Quick Service Restaurant Players Turn Their Attention To Value Menus

Chains' challenge: Setting low price points without setting off discount war

By Amy Garber

Nations Restaurant News

December 2005

After successfully raising prices over the past two years with premium products like salads and oversized sandwiches, fast feeders are finding that customers still crave the good deals promised by value meals.

Such major quick-service chains as McDonald's, Wendy's and Taco Bell have national value menus, which observers say could become more popular this winter if consumers are squeezed by higher energy costs.

And although Burger King does not have a national value menu, the Miami-based company is looking to create one. The nation's second-largest burger chain is experimenting with at least two versions: one in Los Angeles that offers an array of daily options for $1; and another in Minneapolis with a similar lineup but with prices ranging from 99 cents to $1.29.

At the same time, Wendy's, which scrapped its longstanding 99-cent Super Value Menu in May for a new program that offered expanded options and price points, could be rethinking its strategy, according to a Wall Street analyst. Customers seem particularly unhappy that the price of the popular Jr. Bacon Cheeseburger rose 30 percent to $1.29, according to Wendy's franchisees.

Wendy's months-old Value Choices Menu has suffered from "poor consumer response and reduced usage," restaurant analyst Peter Oakes of Piper Jaffray noted in a report. He said that "part of the brand's recent poor same-store sales showing appears due in part to the confusion associated with the Value Choices effort," and he expects "management to retool their value offering with fewer items and a singular 99-cent price point."

A spokesman for the Dublin, Ohio-based burger chain said Wendy's continues "to evolve and enhance our entire menu," with additional changes slated for 2006. But he added: "We're not in a position to discuss our plans now for competitive reasons."

In other signs of pricing pressure, Wendy's modified in August the test of its highly anticipated Frescata cold deli sandwich lineup to include lower price points, Oakes noted. "Retooling the Frescata with a lower price point ? but no shift in product specifications ? suggests the consumer is putting a lid on the brand's price points, at least for the time being," he said. Oakes did not provide details.

Meanwhile, KFC is advertising in such markets as Southern California and Chicago three value-oriented dinners for $4 each. The dinners come with mashed potatoes and gravy, cole slaw, and a biscuit along with the choice of a chicken breast, leg and thigh, or three crispy chicken strips.

Also in Southern California, Subway is advertising for a limited time a daily special after 4 p.m. called "Dinner For Two. Two-Night!" The $7.99 deal includes two regular 6-inch subs, two bags of chips and two drinks. Also, in the same market, the chain is promoting all day on Sundays two foot-long subs for $7.99.

Despite the renewed interest in value, restaurant consultant Stuart Morris, president of Coronado, Calif.-based QSR Consulting Group, warned that too much reliance on 99-cent advertising by quick-service chains could revive a discount war. That would ultimately hurt the industry as it did in late 2002 when McDonald's and Burger King promoted signature sandwiches for under $1, he said.

Instead, Morris, who had worked for Jack in the Box until June, said he would like to see chains follow in the footsteps of Taco Bell, which often is credited with popularizing the value menu concept in the late 1980s and has once again changed the pricing landscape.

More than a year ago, Taco Bell broke the $1 barrier by launching nationwide a seven-item value menu with offerings priced as high as $1.29. Dubbed the Big Bell Value Menu, it features dishes ranging from a half-pound bean burrito for 99 cents to a half-pound beef and potato burrito for $1.29.

Morris predicted that, with efforts like those at Taco Bell, "it is likely that McDonald's, Burger King and most other QSR chains will broaden their value menus beyond a specific 99-cent or $1 price point."

Segment leader McDonald's, the nation's largest burger chain with more than 13,000 U.S. units, launched a national "Dollar Menu" in the fall of 2002. Offerings include fries, soft drinks, a side salad, two apple pies, the McChicken and a Double Cheeseburger. The menu has been controversial with some franchisees, who insist its food costs are too high to sell at a discounted price. McDonald's locations in downtown Chicago, for example, do not always sell the Double Cheeseburger for 99 cents. A chain spokesman explained that there are some limited menu variations in a few markets around the country.

Miami-based Burger King, which has an estimated 7,600 U.S. locations, is testing in Los Angeles a lineup of six items available for $1 each. Calls to area restaurants found that those products include the Whopper Jr., two tacos, a cheeseburger with barbecue sauce, onion rings, a side salad or fries. In Minneapolis, BK is promoting a value menu that includes similar offerings for 99 cents, except the Whopper Jr., which is priced at $1.29. The menu also includes mozzarella sticks, a new product, at $1.29. Burger King launched a 99-cent value menu in the fall of 2002 with 11 items but eventually made it an optional offering.

Nath Companies in Bloomington, Minn., which has some of its 89 Burger King stores involved in the test, declined to provide details. However, Ken Stanecki, Nath's president, said that "providing value is extremely important."

Alan Vituli, chairman and chief executive of Syracuse, N.Y.-based Carrols Corp., BK's largest franchisee with some 350 stores, said that a value menu is "a critical component" of the chain's strategy. He added that once a value menu becomes a permanent offering, it allows Burger King "to continue to introduce premium full-margin products."

Jeff Rogers, president and chief executive of Downers Grove, Ill.-based Heartland Group, which operates more than 200 BK units, said that the chain needed continuity and that he was pleased that the company's management is "taking the time to do testing in a variety of geographic areas."

Wendy's national Value Choices Menu features 14 items for 99 cents each. These include chicken nuggets, a Jr. Cheeseburger Deluxe, fries, soft drinks, a small Frosty, a sour cream and chives baked potato, a small chili, a side salad, a Caesar side salad and mandarin oranges. The menu also offers a $1.19 Junior Smoky, a $1.29 Jr. Bacon Cheeseburger, a low-fat strawberry flavor yogurt for $1.29, and a $1.29 Fix n' Mix Frosty.

But analyst Oakes noted that the breadth of the offerings combined with pricing above $1 has "diminished" the impact of the menu for Wendy's. In the first quarter of 2006, he said he expects Wendy's to focus on promoting the Jr. Bacon Cheeseburger, chili and baked potato for 99 cents each.

Joe Cunnane, president and chief operating officer of Crofton, Md.-based DavCo Restaurants, Wendy's largest franchise group with 156 units, described 99 cents as "a magical price point," especially for core items like chicken nuggets and the Jr. Bacon Cheeseburger. "If we can increase our transaction base, we will offset any margin decline," Cunnane said.

Wendy's franchisee Mike Givens, who operates 22 stores in the Minneapolis area, agreed that Wendy's needs "to have a compelling value strategy. The bottom line is that we lost some transactions, and we are figuring out how to bring them back. The customers are speaking loud and clear that they always want a compelling value."

Roger Webb, a Wendy's franchisee who operates 39 units, described 99 cents as "an important number to consumers," especially with the current economy and competitive environment. He insisted that Wendy's could make 99-cent offerings profitable.

Consultant Morris described Wendy's third-quarter same-store sales decrease of more than 5 percent as alarming and said it "clearly calls for drastic incremental-transaction-driving strategies." But he predicted that if Wendy's advertises discounted offerings, some rivals would follow suit.

"The net result is a fast-food landscape of low-priced menu items driving down guest check averages and profit per transaction," he said. "Why would any QSR chain motivate a guest, who normally buys a combo meal, into buying a $1 burger? It's a great way to lose money."

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