Fast Food Keeps Pushing Value Envelope
By Tom Ryan
Taking the value menu down yet one more rung, Taco Bell has introduced
a $2.00 combo meal featuring a taco or burrito, medium soft drink and a bag
of Doritos. The move is seen as a direct strike at popular dollar menus at
McDonald’s and other hamburger chains, where three items cost $3.
Commercials
that began running Sunday even poke fun at the dollar menu. Taco Bell workers
and customers are seen pondering how the chain can sell three items for $2,
and assume one of the items must be "free." The actors then
argue about which item the freebie is.
"If we just tossed a pebble into the
pond, the ripple wouldn’t find its way to shore," said Greg Creed, president
of Taco Bell, to USA Today. "We’re
throwing a boulder into the pond. This will be a disrupter in the marketplace."
Executives
also cited the need for a strong value message amid still high unemployment
rates. Taco Bell will continue to offer its 79-cent, 89-cent and 99-cent value
menu. "This is a way to reframe another point of value," Mr. Creed
said.
Speaking to Walletpop.com, Scott Testa, professor of business administration
at Cabrini College, said fast food chains are using these deals as loss leaders
and hoping consumers stock up on fuller-margin items.
"They get you in with the $2 promotion and while people are there they
hope they will spend money on other areas such as some extra guacamole and
up-sell them on those products," he said.
Other restaurants have followed
fast-food joints in offering steep bargains to drive traffic. Pizza Hut is
offering pizzas for $10. T.G.I. Friday’s briefly offered $5 sandwiches
last year. Denny’s recently rolled out $4 all-you-can eat pancakes. Subway’s
$5.00 foot-long deals were quickly matched by Quiznos and Blimpie.
One group not happy
about the extent of the value-deals is Burger King franchisees, who twice voted
against selling the $1 double cheeseburger sandwich. After Burger King executives
overrode their wishes and made the double cheeseburger a mandatory menu item,
the franchisees filed a class action lawsuit.
Franchisee Dan Fitzpatrick
told Minyanville.com that combining the ingredients
(estimated at 55 cents each), plus rent, labor, and royalties paid to the parent
company, each burger "conservatively" costs $1.10 to $1.15.
In looking
to dismiss the franchisees’ suit, however, Burger King’s attorney argued last
week in a court hearing, "We’re responding to the competition.
Everyone is out there with $1 products."
Discussion Questions: Are value deals a positive or negative for fast food
chains? Will chains be able to wean consumers off dollar menus and the like once
the economy rebounds or are they here to stay?
Good retailing, good for your pocketbook, not so good for your waistline.
I worry over the low value/high calorie count nature of these types of meals.
With all this downward pressure on fast food prices, where will the savings come from? Ingredients. BK owners are right to look at the food costs; you still have to make a profit.
When it just has to meet a price, you open the door to all kinds of ways to achieve it. This is how we ended up with light sets that erupted into flaming Christmas trees last year, toxic substances in dog food and toys, etc. Value is a very subjective term.
Taco Bell started the “fast food” price wars and this is certainly another shot across the bow for their competitors.
At what price point do consumers begin to question what it is that they are eating? Frankly, I’m not sure. However, the question has to be how low can you go?
There was an article in the news yesterday about the increasing cost of hamburgers. What I found most interesting was not the increase in price but the fact that one of the items they were discussing was 50% lean. 50%?
It now costs more to feed your dog than yourself. No wonder my dog won’t eat $1 food scraps. Fast food chains have to be competitive but at what cost–and with what ingredients in their cheap products?
This value meal rivalry between Burger King, McDonald’s and Taco Bell is getting out of hand. Eating this type of food on a regular basis does not save you money in the long run (long run being defined as 1 to 2 years). Just think about the new clothes you will need to buy and the extra medications you will need to be on as you gain weight. That is far more expensive than eating right and maintaining your weight.
When you lower cost that much something has to give. That usually means jobs at the restaurant impacting overall service and of course the quality of ingredients going into what they are serving.
Burger King and McDonald’s would be smart to move in another direction and focus on more nutritious food options. They should also continue to drive sales of their very successful coffee selections. We all love a good French fry and a chocolate shake, but do we really need to be eating this on a regular basis because the price is so ridiculously low?
Creativity in menu development will cover most/all their cost. Those who develop interesting new add-on products will also gain market share.
There are two issues here: 1. What is the perceived quality of products priced so cheaply? 2. What is the likelihood of being able to convince consumers to pay more when good times return? The challenge is to add value without lowering price. Using the simple definition of value equaling quality divided by price, it appears that the approach is simply to lower prices and suffer the possible consequences already noted.
However, if quality was defined as benefits received divided by burdens endured, the creative marketer could consider a number of non-price burdens that could be addressed, e.g., faster drive through, cleaner stores, etc, or provide additional benefits, e.g., kids eat free on Mondays, school teams with special seating, etc. The challenge for all marketers today is to find creative ways of creating value without lowering prices. Anybody can give product away. It takes brains to sell it.
Lots of QSR boxes out there. The economy isn’t growing, nor is the population at a breakneck pace. If commodity prices can stay under control (they won’t on beef and pork prices over the next 6 months), the value menu can deliver store traffic and ‘butts in seats’.
Tough playing the game in these circumstances, so the QSR group has to keep quality, cleanliness, and service top-of-mind for their crews. That will help deliver the incremental boost to sales, and subsequently profitability for these merchants.
As QSRs engage in their “fast food wars,” they will gain short-term share but at what expense? With $2 meals there can’t be money left for R&D or better tasting and healthier food, brand-building advertising, or even investment in new locations. In the current economy, will diners really come in to buy the $2 meal and buy other things? This feels like a category-killing spiral, one that will be hard to rebound from when the economy picks up.
Part of the equation is that America is still over-stored, and it’s not a foregone conclusion that the number of QSRs will stay steady. The chains that can boost awareness and remain relevant improve their chances of thriving, even if that means suffering through some loss leaders.
The use of the term “value menu” feels terribly misleading. Until it’s proven, what Taco Bell is bringing to the market is a loss leader, or a special promotion, or a simply a low price offering. Whether or not it’s a VALUE will be determined by the consumer. “Value” is all about relative worth. It’s about the total experience (the quality of the ingredients, the convenience, the taste, the cleanliness of the facility, the staff, etc.) divided by the cost (the price paid, distance one travels to get it, risk of trying something new, etc.). If consumer perceive it to be a good “value” when they compare all those factors to the price charged they will make the product a success. If they decide the total experience is lacking, it will be of “value” only when they have very little money and price is all that matters.
Been there once–yes, once. That’s it, once. Can’t believe that $2.00 would get me back, or even ten cent tacos. Kids (especially college kids) love the place. Don’t understand it, never will. But then again, there are also ‘Hot Pockets’. I don’t get those either. There’s a market for really cheap, really bad food. And, I do mean bad–in every way. There probably always will be a market for it. I just don’t get it.
Will this offer change the playing field? No. Does it make a difference? No. I think their customers are their customers and they probably just gave up margin.
McCafe’ hasn’t change my thoughts about McDonald’s either. But, I do have to admit a once a year Big Mac! I can’t say that for Taco Bell.
Definitely a good thing for the pocketbook of people who are strapped for cash. Not such a good thing for healthy eating. It would be nice if one or two of those items were healthy to give the cash strapped consumers a healthy choice.
Just think of all the good that fighting to be “the low price leader” has done for the supermarket industry! About time QSRs began copying supermarkets, instead of the other way around! (For those who may not know any better, yes, I’m being sarcastic.)
I think they should be more concerned with the attitude of the employees who work at the restaurants. The encounter I had last week (the first time at TB in years) was amazing. I am sure that I will not be going back for years.
This topic is not about the health/nutritional value of QSRs; we are talking pricing / marketing / promo strategy. People go to QSRs because they offer tasty, fast, cheap meals. Period. In tough times, 90% of consumers can easily look past the moronic teenager in the window, grab their bag of food and relish in the fact that little Billy and Susie’s meals cost $2 each. Genius, huh? Trouble is, so many of those cheap meals cut the franchisee’s profits to nil or less. BK’s $1 double cheeseburger was costing more than a buck to make. And that’s just ingredient costs, excluding operating costs. They have now eliminated a slice of cheese to squeak under the $1 cost. You can’t continue to operate a profitable business that way. We’ll see how this pans out for TB.
Value is critical to QSR success in this recession. Those companies that adapt will flourish. Those that do not will die. This is not an option, but a requirement during these demanding times for consumers. Value starts with who can offer the most for the least, and Taco Bell has certainly hit on another winner. Now, we have to see how the burger chains respond to this.
Are fast-food price wars a deflationary influence? On our economy perhaps, but on our nation’s waistlines–no.
I don’t care if it’s good for them cause it’s GREAT for me!
The fast food giants can figure it out for themselves! Is it building traffic? Are profits holding or declining less than competition? Who wouldn’t love paying $2 for an entree, side and beverage? Now, who can get it down to $1.99?
I guess I’m in the minority here but I think Taco Bell is an expert marketer. They are constantly tweaking and changing the menu, finding different ways to freshen up the same old “Mexican” offerings. And, there are plenty of people who will come in for a two buck meal who will buy other things while there and return for some of the new offerings they see.