The Homa Files

Got this provocative email from one one of my son’s friends:

Mr. H – As patriarch of the “First Family” of the $1 menu, I wanted to bring your attention to this article. 

It appears that suspicions may have been correct –   The $1 McDouble cheeseburger is literally a LOSS LEADER. 

Who is right Burger King or their franchisees?  Why charge an unprofitable price?

Below is the article.  Far below is Ken’s Take.

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Excerpted from AP: Food fight: Burger King franchisees sue chain, Nov.13, 2009

Restaurants, especially fast-food chains, have been slashing menu prices because of the poor economy. Executives hope the deeply discounted deals will bring in diners who are spending less when they eat out, or opting to stay home altogether.

But, Burger King franchisees sued the hamburger company this week over its $1 double cheeseburger promotion, saying they’re losing money on the deal and the company can’t set maximum menu prices.

A group that represents more than 80 percent of Burger King’s U.S. franchise owners, said the $1 promotion forces restaurant owners to sell the quarter-pound burger with at least a 10-cent loss.

The $1 double cheeseburger typically costs franchisees at least $1.10 — That includes about 55 cents for the cost of the meat, bun, cheese and toppings.

The remainder typically covers expenses such as rent, royalties and worker wages.

“New math, or old math, the math just doesn’t work.”

When the $1 double cheeseburger was announced this fall, an analyst said it could increase restaurant visits by as much as 20 percent, but that as much as half of the gain recorded from increased traffic could be lost because customers were spending less when they ordered food.

Copyright © 2009 The Associated Press. All rights reserved.
http://www.google.com/hostednews/ap/article/ALeqM5hLeKv3ns6qUW8InI9h7yHYvgzHZwD9BUB0181

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Ken’s Take:

1. So, the franchisees just want to cede the “value” position to Mickey D ?  Not a wise move.
2. Why a loss leader ?  Because it draws traffic — and most customers complement the loss leader with another high margin product — e.g. soda, or fries.
3. Technical note: the franchisee’s should be thinking about the $1 burger in terms of “incremental profitability” — incrementally, they’re still making 45 cents on each burger — the employees are still going to be there, the rent’s still going to be paid, and the lights are still going to being using electricity whether the burger is sold or not … only way the franchisee loses is through “dilution” — if a dude who would have paid 2 bucks for a burger anyway gets one for $1

Bottom line: Franchisees should fire their lawyers and flip some burgers.

This entry was posted on November 17, 2009 at 6:44 am and is filed under Mktg - Pricing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.