Pricing: Burger titans take cue from Wal-Mart

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Adopting a strategy from discounter Wal-Mart Stores, the nation's top three burger chains are fighting the burger wars with 99 cents everyday low-price strategies.

"When things are slow, it's time to bring out the sale rack," said Ron Paul, president of restaurant consultancy Technomic.

Since the new year began, McDonald's Corp. has launched several under-a-buck tests in markets around the world, while Wendy's International rolled out new advertising for its 13-year-old 99 cents Super Value menu from Cordiant Communications Group's Bates USA, New York. Burger King Corp. is testing a national 99 cents menu in Canada.

"People do not associate spending 99 cents as spending money. It's pocket change," said Gary Stibel, founder and principal New England Consulting Group, a marketing consultant in Westport, Conn., "while $2 is a serious decision-making process." He asserts, however, that most marketers are failing to use discounts effectively because they haven't identified the proper psychological balance between price and value. "They're giving away product and losing money in the process rather than offering consumers something they really do value and making money doing it."

Fast feeders have tried deep discounting with local offers as low as 29 cents, a move observers contend temporarily boosts traffic but eats away at margins and trains consumers to wait for the discount. So, over the past two years, most chains had begun using a two-tiered pricing strategy that starts with discounted items to entice consumers in the store. Once inside, cashier suggestions and in-store displays push add-ons such as drinks, sides or other high-margin items.

two tiers

Wendy's was the first to master the two-tier approach, rounding out its Super Value menu-which gets two to three promotional periods per year-with monthly specialty burgers that boost the top and bottom lines. Still, Wendy's has had its problems with value. In 2001, the chain downsized its Biggie french fry and soft drink Super Value choices with medium sizes. "This is something that we had hoped to avoid, but, unfortunately, after almost a dozen years, we had to do so because of increased costs," said a spokesman. At least one observer suggested the availability of the two larger items, combined with a burger, created a $2.79 combo meal that undercut Wendy's typical combos by more than a dollar.

All the fast-feeders closely guard their statistics on what impact price and product deals have on sales. But according to NPD Foodworld CREST data, roughly one-fourth of all quick-service meals consumers purchased in 2001 involved a deal or special. Tricon Global Restaurants' Taco Bell, the granddaddy of the value-meal, has come a long way from its deep-discounting days. In the late-1980s, the chain launched its under a dollar menu. Today, the chain is using what it calls the "and" strategy, where it continually promotes price and value, core products and high-end menu items.

"We will use a low-pricing strategy to get price-sensitive consumers but ... do it on a balanced calendar," said Jeff Fox, VP-national marketing, Taco Bell. "Of nine or 10 marketing [periods], probably a third are price/value with a sub-99 cents deal, another third focuses on core products and another third on higher end [limited time offer] products or new menu items with a higher [ingredient] quality and $2.99 price point."

Taco Bell's Chicken Quesadilla is an example of how the chain is trying to raise the "magic" discount price to $1.99. Although not a traditional value product, Mr. Fox said the quesadilla is comparable to the baseline product at quick casual and casual dining chains. "Taco Bell is the only place they could get it for less than $2."

He wouldn't quantify the strategy's impact on the bottom line but said the chain has seen an increase in "transaction as well as reach." Since starting the effort, Taco Bell same-store sales have steadily improved, including an 8% fourth quarter boost.

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