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Meghan Brown, Melissa Schwartz, Blair Davis, and Brittany Canaski

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1 Meghan Brown, Melissa Schwartz, Blair Davis, and Brittany Canaski
Fast Food Industry Meghan Brown, Melissa Schwartz, Blair Davis, and Brittany Canaski

2 Overview Industry Background Competitive Environment
Government Regulation Trends Primary Pricing Strategies Bundling 2nd Degree Price Discrimination Quantity Discounts Versioning Advertising Secondary Pricing Strategies 3rd Degree Price Discrimination Psychological Pricing 2nd Degree Price Discrimination: Coupons Upstate New York Case Study Recommendations

3 Fast Food Definition Pay before eating Limited service
On-site, carry-out, drive-through consumption Why fast food? Incredibly relevant to recent trends, a lot of attention lately. I’m sure we have all purchased something from the fast food industry before, and we are likely to again in the future so it is good to understand the industry and what kind of pricing strategies they are using to try to get us to purchase from them. Limited service: so you usually won’t be served at your table (no waitresses or bus boys) Profit only 2-5% 300,645 businesses, HUGE number Source:

4 Industry Breakdown Limited service is largest sector and the focus of our analysis -most revenue from on site eating, then drive thru, then carry out Among limited service restaurants, 45.1% of revenue comes from on-premises dining (37.3% of industry revenue), 36.0% of from drive-thru purchases (29.9% of industry revenue), and 18.9% from take-out purchases (15.7% of industry revenue).

5 Industry Performance Recession actually hurt fast food industry
Less disposable income But expected growth to 2015 of 2.5% to $ billion -RECESSION: consumers have less disposable income, so although fast food is a less expensive option they are not going out to eat at all or trading down to cheaper items when they go out -Industry revenue declined 3.3% from -expected growth of 2.5% over the next 5 years, which directly correlates to the increase of 2.5% in consumer expenditures

6 Cost Structure Low profit margin (2-5% captured)
Economies of scale for large players High level of labor intensity -2-5% of profit is captured from overall revenue, with major costs coming from raw materials and labor -large players, and ultimately the most successful, derive profits from economies of scale -lots of labor employed because people are needed for ordering, making the food, management, cleaning, etc -increases in food and beverage costs usually cannot be passed on to consumers so can significantly impact profit

7 Technology Medium level Reduce food wastage and preparation time
Reduce need for human capital Less room for error Streamline ordering process Examples include: automated machines in drive through, automated drink dispensers, touch screen (with pictures) ordering system for employees, speakers in the kitchen to hear drive thru orders Makes process easier for both customer and workers, reduces waiting time and wasted food -customers can personalize their order and it makes it easier for the employee to get it right

8 Overview Competitive Environment Industry Background
Government Regulation Trends Primary Pricing Strategies Bundling 2nd Degree Price Discrimination Quantity Discounts Versioning Advertising Secondary Pricing Strategies 3rd Degree Price Discrimination Psychological Pricing 2nd Degree Price Discrimination: Coupons Upstate New York Case Study Recommendations

9 Franchise Definition Using another firm’s successful business model
Franchisor controls the business concept Franchisee purchases the license, but still seen as an independent merchant Must pay the franchisor a royalty for the trademark and reimbursement for the training and advisory services given to the franchisee Protected by the franchisor from any trademark infringement by third-parties Two people involved: franchisor and franchisee. Franchisor owns and controls the business concept which they sell to the franchisee to reproduce. The franchisee runs their own business based on the concept already developed and proved to be successful by the franchisor

10 Non-Franchise Fast Food
Remember definition: pay before you eat Single establishment Ex: Ma and Pa locally-owned fast food restaurants (sub shops, pizzerias, burger joints, etc) When first mentioning fast food what pops into people’s minds is mostly well known fast food franchises (McDonald’s, Wendy’s) but a large portion of companies is actually non-franchised fast food restaurants. Ma and Pa shops that are pay before you eat ex: local sub and pizza shops 10% of establishments are franchise or multi-estblishments

11 Competitors 300,645 businesses total! Yum! Brands Inc
Brand names: KFC, Taco Bell, Pizza Hut, Long John Silver, and A&W Doctor’s Associates Brand name: Subway For the majority of our project we decided to focus on McDonald’s Burger King, and Wendy’s because their product offerings are the most similar so they are very comparable for pricing strategies

12 Concentration Calculations
Four-Firm Concentration Ratio (CR4) McDonald’s, Yum!, Wendy’s/Arby’s, Starbucks 34.9% Low Herfindahl-Hirschman Index (HHI) 390 Extremely low US Department of Justice considers anything below 1,000 to be a competitive marketplace CR4: Market share of top 4 firms…very small, not even half of the industry Because there are so many business in this industry, I calculated the HHI based on the top 8 to get a vague idea 1,000-1,8000 HHI: moderately competitive

13 Concentration Concentration is low A lot are small businesses
Although large franchises account for 65% of industry revenue As you can see from the CR4 and HHI calculations, concentration is very low 47.9% of these business have nine or fewer employees (small business) Data from

14 Concentration Continued
Concentration has been increasing Wendy’s and Arby’s merger (2008) Burger King bought out by a private equity firm 3G (2010) Expected to continue to increase After recession, concentration is starting to increase Wendy’s and Arby’s: 2008 to try to help Wendy’s come back -consolidating operations decreases costs BK: September 2010 sold for $3.26 Billion by 3G - Going private will allow them to make more changes than they could have before which will hopefully make them more competitive -wanting market share to stay stable and profitable regardless of external factors -may also be more consolidation in the future, such as with Yum Brands (KFC, Taco Bell, Pizza Hut) - More existing companies will be expanding their franchising as opposed to new companies entering the market

15 Barriers to Entry Overall low barriers Capital Intensity
Franchisor Company Single Franchise Local FF Restaurant Competition High Concentration Low Capital Intensity Medium Regulation & Policy Heavy Overall low barriers Capital Intensity Low for single franchise because the franchise agreement includes outfitting and equipment, training, and computer systems Medium for others because they have to invest from scratch Easy enough to sign a franchise agreement

16 Internal Competition Internal Price-based Location
Food quality and consistency Style and presentation New products Variety Service Franchise operators vs. non-franchise Price based: probably most important because ‘more bang for your buck’ especially during the recession they were trying to steal current customers from one another instead of targeting those that weren’t eating out Location: geographic, food courts in malls (Picture: Orlando Airport) Food quality/consistency: you can really tell the difference, probably won’t give in much New products: need to keep up on new trends ex: health conscious, specialty coffees, ethnic and specialty markets Service: availability of drive thru, staff training, and attitudes Franchise: some people refuse to eat at certain franchises because of rumors ex: animal cruelty, not real meat, etc

17 External Competition Fast Casual Dining
Full-service restaurants offering take-out services Frozen restaurant meals at grocery stores Fast casual dining industry has always been a main competitor: a little more expensive and slower, but more service and better quality Examples of take-out services to speed up the process and be more similar to fast food industry: Applebee’s, Chili’s Eating at home new trend due to economy P.F. Chang’s frozen skillet meals TGI Friday’s frozen appetizers, White Castle frozen sliders

18 McDonald’s Supply Chain Efficiency
3 Legged stool philosophy Small number of strategic suppliers Suppliers = partners Long term relationships Some open book costing Based on McDonald’s behavior as the leader in the industry we wanted to see what was behind their strategy and how they could afford to sell at such low prices. Long term relationships Can be difficult to be a supplier: Large volumes, cannot be out of stock, rigorous quality and service standards, security of supply, price is lower on the list surprisingly Open book costing: essentially, McDonald’s can see some supplier’s finances and costs so they can understand the drivers’ in their business better

19 Overview Government Regulation Industry Background
Competitive Environment Government Regulation Trends Primary Pricing Strategies Bundling 2nd Degree Price Discrimination Quantity Discounts Versioning Advertising Secondary Pricing Strategies 3rd Degree Price Discrimination Psychological Pricing 2nd Degree Price Discrimination: Coupons Upstate New York Case Study Recommendations

20 Government Intervention
Heavy and steady regulation Employee protection Health and sanitary laws Calorie counts on menus Banning toys in Happy Meals Banning trans fat – New York, NY Fast food ban – California --Since there are many employees, many of whom at the entry level receive minimum wage, they must ensure that these conditions are being met and that they receive proper insurance. The government also must make sure that each franchise location meets health and sanitary standards --With the emerging and strengthening trend of health consciousness, the government has become more involved in this sector Calorie counts: although calorie counts are currently listed on NYC menus, the FDA is pushing to have this happen in any chain restaurant with more than 20 locations in the US; information must be clearly displayed on both menu and drive-through boards, and other information such as fat, carbohydrates, etc. must be available in writing upon request Banning Toys: Queens Councilman Leroy Comrie has created the Fast Food Toy Ban, which argues that any Happy/Kids meal with over 500 calories should not have a toy in an effort to combat childhood obesity. The reasoning is that kids end up choosing meals based off the toys and not the actual food, and are therefore lured into choosing unhealthy options. Currently in SF and Clara County, CA Trans Fat: NYC in June ’08 banned trans fat from all restaurants; this initiative heavily affected fast food restaurants because they had to search for healthier, unsaturated fats in which to fry and cook their food with. Many companies had to therefore alter their “tried and true” formulas and recipes Fast Food Ban: LA City Council in ‘08 pushed to ban construction of new fast food eateries for a year in a 32-sq mile area of downtown LA where childhood obesity rates were 9% higher than the average. Wanted to coerce people into buying grocery store and fresh format store food and affected more than 400 food outlets -- now being banned in Wisconsin

21 Overview Trends Industry Background Competitive Environment
Government Regulation Trends Primary Pricing Strategies Bundling 2nd Degree Price Discrimination Quantity Discounts Versioning Advertising Secondary Pricing Strategies 3rd Degree Price Discrimination Psychological Pricing 2nd Degree Price Discrimination: Coupons Upstate New York Case Study Recommendations

22 Health Consciousness --Customers have recently become more health conscious and concerned with fast food’s frightening nutritional statistics; namely, the fat, salt, and calories associated with the products. --companies have pushed healthier options to attain additional market share and serve as a new marketing platform. --added salads as main entrees, vegetarian options, more chicken (and less red-meat), grilled foods rather than fried, and whole grains. --Examples include Burger King’s veggie burger, McDonald’s Healthy Choices Menu, Subway’s “Eat Fresh” campaign Bk.com Fitsugar.com

23 Product Expansion -in order to remain competitive, companies are expanding into non-traditional menu items beyond the plain burgers, fries, and chicken nuggets - McCafe offerings, Wendy’s natural-cut fries with sea-salt  take into account consumer preferences, food industry trends, external competition Foodbeast.com Wendysarbys.com

24 Joint Branding Formats
-as Brittany previously mentioned, concentration in the industry is increasing because more companies are consolidating under one parent -reflected in the actual store formats  multiple brands will be under one roof. Easier for the parent company, in this case YUM brands, to have control over their franchises because they will have one instead of three Flickr.com

25 Changing Product Sizes
-over time, the portion sizes at fast food restaurants have been increasing but they have retained the same, even smaller, title Example: McDonald’s originally had a seven-ounce soda as its largest size—now the child size is twelve! --what is now the medium size of Wendy’s french fries is what the small used to be -These hidden tactics are a marketing ploy for companies to gain additional revenue – consumers subconsciously translate bigger sizes as having more value Calorieking.com

26 Ethnic Chain Restaurants
Push for ethnic chain restaurants: first started with Taco Bell, now moving into Chipotle, ShopHouse East Asian Kitchen (sister of Chipotle) -reflecting overall globalization of the United States and consumer’s desires for more “daring” foods Discoverspringtexas.com

27 International Expansion
--Over the next five years, international expansion is expected to be one of the largest profit drivers for fast food companies -- big areas for growth include China, other parts of Asia, and the Middle east (areas where people are crunched for time and there are large populations) - Not necessarily the exact same store as the one in the US; for example, McDonald’s in France has better coffee and pastry selections and more vegetarian options in India Map.net.au

28 Overview Primary Pricing Strategies Industry Background
Competitive Environment Government Regulation Trends Primary Pricing Strategies Bundling 2nd Degree Price Discrimination Quantity Discounts Versioning Advertising Secondary Pricing Strategies 3rd Degree Price Discrimination Psychological Pricing 2nd Degree Price Discrimination: Coupons Upstate New York Case Study Recommendations

29 Bundling A group of items are sold as a single unit at a discounted price Reduces heterogeneous demands to extract maximum consumer surplus (like 2nd degree PD) Ex: Value Menus – mixed bundling The first pricing strategy is bundling. Bundling is when a group of items are sold as a single unit at a discounted price, and it is especially profitable when consumer’s demand for the goods is heterogeneous (meaning some customers value one item in the bundle the most while other customers value a different item in the bundle the most, i.e. fries vs. a soda). Bundling reduces heterogeneous demands, allowing firms to design product lines that extract maximum consumer surplus, similar to 2nd degree price discrimination. Fast food chains are commonly known for bundling, as seen with their various value menus. The menu board contains the variety of value meals available alongside the individual prices of the goods; the value meal usually contains a sandwich/burger, side dish, and drink.

30 Bundling Data from three fast food restaurants on Elmira Road in Ithaca, NY on April 14, 2011 Company Burger Medium Drink Medium Fries Total Individually Bundle Difference McDonald's 2.99 1.49 1.59 6.07 4.99 1.08 Burger King 3.49 1.79 2.09 7.37 6.09 1.28 Wendy's 3.29 6.57 5.78 0.79 This is data from three fast food restaurants on Elmira Road in Ithaca, NY on April 14, The customer can easily see that buying each good separately is more expensive, so they are lured into buying the total package even though they may not want every item in the bundle. The chains are able to extract consumer surplus from these bundles by offering a lower price for a package of items compared to the summation on the prices of the items sold individually; consumers feel compelled to not walk away from a deal, and they cannot justify buying, for example, fries and burger when a drink, burger, and fries are sold for the same price with the bundle. In this situation, the Burger King bundle is the best value compared to the individual items, even though it is the most expensive.

31 Overview Primary Pricing Strategies Industry Background
Competitive Environment Government Regulation Trends Primary Pricing Strategies Bundling 2nd Degree Price Discrimination Quantity Discounts Versioning Advertising Secondary Pricing Strategies 3rd Degree Price Discrimination Psychological Pricing 2nd Degree Price Discrimination: Coupons Upstate New York Case Study Recommendations

32 2nd Degree Price Discrimination: Quantity Discounts
Bulk food discount by larger sizes or quantities of food S,M,L drink/fries; 5, 10, 20 chicken nuggets 69% discount at Wendy’s going from small to large drink Super Size Me – public backlash The next pricing strategy is second-degree price discrimination, which takes two forms: quantity discounts (or bulk) and versioning. Fast Food chains offer bulk food discounting in the forms of larger sizes or quantities of their foods. Typical bulk discounts include the small, medium, large drinks/fries and the 5, 10, 20 piece chicken nuggets. At Wendy’s, a small drink costs $1.29, while an upgrade to a large which is 100% larger cost only 40 additional cents; only a 31% increase in price for the 100% increase in quantity – a 69% discount. Similar discounts are applied on larger numbered quantities of chicken nuggets and dessert items such as apple pies (1 for .69, 2 for $1 at McDonald’s).] The most extreme form of bulk discounting performed by fast food chains is the ‘super-size’ discount, or the small premium to upgrade a meal’s drink and fries to a 42-ounce and 7-ounce size, respectively. However, McDonald’s discontinued the use of what was once the largest of the bulk discounted sizes, the “super-size” due to public backlash that this discount over-encouraged its customers to eat in excess (Wikipedia).

33 2nd Degree Price Discrimination: Versioning
TenderGrill Sandwich - $4.99 Chick’n Crisp Sandwich - $1.00 Another aspect of second-degree price discrimination is versioning. The fast food chain offers a small set of food choices with several different versions of each choice. One such example is the standard chicken sandwich, which may come in a regular/value version (often on the dollar menu) or in a premium chicken sandwich version. While both are similar sandwiches, the premium version may come with a slight increase in quality of meat (usually guaranteed 100% white meat) at a very significant price, and profit, premium. For example, at Burger King, the TenderGrill Sandwich and Chick’n Crisp Sandwich are different versions of a very similar meal, however the prices are $4.99 and $1.00 respectively. The only differences according to the website are the type of meats used: TenderGrill uses premium grilled chicken and the Crisp uses a crispy chicken patty. Using such versioning techniques, fast food restaurants are able to second degree price discriminate by allowing different consumers to self-select into pricing groups according to their heath, price, taste, and status preferences.

34 Overview Primary Pricing Strategies Industry Background
Competitive Environment Government Regulation Trends Primary Pricing Strategies Bundling 2nd Degree Price Discrimination Quantity Discounts Versioning Advertising Secondary Pricing Strategies 3rd Degree Price Discrimination Psychological Pricing 2nd Degree Price Discrimination: Coupons Upstate New York Case Study Recommendations

35 Advertising: Ad-to-Sales Ratio
Depends on the type of product, advertising elasticity of demand, and the price elasticity of demand: A/(P*Q) = EA/ lEDl Industry ad-to-sales ratio is low - homogeneous products and a high price sensitivity of consumers (from 2008 data) Fragmented industry Company Spending on Advertising (2008) Revenue (2008) from IBISWord Advertising to Sales Ratio (%) McDonald's 50,233,543 8,078,300,000 0.62 Burger King 4,249,735 2,455,000,000 0.17 Wendy's/ Arby's 26,456,680 1,822,800,000 1.45 Industry 329,342,510 184,766,700,000 0.18 A marketing strategy that would affect prices is the advertising techniques that the industry utilizes. The ad-to-sales ratio varies between industries; the amount on advertising intensity depends on the type of product, advertising elasticity of demand, and the price elasticity of demand. When there is more differentiation in the industry between products (vs. homogeneous), then there would be a low elasticity of demand (consumers are less price sensitive), and so there would be higher advertising spending because they would have a high advertising elasticity. From 2008 data, the industry ad-to-sales ratio is low, consistent with the fairly homogeneous products throughout the industry, and a high price sensitivity of consumers. McDonald’s and Burger King’s ratios are close to the industry average. Wendy’s/Arby’s higher ratio is most likely due to the fact that both brands must be promoted, even though they have merged. As mentioned earlier, the market concentration is low in the fast food industry, and the more fragmented the industry is, the lower benefit from advertising that is captured by the firm that pays for it. This is also probably keeping the ad-to-sales ratio low for the industry. Have formula for ad-to-sales ratio Describe why homogeneous and high price sensitivity leads to low a-t-s ratio

36 Advertising Burger King’s: Combative Advertising
Shifts consumer preferences toward the advertising firm, but does not expand the category demand If the real differences between brands are modest, then combative advertising could just be undercutting profits Also, because this is a mature market, combative advertising is commonly used to shift consumer preferences toward the advertising firm, but does not expand the category demand. This is an example of combative advertising between McDonald’s and Burger King. However, if the real differences between brands are modest, then combative advertising could just be undercutting profits, with the costs outweighing the benefit. It is important that the advertising that these companies do actually creates product differentiation, or they are losing money on this advertising. If the advertising is successful in creating product differentiation, then consumer shift to the advertising brand, and the product differentiation creates increased market power, allowing the firm to price higher. It is interesting, however, that McDonald’s spends the most on advertising of the three and a higher ad-to-sales ratio than Burger King, but prices the cheapest. If they are advertising Hamurger vs hamburger – not really going to do anything – bc not really product differences – so stop spending so much on advertising! But if there are actually product differences such as the new healthy options that other fast food restaurants aren’t offering or the McFraps – then this advertising will be effective – so raise prices!

37 Wendy’s Square “Never Frozen”Burgers
Advertising Persuasive Advertising Wendy’s Square “Never Frozen”Burgers Alters consumers’ tastes and creates perceived product differentiation, making demand for the firm’s product more inelastic The company can therefore raise their prices, resulting in higher profits Companies use combinations of persuasive and informative advertising to help create product differentiation. Persuasive advertising alters consumers’ tastes and creates perceived product differentiation, making demand for the firm’s product more inelastic. The company can therefore raise their prices, resulting in higher profits. For example, Wendy’s focuses on its square never frozen burgers, while McDonald’s emphasizes the use of only white meat in all of their “chicken mcnuggets”.

38 Funny, but product differentiated?
Less effective?

39 Product and Price Differentiation
More effective?

40 Advertising Informative Advertising Reduce consumers’ search costs
Pro-competitive consequences if prices are advertised because consumers become more price sensitive Some fast food chains also utilize informative advertising, which serves to convey information to customers. This type of advertising reduces consumers’ search costs, but it can have pro-competitive consequences if prices are advertised because consumers become more price sensitive. Chains such as Burger King, McDonald’s and Wendy’s all intensively advertise their versions of the dollar menu, and stores such as Subway emphasize particular product prices, i.e. the Five Dollar Footlong.

41 Overview Secondary Pricing Strategies Industry Background
Competitive Environment Government Regulation Trends Primary Pricing Strategies Bundling 2nd Degree Price Discrimination Quantity Discounts Versioning Advertising Secondary Pricing Strategies 3rd Degree Price Discrimination Psychological Pricing 2nd Degree Price Discrimination: Coupons Upstate New York Case Study Recommendations

42 3rd Degree Price Discrimination
Charge different prices in easily identifiable submarkets, dependent on the geography and demographics of their consumers Charge more for their products in busy, metropolitan areas where competition is more intensive, customers have higher income, and they are selling at a higher volume i.e. New York City --operate under a franchise model: food items they offer across locations are identical; people know that if they get a Whopper in one city, they can expect the same exact taste, texture, and quality in another --BUT many chains will charge more or less depending on the region the store is located --where competition is more intensive, customers have higher income, and they are selling at a higher volume (NYC) --3rd degree price discrimination because they charge different prices in easily identifiable submarkets, dependent on the geography and demographics of their consumers.

43 Overview Secondary Pricing Strategies Industry Background
Competitive Environment Government Regulation Trends Primary Pricing Strategies Bundling 2nd Degree Price Discrimination Quantity Discounts Versioning Advertising Secondary Pricing Strategies 3rd Degree Price Discrimination Psychological Pricing 2nd Degree Price Discrimination: Coupons Upstate New York Case Study Recommendations

44 Psychological Pricing
Retail prices often end in 9, 5, or 0 due to the theory that this drives greater demand Consumers ignore the least significant digits rather than doing proper rounding -consumers use price as a measure of quality -prices end in 9, 5, or 0  theory that there is greater demand than if the customer was perfectly rational; customers ignore the least significant digits rather than rounding properly; view a fractional price as lower -- for dollar menu: much more willing to pay if price is 99 cents or $1 than if it was over $1 Examples: McDonald’s dollar menu, KFC’s 99 cent snacker, Taco Bell’s new 3 pronged pricing menu Mediapost.com Xanapus.com Fastfood.ocregister.com

45 Overview Secondary Pricing Strategies Industry Background
Competitive Environment Government Regulation Trends Primary Pricing Strategies Bundling 2nd Degree Price Discrimination Quantity Discounts Versioning Advertising Secondary Pricing Strategies 3rd Degree Price Discrimination Psychological Pricing 2nd Degree Price Discrimination: Coupons Upstate New York Case Study Recommendations

46 2nd Degree Price Discrimination: Coupons
--offer a one-time discount on a specified item and may be used to introduce new products or competitively attack the price of other rival chains. -form of 2nd degree PD because: the use of coupons differentiates consumers by their willingness to find and cut coupons, or ‘value seek’. Separates those who are actively seeking out a deal versus those who are complacent in paying the standard prices --Coupons may be distributed through the mail, newspaper inserts, or with the sale of food. --Depending on its distribution, fast food chains can third degree price discriminate by demographic information. Coupon-coupons.com

47 Overview Upstate New York Case Study Industry Background
Competitive Environment Government Regulation Trends Primary Pricing Strategies Bundling 2nd Degree Price Discrimination Quantity Discounts Versioning Advertising Secondary Pricing Strategies 3rd Degree Price Discrimination Psychological Pricing 2nd Degree Price Discrimination: Coupons Upstate New York Case Study Recommendations

48 Basket Good Comparison: Individual Item
Items MCD BK Wendys Avg Burger Standard 2.99 3.49 3.29 3.25 Double 3.69 4.59 4.29 4.19 Chicken Sandwich 4.79 4.22 Grilled 4.99 Chicken Nuggets Nuggets 3.39 2.00 2.38 2.59 Salad Full 4.39 5.99 5.12 Side 1.00 1.49 1.16 Fries Small 1.89 1.46 Med 2.09 1.79 Large 2.39 1.99 Drink 1.59 1.29 1.69 Basket 31.6 37.69 35.56 34.95 1 1.193 1.125 1.106

49 Basket Good Comparison: Individual Item

50 Basket Good Comparison: Med Meal
Items MCD BK Wendys Avg Burger Standard 4.99 6.09 5.78 5.62 Double 5.69 7.19 6.78 6.55 Chicken Sandwich 7.09 6.68 6.48 Grilled Chicken Nuggets Nuggets 5.39 4.79 5.18 5.12 Combo Med Upgrade 0.00 0.50 0.49 Basket 27.45 32.25 31.1 30.26 1 1.175 1.133 1.103

51 Basket Good Comparison: Med Meal

52 Basket Good Comparison: Large Meal
Items MCD BK Wendys Avg Burger Standard 5.49 6.59 6.18 6.09 Double 6.19 7.69 7.18 7.02 Chicken Sandwich 7.59 7.08 6.95 Grilled Chicken Nuggets Nuggets 5.89 5.29 5.58 5.59 Combo Lg Upgrade 0.50 1.00 0.89 0.79 Basket 29.95 34.75 33.1 32.6 1 1.160 1.105 1.088

53 Basket Good Comparison: Large Meal

54 Fast Food Basket Summary
McDonalds cheapest basket BK basket 19% premium Wendy’s basket 13% premium No significant basket price difference by individual item or meal. MCD BK Wendys Individual 100% 119% 113% Med Meal 117% Lg Meal 116% 111%

55 Local Advertising: Rochester Market
Advertising Spending (Thousands $/year) % Total McDonalds 13,730 47.78% Wendys 6,033 20.99% Burger King 293 1.02% Total 28,737

56 Local Advertising vs. Price
MCD BK Wendys Basket 1 1.192 1.125 Advertising 0.021 0.439

57 Operating Margin vs. Price
MCD BK Wendys Basket 1 1.192 1.125 Operating Margin Q2-10 33% 13.30% 15%

58 Overview Recommendations Industry Background Competitive Environment
Government Regulation Trends Primary Pricing Strategies Bundling 2nd Degree Price Discrimination Quantity Discounts Versioning Advertising Secondary Pricing Strategies 3rd Degree Price Discrimination Psychological Pricing 2nd Degree Price Discrimination: Coupons Upstate New York Case Study Recommendations

59 Analyst Recommendations
MCD Wendys P/B 5.54 .91 Yahoo Finance Wendy’s Overweight (Buy) Trading significantly discounted to pre-recession levels Large room to improve operating margins with new management High potential for revenue growth by leading new healthy options/small portions trends

60 Firm Recommendations Focus on product differentiation through combative advertising Consider mergers to raise market concentration (and therefore pricing power) If products are well differentiated (they should be!) consider raising price Limit persuasive advertising to innovative products (such as McCafe)

61 Questions??


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