The buck stops here: Wendy's hikes prices

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The company that shook up the fast-food world with the value meal is now doing an about-face.

After creating the under-a-buck meal concept that now accounts for 12% of the industry's total burger business, Wendy's International is quietly testing ways to "evolve" its profit-pinching Super Value Menu with new products carrying higher prices. The new menu raises the price of the Junior Bacon Cheeseburger from 99¢ to $1.29, and adds items such as a yogurt-and-granola combo priced over $1.

A spokesman wouldn't confirm details, citing competitive reasons and company policy, but acknowledged that corporate and franchised units in a number of markets (including Chicago and Athens, Ohio) are in trial, with local TV, radio, outdoor and in-store marketing support. Interpublic Group of Cos.' McCann Erickson, New York, handles.

Wendy's for years has resisted pressure from franchisees to raise prices as food costs have gone up, said an executive close to Wendy's. It tested price hikes in the late 1980s to mid-1990s, but management held firm, the executive said, believing that consumers would be lured by the low prices and trade up when they placed their orders.

But times have changed. On April 6 Wendy's reported a 5.1% decline in same-store sales at company-owned stores, more steep than analysts expected. In a February conference call with analysts, Wendy's Chief Financial Officer Kerrii B. Anderson blamed lower margins on rising beef costs. "Despite the increase in same-store sales and menu-price increases, we were unable to offset the magnitude of the increases in beef, therefore our overall margins at Wendy's declined," she said at the time.

`VOLUME KILLS, PROFIT THRILLS'

"Earnings per share is more important than market share," said Roger Blackwell, professor of marketing at Ohio State University's Fisher College. "If you can get an extra 20¢ or 30¢, that's worth more than looking at volume. Volume kills, profit thrills and too many firms make the mistake of focusing just on share. What you want is profitable share."

Raising prices is a good move for Wendy's, said Tom Miner, principal and restaurant consultant Technomic. "The industry, based on consumer preference, has pushed consistently into better and better premium and quality products and the top half has shown that they're willing to pay a bit more," he said. "It behooves [fast-food] hamburger concepts to get as much of that market as they can. It's not just that 99¢ as a pricing strategy is outdated or little flat, it's that the market is moving more upscale."

But will the industry follow?

It will only follow the leader, said Neil Stern, partner at McMillan Doolittle, and Wendy's is not the key player to walk away. "I don't think you'll see people follow Wendy's," he said. "I don't think it's like the airline industry. I don't think there's going to be a backlash."

McD's waits and sees

McDonald's for now is standing firm. "We're aware of what Wendy's is testing," Bill Lamar Jr., senior VP-chief marketing officer of McDonald's USA, said crisply. "We'll see how it does. We're always looking at our initiatives." McDonald's value offering has helped boost trade-up as seven in 10 U.S. customers who visited the Golden Arches for the dollar menu bought pricier items, McDonald's President Michael Roberts said in January.

For its part, Burger King already has bailed out of the value menu. Its 2-year-old line of 11 items priced at 99¢ has all but disappeared and is no longer a required menu, according to franchisees. Yum Brands' Taco Bell has also inched up prices on its Big Bell Value Menu with some prices topping out at $1.29.

But breaking the price cycle isn't as easy as it sounds. "When you start to have variations in price points and everything isn't a buck, that communication is no longer clear to the consumer," said Mr. Stern. Wendy's has "walked a fine balance and very successful balance of selling premium products with a halo of value. If you lose that, then you risk losing a lot of traffic."

Said David Aaker, professor of marketing at the University of California, Berkeley's Haas School of Business: "If you have a value offering, it's hard to dig your way out of it. It's easy to bring a brand down toward the value space but it's hard to recover."

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