Fast Food Value vs. Discounts | Advertising | LOOMIS

Promoting Value vs. Offering Discounts in the Quick Service Restaurant Category

By Mike Sullivan | October 2009 | LOOMIS

The term “value” and the concept of the “value menu” as it relates to fast food restaurant marketing and advertising first appeared in the industry’s vernacular in the late 1980s. Desperately searching for a way to fight sinking sales in 1988, embattled Taco Bell president John Martin seized on a successful experimental extreme price-cutting tactic used by a Las Vegas franchisee to combat a local McDonald’s operator.[i] Taco Bell introduced the industry’s first value menu—a concept based on massive price reductions—system-wide. The strategy was lauded industry-wide as a great success. The chain achieved 20 percent sales increases, and Martin was hailed as a category innovator. Taco Bell was named the best performer in the fast food industry in a 1991 Harvard Business Review article where the authors noted, "If McDonald's is the epitome of the old industrialized service model, Taco Bell represents the new redesigned model in many important respects."

But 20 years later, former McDonald’s CEO Ed Rensi says that while Taco Bell’s price-based strategy delivered strong short-term gains, it ruined the company’s long-term prospects by etching “the image of the chain indelibly as a marketer of cheap food.”[ii]

Discount-Driven Value

Today, the terms value and discount are used interchangeably by many fast food marketers and industry observers. The original conception of the value menu as invented by Taco Bell and viewed now with 20 years of hindsight exposes it for a cleverly veiled discounting strategy that packaged 59-, 79-, and 99-cent product offerings. As fast food unit growth outpaced U.S. population growth and category competition intensified, the biggest fast food players adopted the discount-driven value menu concept. Notably, McDonald’s and Burger King rolled out value menu pricing in the early 90s in response to economic challenges, but began to scale back the tactic by the mid-90s as the economy improved. By 1996, industry analysts had declared the end of the “price wars.”[iii]
 
“We know that value has fueled our growth, so you’ll still see the 99-cent Whopper as an arrow in our quiver,” said Mike DeRosa, former president of Burger King’s franchisee association in a 1996 Brandweek article. But, spurred on by the recession after 9/11, the burger chain leaders were back into discounting under the guise of “value menus” as a means for boosting traffic and sales. The 99-cent “burger wars” between McDonald’s, Burger King, and Wendy’s “nearly crippled” the category, according to a Nation’s Restaurant News article.[iv] Interestingly, a former Taco Bell marketing executive who worked for the chain in the heyday of its early 90s value menu success says she believes traditional value menus of this variety are no longer effective. She told Advertising Age, a value-menu strategy based strictly on low-price offerings isn’t likely to be successful because so many others will follow suit.[v] That sentiment is echoed in a Wall Street Journal article that notes consumers have become used to price breaks because chains rely so much on discount-driven value messaging.[vi] The industry’s over-reliance on traditional value menus has negated the ability of chains to use them as a means for meaningful differentiation as Taco Bell did 20 years ago.

A New Definition of Value (“Two-Way Value”)

Of course, the problem with discount-driven value is its perilous impact on profitability. Simply cutting the price of a product designed to be sold profitably at a higher price isn’t a sustainable long-term approach for boosting customer perceptions of value. Industry leaders agree this strategy has the capacity to boost guest counts but accomplishes this at the expense of margin performance and a weakened brand image.[vii]

But some industry leaders are offering a modernized definition of value and value menus. It’s based on what might be called “two-way value.” It’s value that works for both the consumer and the operator in that it delivers both a favorable customer price point and a strong margin for the operator.

Products offered as value items should be designed for the price point desired by the customer. That’s achieved through properly balancing product appeal, quality and price. Quiznos offers a strong case in point with its Torpedo sandwich. The company initially introduced the product as a 13-inch sandwich at a price point of $4. Customers liked the sandwich but not the price. So, the company quickly redesigned the sandwich in an 8-inch version, called it the Toasty Bullet, and priced it at $3. In doing so, they achieved two-way value for the customer and the operator with an appealing price that preserved margin.[viii] “It was a product designed to be sold at $3, which is different than taking an existing menu item and discounting it down,” Quiznos Chief Executive Rick Schaden told the Wall Street Journal.

Still others are working to preserve margins by focusing on add-on items to deliver value to menus rather than offering combo meals at reduced prices. The approach relies on value enhancement by addition (less expensive add-on items) as opposed to subtraction (discounts on core menu items). Restaurant Research LLC Principal Wally Butkus believes the most successful value menus are built around complementary items and not full meals. Offering full meals on value menus would be considered discounting.[ix]

The executive leadership at California-based Rubio’s Fresh Mexican Grill chain agreed with this idea when they successfully introduced their first-ever value menu in 2005. The company’s goal was to position the lower-priced value menu items as add-ons rather than meals, and did so by featuring smaller portioned products such as carnitas and tacos.[x]

Burger chain Carl’s Jr. eliminated the value menu long ago, but created an implicit value message by naming its flagship hamburger the $6 Burger. It sells for $3.99. Morris of QSR Consulting noted other chains would have to sell as many as eight 99-cent burgers to match the margin delivered by one Carl’s Jr. burger.[xi]

Discounting: Proceed with Caution

Discounting is the bane of the restaurant industry—the fast food category, in particular. And for good reason. The competitive environment created by frenzied discounting activities can be justifiably characterized as a “race to the bottom.” Some industry leaders have called discounts “the kiss of death” and a “marketer’s nightmare … never a sign of a healthy organization.”[xii]

No doubt, the customer population attracted by discounts is fleeting and disloyal, and the trade-off in operator margin often is not worth the effort. Regular use of discounting also trains customers to wait for the discount, according to industry observers.[xiii] It’s worth remembering that the original industry-altering Taco Bell value menu strategy (already identified as a discounting tactic) was borne of desperation in response to intense competitive pressure. All subsequent periods of aggressive category discounting have been informed by periods of poor economic performance, as well.

But, discounting is not a tactic without merit. It can drive traffic, lift transaction count, and build sales. Most industry leaders agree that discounting should be used on a limited basis for these purposes and with specific intent. Discounts can be used on a strategic and limited basis (twice in a calendar year, for example) to drive store traffic, where in-store POP and up-sell tactics can be used to promote add-ons such as drinks, sides, or other high-margin items.

The key to making a discounting effort successful is to pair it with the concept of scarcity. Limited-time discount offers instill the potential for “missed opportunity” in consumers and can generate focused action and create appropriate customer expectations. On the contrary, failing to incorporate scarcity into the discounting equation creates a longer-term customer expectation that results in customer attrition when the tactic is discontinued. Again, Taco Bell’s long-term use of the discount-driven value menu provides a case in point.

Moving Forward

Today’s fast food category looks very different from the environment Taco Bell took by storm with its revolutionary value menu in the late 1980s. Operations are far more sophisticated, food quality is much improved, and the customer base has grown to record levels. But category competition is also as fierce as ever. Perhaps that’s why so many chains find it difficult to move away from the discount-driven traditional value menu offerings.

It’s interesting to note that customers can still find 99-cent hamburgers on the menus of major chains 15 years after they were originally introduced as a value offering. Even so, Wendy’s just launched a new campaign aimed at boosting food quality perceptions as a means for enhancing value, and is de-emphasizing a long-time reliance on traditional discount-driven value messaging. [xiv]

After a period of significant challenges, McDonald’s has emerged once again as the darling of the fast food industry, and their strategy is instructional. As former McDonald’s CEO Ed Rensi said, “Discounting as a tactic that’s event-driven is one thing. Discounting as a strategy is something else. It’s a very bad idea because it cheapens your product and your brand.”

McDonald’s credits its growth in average unit volume to $2 million to its focus on operations, re-investment, development of new product offerings (including a focus on new premium items), as well as an established value menu.

It would seem that the winning combination must incorporate a blend of strong operations, products that deliver two-way value for the customer and the operator, and prudent and judicious use of strategic discounting.