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Value of menus

Cutting prices not always a panacea


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Dollar menus have both fans and detractors. They  can be a boon to sagging sales, but they can also cost the operator money, as one plaintiff claims.

In fall 2005, Luan and Elizabeth Sadik's restaurants finally seemed to be turning a corner. A Burger King restructuring officer, Jacqueline Graham, had helped them develop a plan that would stem the flow of red ink from their struggling Manhattan franchises. According to legal documents she told the Sadiks that the plan would work, as long as Burger King "did not implement another value promotion similar to the 99-cent value menu." And then Burger King implemented another value promotion similar to the 99-cent value menu.

By January 2007 two of the Sadiks' four restaurants were closed and the sisters were in the midst of a lengthy legal battle with Burger King over the timing of the closures and the impact the value menu had on their stores' finances. To the Sadiks, the $1 burgers and fries were too cheap for their stores to take and ultimately forced the demise of their company, E-Z Eating Corp.

Value menu

Value menus have helped quick-service restaurants like Burger King and McDonald's increase traffic during a difficult economic environment. But owners in some high-cost areas say they're money losers

"If I can get two Whopper Jrs. for $2, why would I buy one full-size Whopper for $3.50?" said Oliver Griffin, the Sadiks' lead attorney. "The franchisee in Manhattan needs the Whopper at $3.50. That $1.50 difference adds up. It's our opinion that it drives the franchisee into insolvency."

The Sadiks' troubles go against the grain of current strategy in the quick-service restaurant industry, in which value menus have become an absolute must. Rising gas prices, falling home prices and other problems are contributing to an environment in which diners are choosing less expensive restaurant options. Experts believe that value menus keep many diners from eating out less.

Burger King and McDonald's, among other chains, credit their value menus for propelling solid recent revenue growth despite the economic concerns. And many operators say the menus are popular right now and that they opt out of them at their own risk.

That doesn't mean the menus aren't difficult pills for many franchisees to swallow. In most cases the price point on these items has been unchanged in years—Wendy's currently has the longest running value meal among large quick-service chains. Its menu first appeared in 1989 and items were 99 cents back then, too.

Yet restaurants' costs of doing business have not remained stagnant: the minimum wage and overall labor costs are higher; commodity prices have skyrocketed as have insurance costs. That concern is most acute in high-cost areas, like Manhattan. As it is, most franchisors with value menus allow operators to opt out of the program, or they exempt restaurants located in high-rent places like airports or rest stops.

Value menus emerged in the late 1980s, an outgrowth of the "value meal" movement at many quick-service chains. In general, they provide a list of items for a set, low-cost price, mostly about $1. Taco Bell is believed to be the first major chain to adopt such a strategy when it came out with its long-since-defunct tiered price menu in 1988.

After Wendy's adopted its value menu in 1989, other chains began to offer their own versions. Today, Taco Bell gives diners nine choices in its "Big Bell Value Menu." Arby's lets diners choose five items from a select group for $5.95. Jack in the Box has a value menu. McDonald's created its Dollar Menu in 2002. Burger King had some fits and starts with value menus before its BK Value Menu was introduced in 2006.

Bob Sandelman, president of the consulting firm Sandelman & Associates, said value menus have become vital for any kind of quick-service chain, including companies that specialize in higher-cost premium items like Jack in the Box and Arby's. In those cases, value menus broaden their customer base and keep them relevant in the current economy.

Necessary evil?

"The value menu is increasingly important for chains," Sandelman said. "If they haven't had one, or they haven't promoted it, they will. And we are seeing that take center stage."

"We're already seeing in the industry the trickle-down effect—trading down from casual dining to fast casual or fast casual to fast food or if fast food then less expensive," Sandelman added. "Most restaurant users are less willing to give up an occasion. That's where the value menu comes in."

Marc Levy, who owns five Wendy's restaurants in Southern Connecticut, has never liked his franchisor's 99-cent value menu. He liked it even less after hearing from store managers that some kids would go through the drive-through at 10 p.m. to order bags filled with Jr. Bacon Cheeseburgers and nothing else.

Levy believes that those sandwiches lose money, because at 99 cents the food costs are around 50 cents per burger, and labor costs in Connecticut are higher than they are anywhere else. So he took the sandwich off the value menu and raised the price.

That move lasted all of five weeks, when he returned the cheeseburger to the value menu. Sales of the sandwich in that time were cut in half. "I'm positive that those people didn't opt for something more expensive," Levy said. "They stopped coming in. That was the lesson."

Besides, Levy said, he now thinks that the story of teenagers ordering carloads of bacon cheeseburgers is the exception. "If they buy a couple of sodas, we'll be OK," he said. He also noted that the menu appears to be accomplishing its overall goal. "My sales are up over 7 percent this year. Something's working."

Still, while Levy's units are in a costly part of the country, they're not in the hyper-expensive Midtown Manhattan area. And, perhaps more importantly, his units are financially strong.

Not always the case

That was not the case with the Sadiks, the BK franchisees.

The Sadiks opened four stores between 1996 and 2001. They began losing money in 2001 largely due to a drop in sales—one store saw revenues fall from $1.4 million one year to $1.1 million the next. They blamed the problem in part on Burger King's overall struggles at the time as well as its 2002 foray into a value menu.

The franchisees searched for ways to cut costs, even cutting the size of one location in half to reduce rent and utilities. The franchisees asked to get out of their agreement in 2005 when Burger King threw them a lifeline, providing a loan and sending Graham, the restructuring officer, to help.

Late that year, however, Burger King informed Manhattan franchisees of its new value plan, according to the lawsuit, and the menu was required of franchisees the following February. After initial resistance, the Sadiks acquiesced to their franchisor's demands that they begin offering the $1 Whopper Jrs. But they said that the menu made it impossible for them to follow Graham's prescribed business plan.

The Sadiks did comment for this article, but in legal documents and through their attorneys they claim they "begged" Burger King for several months to get out of the menu. "They never applied for an exemption," counters Keva Silversmith, a Burger King spokesman.

He adds many Burger King franchisees applied for and received exemptions, including some stores in Manhattan. But Griffin, the Sadiks' attorney, says that the exemptions were arbitrary.

Regardless, by January 2007 the Sadiks' stores were losing too much money and the sisters closed two of them. Burger King sued the franchisee—which then filed a countersuit making claims against the value meal. A year later, Burger King rescinded the franchise agreement for the sisters' remaining units; a move they claim was related to the dispute over the value menu.

"It's not a suggestion that the value menu doesn't benefit someone," said Rich Gallucci, another one of the Sadiks' attorneys. "Obviously, if you go in and purchase a hamburger for 99 cents, it benefits you as a consumer and it benefits the corporation. They get royalties off gross sales. But it does nothing to help the franchisee. It's on the back of the franchisee that Burger King is making more money."

Yet Silversmith said that Burger King doesn't have evidence that the menu is hurting franchisees' finances. And the company believes that the value menu has been a boon to its stores. "It drives traffic," Silversmith said.

Still, Griffin says numerous franchisees have contacted him since the Sadiks' lawsuit received nationwide publicity. "This is not a small issue," Griffin said. "And it's not just New York City. It's all over the East Coast."

 

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