Case Analysis: Profitability of Wendy’s Chilli Essay

Dave Thomas, the founder of Wendy’s restaurant, opened his first restaurant on November 15, 1969 in Columbus, Ohio. Dave was born in Atlantic City, New Jersey on July 2, 1932. He was adopted at six weeks old by Rex and Auleva Thomas. Dave moved from state to state with his father when his mother passed at the age of 5. At the age of 12, Dave obtained his first job at a restaurant in Knoxville. Thus, he began his love for the restaurant business. At the age of 15, Dave dropped out of high school to work full time in the restaurant business. While working full-time at the Hobby House restaurant, Dave met Colonel Sanders, the founder of Kentucky Fried Chicken (now KFC). In 1962, Dave was offered the opportunity to turn around four failing Kentucky Fried Chicken restaurants in Columbus, Ohio. Utilizing his past experience, Dave turned the restaurants around, sold them back to KFC, and immediately became a millionaire all at the age of 35. He then co-founded Arthur Treacher’ s Fish and Chips. Dave again capitalized on his experiences in restaurant management when he decided to establish his own restaurant. Since hamburgers were his favorite food, Dave decided to start a restaurant that would serve a quality hamburger without a 30 minute waiting period. Named for his eight year old daughter, Dave started Wendy’s. In order to focus on quality and remain competitive, the menu was limited to four basic products excluding beverages. The product line included hamburgers, chili, french fries, and Wendy’s Frosty Dairy Dessert. Wendy’s hamburgers patties consisted of  ¼ pound of 100 percent pure domestic beef, served as a square shaped patty rather than a round shaped patty, and served â€Å"hot ‘n juicy† in accordance with individual customer orders. The french fries were sliced slightly longer and thicker from high quality potatoes and cooked in specially-designed fryers to allow the inside to be cooked without burning the outside. Wendy’s Frosty Dairy Dessert is a thick blend of vanilla and chocolate flavors and must be served with a spoon as a dessert rather than a straw. Wendy’s chili is the fourth basic menu item. Whenever the cook overestimated customer demand, beef patties stayed on the grill beyond the recommended  time. This caused the beef patties to be well done. To avoid customer dissatisfaction, Wendy’s used the â€Å"well done† beef patties that had been refrigerated from the previous day and could not be served to customers. Each eight ounce serving contained about a quarter pound of ground beef. Wendy’s chili is prepared by the assistant manager or an experienced crew member using an original recipe. The labor cost for the assistant manager and crew member is listed in Table 1. The cost to prepare the chili is listed in Table 2 below. Table 3, illustrates the direct cost associated with the production of chili. Table 1. Labor costs for assistant manager or a crew member to prepare chili in 1978 Table 2. Ingredients and costs in 1978. Table 3. Direct cost for 1978 In the event of a shortage of overcooked patties, beef patties were cooked for the sole purpose of inclusion in the chili. In order to prepare a pot of chili, it took 10 to 20 minutes of preparation time. This process required chopping the meat into small pieces, adding the other ingredients and stirring the batch six times. Sixty percent of the total annual sales for chili occurred during the months from October to March. The chili product has the lowest gross profit margin. The 1978 labor and additional direct costs are listed in Table 4 below. Table 4. Cost of Chili Preparation, Overall Cost of Chili and Profit of Chili. In November 1979, Wendy’s became the first national restaurant chain to introduce a Salad Bar on the menu. Initial test marketing of the salad bar concept had been successful. This innovative idea also posed a dilemma. If Wendy’s was to follow their limited menu concept, the salad bar would potentially replace chili since it had the lowest profit margin on a full cost basis. Then, management would be faced with containing the cost of the overcooked patties that resulted from overestimating customer demand and  cooking too many hamburgers. While hamburgers comprised 55 percent of total sales, chili sales comprised of five percent of total sales. The chili was most popular between the months of October through March. During these months, 60 percent of the total annual chili sales occurred. Management was faced with deciding which product would be best to sustain long-term profitability. Wendy’s revenues were derived from the sales made from company-owned restaurants, from royalties paid to the company by owners of franchised restaurants, from fees paid by the owners of franchised restaurants for technical assistance and from interest earned on investments. By 1978, Wendy’s operated 1,407of restaurants. Of this number, 1,119 stores were owned by franchisees. Franchised stores were built to a uniformed specification and were not located within the same market areas as company-owned stores. Most restaurants were located in urban or densely populated suburban areas; a large volume of customers was a primary factor for Wendy’s success. Each franchisee paid a $15,000 fee for technical assistance prior to the opening of a restaurant for services such as site selection, construction plans, initial training for owners and staff members, advertising materials, national purchasing agreements and operations manuals. For 1978, company-owned stores generated 84.13% of revenue, royalties generated 12.65% of revenue, technical assistance fees generated 1.87% of revenue, and interest from investments generated 1.35% of revenue. The income statement from Moody’s is listed in Table 5 below (Moody’s, 1980, p. 1565). Table 5. By focusing on a product differentiation marketing strategy, quality food, quick service and reasonable prices, Wendy’s was able to achieve its financial success and to grow rapidly at a time when the fast-food industry appeared to be saturated. The adoption of the limited menu concept also contributed to this success. Having a limited menu concept allowed Wendy’s to concentrate on the quality of a few menu items and allowed Wendy’s to quickly prepare a meal to the customer specifications. The limited menu  concept does not allow for changes in consumer preferences nor does it allow Wendy’s to compete with other fast food restaurants serving items such as chicken. In 1970, Wendy’s broke new grounds by opening a second restaurant with a unique feature. This restaurant featured a drive-thru window with a special grill within the pick-up window. Wendy’s was able to achieve success in their drive-thru window concept, because their product was served fresh from the special grill within a short span of time. While other restaurants offered a standard product through their dive-thru window, Wendy’s differentiated their concept by offering a product that was prepared fresh to the customer’s specifications. Therefore, the product delivery time did not increase when preparing the order as requested by the customer, whether in the dining room or through the pick-up window. Wendy’s used a product differentiation approach for their hamburgers. By marketing the hamburgers as a square patty rather than a round patty, Wendy’s was successful in advertising their hamburgers as â€Å"old-fashioned.† Wendy’s also cooked each hamburger in a manner that provided a customized hamburger for each customer quickly and at a reasonable price. Innovations have been the key to Wendy’s growth. Their innovative style of management has made Wendy’s a leader in the fast-food industry. By catering to young adults and adults, Wendy’s has attempted to create brand loyalty among their target customers. Wendy’s recognized the dynamic needs of their customers and consequently offered a dining experience that emphasized quality food, fast and friendly service within a setting that is common throughout all their restaurants. Wendy’s has made growth a priority in their strategic plan in order to achieve high employee retention and satisfaction rates. According to Doorley and Donovan, â€Å"employee satisfaction rises when a company grows, probably because people experience new challenges and are excited about being on a winning team (Swanson, 2001).† The introduction of a salad bar will contribute to a diversification strategy that will also augment their  innovative approach. Chart 1. Sales comparison of Wendy’s and competitors. Quality was a foundational component in the first Wendy’s restaurant. This was due largely to uncompromising passion for quality by the founder, Dave Thomas. Quality still remains the top priority in the food, people and service industry. The mission statement of Wendy’s is: â€Å"To deliver superior quality products and services for our customers and communities through leadership, innovation and partnerships (Wendy’s, 2004).† The vision statement of Wendy’s is: â€Å"to be the quality leader in everything we do (Swanson, 2001).† This core value has guided the organization and helps to define the corporate culture and distinguished Wendy’s from the competitors. Business Creations recommends Wendy’s pursue adding salads to their limited menu concept; however, this should be done as a menu item rather than as a Salad Bar concept. Since Wendy’s has placed a high emphasis on quality, a Salad Bar concept introduces various risk factors which may cause dissatisfaction among the customers. Risk factors such as foreign objects falling into items on the Salad Bar and the food area remaining sanitized are just two of the risk factors. Also, the Salad Bar concept would require additional labor to replenish the stock. To maintain a consistent standard, Wendy’s should prepare the salad and sell the item as a pre-packaged menu item. We also recommend Wendy’s further evaluate removing chili from the menu in the 128 restaurants in the southern states during the summer months since sales decrease to 40 percent during this time frame. Excess beef patties can then be used as a topping for a salad, such as a Taco Salad. References: Hoover’s fact sheet. (2003). Retrieved from: www.hoovers.com/wendy’s/–ID__11621–/free-co-factsheet.xhtml, www.hoovers.com/sonic/–ID__13112–/free-co-factsheet.xhtml, www.hoovers.com/krystal/–ID__15659–/free-co-factsheet.xhtml, www.hoovers.com/burger-king/–ID__54531–/free-co-factsheet.xhtml, www.hoovers.com/mcdonald’s/–ID__10974–/free-co-factsheet.xhtml on May 2, 2004. Moody’s OTC Industrial Manual. (1980). New York, NY: Moody’s Investors Service, 1565. Swanson, B. (2001). â€Å"New strategic plan combines the best of Wendy’s and Tim Hortons.† Wendy’s Magazine. 13. â€Å"Wendy’s strategic plan†. Retrieved from www.wendy’s-invest.com on May 2, 2004.