There Can Be Only One… Double Cheeseburger
McDonalds, Wendy’s, Burger King… these are a few of the major players in the fast food arena who have recently entered in to a double-cheeseburger value menu pricing battle being waged all across the country as consumers look for cheaper food options. The Wendy’s Doublestack, the McDonald’s McDouble, and the Burger King Double Cheeseburger are being sold at $1 a piece, and there is no shortage of creative advertising to explain to hungry consumers why each is better than the rest. These players are charging into the recessionary marketplace with price guns blazing. But will these tactics have a positive affect on brand profitability?
For the cash-strapped consumers, this situation is a winning proposition. They can load up on some of these tasty dollar menu items which, earlier in the year, might have cost marginally higher across franchises. As an example, many restaurants have adopted value menus with $1-$1.99 thresholds due to a weakening currency and increasing costs of goods.
Does the fast food industry win, though? Short term revenue boosts might indicate that the answer is yes, but a macro view of the price wars and recent evidence provide arguments for the contrary.
One of the most recent examples happened in November, when news broke that the National Franchise Association, a group that represents about 80% of the Burger King Franchises in the United States, was suing the corporation over its national $1 double cheeseburger campaign. The group contended that brand profitability would be negatively affected because the cost of goods for every sandwich is estimated to be higher than the marginal revenue it would bring in; $1.10. Burger King franchises are losing money on every double cheeseburger sold. In the space of a la carte burgers, it seems like a boneheaded decision, right?
One reason for this brand strategy, from a competitive standpoint, could be that price wars like these seem unavoidable. Innovation in the fast food industry is often short-lived due to the ability of most major chains to copy-cat popular items relatively quickly. As a result, if one chain adds a new item or drops a current item into the $1 threshold, its competitors tend to follow suit as to not surrender what they might believe to be any sort of competitive advantage, particularly if such a promotion boosts raw customer volume for one competitor at the expense of another.
Another reason is the supposition that if $1 double cheeseburgers attract loads of new consumers, then these consumers might make up for the low marginal revenue of the sandwiches by purchasing higher margin colas and fries to go along with them. I guess we’ll see whether or not this is the case when the fourth quarter is over.
The fundamental, overarching question I still have in this case: Even if a pricing battle for a la carte burgers boosts customer volume – has it increased loyal brand followers, or has it simply grabbed some price-conscious non-loyal consumers for the short term. Who will disappear as soon as the price goes back up? If it’s the latter, is the amount of marketing focus put on the promotion worth it in the first place?
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Here is an interesting update to Burger King’s strategy. They plan to have a Whopper Bar in Miami. They recognize people may want a beer with their burger so they are experimenting with a new concept. This will be totally separate from the BKs we know . They are making it very clear that existing BKs will not be selling beer. Forget about $1 burgers…how about a $1 beer to go with that $5 burger. Wonder if this will become a franchise opportunity in the future!