer costs for new machinery are incurred. Another benefit is Wendy’s apparent goal and ability to serve beQer-‐quality products than its compeGtors at the Gme. With less menu items, there are less quality assurance control measures in total, than if Wendy’s had started off with a menu of 20 products with 10 quality control measures each. Ideally, this would allow Wendy’s more Gme to focus on the quality of individual products and to address issues more quickly.
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Ques3on 2: Cont’d What benefits might have resulted from Wendy’s’ “limited menu” concept? What were the disadvantages of such a concept? Why was the concept eventually discon3nued? A final benefit is “Wendy’s W ay” and the chili advantage. In
keeping with “Wendy’s Way,” a set of beliefs that would result in a successful company, chili was added to the limited menu aVer choosing to maintain the most desirable product mix. Adding chili to the menu prevents wasGng the hamburger paZes and also provides less problems for store managers since there is less pressure to serve any hamburger with a paQy that is too “well-‐done” and not up to the Wendy’s “hot ‘n juicy” standard. The absence of any excessive items in Wendy’s limited menu accounted for savings which enabled Wendy’s to be able to serve a cost-‐effecGve quality product, retaining a compeGGve advantage. The disadvantages of such a concept was the lessened menu variety to customers. However, in the case of Wendy’s main product, the hamburger, this becomes less of an issue. Between the three different paQy choices and all the varying condiments, Wendy’s was sGll able to provide up to 256 different burger variaGons. G. Nickerson & L. Zhang
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Ques3on 2: Cont’d What benefits might have resulted from Wendy’s’ “limited menu” concept? What were the disadvantages of such a concept? Why was the concept eventually discon3nued? Another disadvantage would be in the acquisiGon of new customers. Many customers would go to Wendy’s for its unique burger but others would frequent other fast food restaurants for new menu choices. Because of Wendy’s limited and stagnant choice of four menu items, it’s not as aQracGve as other fast-‐food restaurants, so it limits the chances of a new customer going to Wendy’s for a unique product. Lastly, Wendy’s was unable to keep pace with other compeGtors at the Gme in terms of having new and exciGng menu choices. McDonald’s and Burger King, for instance, conGnued to release novel menu items. Each new product came with a level of “buzz” or word-‐of-‐mouth markeGng that was not apparent for Wendy’s. Therefore, other fast food establishments may maintain a compeGGve advantage over Wendy’s in terms of product offerings. Wendy’s limited menu concept was eventually disconGnued in the late 1970’s because the management faced some upcoming formidable challenges. One of them was crucial to the life of the already short-‐lived limited menu concept. Wendy’s major compeGtors had “substanGally improved the quality of their products, service, and faciliGes,” and worse: they had been, in an aggressive manner, introducing new menu items. Wendy’s decided to disconGnue this idea of a limited menu in order to keep up with and limit their compeGtors’ growing advantage over them. G. Nickerson & L. Zhang 5
Ques3on 3 Why was Wendy’s’ drive-‐through window successful when other quick-‐service restaurant chains had been unsuccessful at implemen3ng the same concept? This success was a result of Wendy’s decision to implement these windows in mostly urban or densely populated, suburban areas. A lot of their success was d ependent on serving a large number of customers. Wendy’s was able to capitalize on its drive-‐ through windows because of their decision to put them in these areas where people are more oVen than not, busy enough to uGlize the drive-‐through or even due to the fact that there is saturated populaGon per square mile in these areas. AddiGonally, Wendy’s concept of the drive-‐through window was fairly newly implemented, and they were able to use this fact as an early compeGGve advantage. This made Wendy’s stand out and subsequently garner more profit because of the aQracGon and popularity it gave Wendy’s. Other restaurant chains had been unsuccessful at this because of the decrease in “buzz” aVer each subsequent implementaGon of the drive-‐through window.
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Ques3on 4 How much does a bowl of chili cost on a full-‐ cost basis? An out-‐of-‐pocket basis? General Assump3ons • A full-‐cost basis is defined as the total cost of producGon towards a batch/cup of Wendy’s chili, including out-‐of-‐pocket costs, direct costs, and indirect costs. • The out-‐of-‐pocket costs include costs that are deemed “relevant costs” or costs that are directly associated with the producGon of Wendy’s chili. Furthermore, we concluded that these out-‐of-‐pocket costs are all costs associated with producing the next batch/cup of chili (i.e. no sunk costs such as a one-‐Gme cost to buy special machinery for the kitchen). • Costs are calculated for one batch of chili, which makes 57 eight ounce servings. • The producGon process has not changed over Gme. • Employees consistently work the same number of hours each day. G. Nickerson & L. Zhang 7
Ques3on 4: Cont’d How much does a bowl of chili cost on a full-‐ cost basis? An out-‐of-‐pocket basis?
Ingredients (Direct Materials)
Can of crushed tomatoes 46 oz. can of tomato juice Wendy's seasoning packet Cans of red beans Cooked beef paZes
Quan3ty
1 5 1 2 12 (lbs.)
Cost per Unit
$2.75 $1.25 $1.00 $2.25 $3.50
Full Costs Cost per Cost per Batch Bowl
$2.75 $6.25 $1.00 $4.50 $42.00
$0.05 $0.11 $0.02 $0.08 $0.74
Out-‐of-‐Pocket Costs Cost per Cost per Batch Bowl
$2.75 $6.25 $1.00 $4.50 $2.10
$0.05 $0.11 $0.02 $0.08 $0.04
Assump3ons • Beef paZes are only included as an out-‐of-‐pocket cost in the months of October through March, when there was need to cook meat specifically for the chili (occurred 10% of the Gme). – Out-‐of-‐pocket costs are calculated as 0.5 * 0.1 * $42 = $2.10
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Ques3on 4: Cont’d How much does a bowl of chili cost on a full-‐ cost basis? An out-‐of-‐pocket basis?
Utensils (Indirect Materials)
Serving Bowls Lids Spoons
Quan3ty
57 57 57
Cost per Unit
$0.035 $0.025 $0.01
Full Costs Cost per Cost per Batch Bowl
$1.995 $1.425 $0.57
$0.035 $0.025 $0.01
Out-‐of-‐Pocket Costs Cost per Cost per Batch Bowl
$1.995 $1.425 $0.00
$0.035 $0.025 $0.00
Assump3ons • Spoons are not counted in out-‐of-‐pocket costs because they are stocked regardless of whether the chili is sold. In other words, spoons are used for other items on the menu as well (such as FrosGes). – This contrasts with bowls and lids, which we assume are used specifically for the chili.
• Although lids are used specifically for chili sold at a carry-‐out window, we assume that Wendy’s purchases the same quanGty of lids and bowls. G. Nickerson & L. Zhang 9
Ques3on 4: Cont’d How much does a bowl of chili cost on a full-‐ cost basis? An out-‐of-‐pocket basis?
Labor Costs
PreparaGon Obtaining paZes from cooler Cooking paZes Chopping paZes SGrring paZes
Minutes
12.5 1 10 5 2.5
Full Costs Wage per Cost per Cost per minute Batch Bowl
$0.175 $2.1875 $0.0384 $0.175 $0.175 $0.0031 $0.175 $1.75 $0.0307 $0.175 $0.875 $0.0154 $0.175 $0.4375 $0.0077
Out-‐of-‐Pocket Costs Cost per Cost per Batch Bowl
$0.00 $0.00 $0.00 $0.00 $0.00
$0.00 $0.00 $0.00 $0.00 $0.00
Assump3ons • Only the assistant manager is involved in the producGon of the chili. – So his $10.50 wage is $0.175 per minute.
• There are no out-‐of-‐pocket labor costs. This is because the hours worked by the associate manager are sunk – they would be working the same hours regardless of whether they were making the chili or not. • Labor costs include payroll taxes. • Since it takes 10-‐15, the Gme to prepare a pot of chili takes an average 12.5 minutes. • The chili is sGrred for 30 seconds of each hour for 5 hours (average of 4-‐6 hours of cooking Gme for a batch).
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Ques3on 4: Cont’d How much does a bowl of chili cost on a full-‐ cost basis? An out-‐of-‐pocket basis? Results
• By summing the full and out-‐of-‐pocket costs for an 8oz. bowl of chili, we get: – Full costs per 8oz. bowl of chili: $1.16 – Out-‐of-‐pocket costs per 8oz. bowl of chili: $0.35
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Ques3on 5 For determining the true profitability of chili, how much does a bowl of chili really cost? Only costs that are specifically related to the producGon of chili should be included in the calculaGon of true profitability. Thus, we do not include sunk costs and costs that were already allocated to the producGon of hamburgers. Thus, the out-‐of-‐pocket costs determine the true profitability of a bowl of chili. The cost of each bowl of chili is $0.35.
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Ques3on 6 Would you recommend dropping chili from the menu? Why or why not? Since the true cost associated with the profitability of chili is $0.35, and the price of an 8oz. bowl of chili is $0.99, there is a significant profit margin for keeping chili on the menu.
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