Fast-food diners have it their way: cheaper
Before the recession, Andrew Puzder, who heads the Carl’s Jr. and Hardee’s burger chains, liked to joke about how sharp-priced competitors were “giving food away.”
As the recession deepened and the number of 79-cent taco and 99-cent hamburger offers exploded, Puzder realized it was “no longer a joke; they are giving food away.”
Literally.
On Monday, KFC gave away a free piece of its new grilled chicken just for the asking. And on Tuesday, most El Pollo Loco stores offered two pieces of chicken, two tortillas and salsa free upon request.
Welcome to the fast-food value war -- a battleground where $3, $4 or $5 will buy a hungry consumer a double burger, fries and drink combo, or entrees such as a pesto turkey sub, a grilled chicken burrito and more tacos than anyone but a teen boy could consume.
“The marketplace is contracting and all the brands are using value to get sales,” said David Ovens, chief marketing officer of Taco Bell. The nation’s largest Mexican fast-food company is a full participant, touting its “Why Pay More” menu of 79-to-99-cent items such as the Cheesy Double Beef Burrito and Triple Layer Nachos.
Rival El Pollo Loco has taken it one step lower -- 69-cent tacos, with a limit of 10.
Fast-food chains are chasing cash-careful customers such as Kevin Henderson of Monrovia, who was eating the new $4 Torpedo turkey sandwich at Quiznos in downtown Los Angeles on Friday.
“It’s cheap, only four bucks, and I will get a cup of water to go with it. I don’t eat out too often these days, but when I do I look for the best value,” said Henderson, who works for Caltrans.
Quiznos and its competitors are responding to customers who are eating more at home, waiting for some attractive promotion or coupon before heading to the drive-through and skipping sodas and shakes when they do eat out.
Yet going after Henderson and other budget-conscious consumers is a risky proposition. Restaurants must adjust their menus to attract stingy consumers in a manner that doesn’t erode their business, said Darren Tristano, a restaurant industry analyst at Technomic Inc.
“You have to manage a shift from high margin to high volume,” Tristano said.
Puzder knows he must respond and is bringing back a 1/8 -pound hamburger that will sell for 99 cents to $1.29 at Carl’s Jr., depending on the location, as well as Carl’s chili dogs and Hardee’s double cheeseburgers at two for $3. This isn’t the way Puzder, chief executive of CKE Restaurants Inc. in Carpinteria, Calif., likes to do business.
“I refuse to lock us into some low price point and then make food I won’t eat,” Puzder said. And based on his experience sampling the value fare at several competitors, he considers much of the low-priced food in the marketplace “inedible.”
Puzder contends that it’s almost impossible to sell quality food at $1 or less.
“Go to the store,” he said. “Buy ingredients and make something yourself that you spent only 99 cents on. It is really hard, and then we are not even including the cost of rent, utilities and labor in that 99 cents. It is just ingredients.
“You can do value and quality -- you just can’t do 99 cents and quality.”
Quiznos knew it needed a value entree but didn’t attempt the $1-or-less level, said Rick Schaden, CEO of the Denver sandwich chain.
The company’s marketing research found that “there is kind of a big cliff above $4 right now” and set that as its target. It gave a team of chefs, accountants and marketers the task of coming up with a product, and in March, Quiznos launched the $4 Torpedo sub sandwich. A month later, the sandwich accounts for about 25% of the chain’s sales, Schaden said.
The five sandwich selections include the Italian, with pepperoni, spicy capicola and ham, and the Turkey Club, with sliced oven-roasted turkey and bacon.
Schaden said comparable-store sales, or sales at stores open at least a year, are up by double digits during the first weeks of the Torpedo’s introduction. The sandwich also is bringing more people into the restaurants, allowing Quiznos to make up for the lower price by selling more food to customers such as Karen Algorri of La Mirada.
“We saw the $4 sign when we were walking by and decided to go for the deal,” said Algorri, as she ate lunch at a downtown Quiznos recently.
The Torpedo also has a higher profit margin than other sandwiches. Ingredients make up 29% of its retail price. That’s lower than the 30% average cost for the company’s entire menu, Schaden said.
There are other fast-food examples of less is more.
Qdoba, the Mexican chain owned by Jack in the Box of San Diego, offered a combo meal promotion in February that was a profit booster. It sold any full-size chicken entree with chips and salsa and a regular fountain beverage for $6.99. The combo has a relatively low food cost, so if a customer traded down from a comparable steak entree, Qdoba’s profit margin increased.
“If you can shift people away from higher-food-cost items like steak to chicken, the margins can go up, and you hope to get people buying the meal more often so your sales go up,” said Tammy Bailey, a Jack in the Box vice president.
Stung by previous price wars induced by soft economies, the chains have become much smarter about “engineering offerings that are still profitable,” said Robert Derrington, an analyst at Morgan, Keegan & Co. in Nashville.
In December, McDonald’s replaced the double cheeseburger on its $1 menu with the McDouble burger. The two sandwiches are essentially the same, with one exception: The McDouble has only one slice of cheese instead of two. The change saves restaurants 6 cents per sandwich, and “when you sell as many as we do, it adds up quickly,” said McDonald’s spokeswoman Danya Proud.
Even when chains aren’t cutting back on ingredients, they are getting an economic break because of the rapid decline in the price of food commodities compared with a year ago, Derrington said. But eventually that will end, and restaurant prices will increase.
“Once commodities start to go up,” Derrington said, “consumers won’t be living in the world of great deals that they have today.”
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