U
WENDY'S CHILI
In January 1979,the management of Wendy's International, Inc., a relatively young and rapidly growing quick-service restaurant chain, was considering adding a salad bar to its menu.
Because Wendy's "limited menu" concept was one of the factors that had contributed to the
Company's remarkable success, management felt that consideration should also be given to the desirability of dropping one of the existing products from the menu if the decision regarding the introduction of the salad bar turned out to be favorable. Of Wendy's four basic products, chili seemed to be the most likely candidate. In addition to being the menu "maverick," chili contributed the least to total restaurant …show more content…
sales and was also considered to have the lowest profit margin. On the other hand, Wendy's management was aware that the reasons chili had been placed on the menu at the Company's inception were, for the most part, still valid.
The Company and Its Products
Wendy's Intemational, Inc. was founded in Columbus, Ohio, in 1969 by Mr. R. David
Thomas. Prior to that time, Mr. Thomas had purchased an unprofitable Kentucky Fried Chicken franchise in the Columbus area, turned it around, and subsequently sold it back to Kentucky Fried
Chicken at a substantial profit. He then became a co-founder of Arthur Treacher's Fish & Chips. So at the time he founded Wendy's, Mr. Thomas was no stranger to the quick-service food industry.
Although he had been involved with businesses specializing in chicken and fish, Mr.
Thomas's favorite food was hamburgers, and he frequently complained that there was no place in
Columbus to get a really good hamburger without waiting thirty minutes or more. Someone finally suggested (whether in earnest or in jest was debatable) that he get into the hamburger business and make his own. After thinking it over, that's just what he did, and he named his new Company after his eight-year-old daughter, Wendy. His goal was to provide consumers with bigger and better hamburgers that were cooked to order, served quickly, and reasonably priced. By offering what …show more content…
he believed was a different product, Wendy's went after a different segment ofthe hamburger marketyoung adults and adults. In so doing, Mr. Thomas did not view his Company as "just another hamburger chain."
This case was prepared by E. Richard Brownlee, II, Associate Professor of Business Administration. This case was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright @ 1979 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to dardencases@virginia.edu. No part of lhis publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in anyform or by any means-electronic, mechanical, photocopying,recording,orotherwise-withoutthepermissionoftheDardenSchoolFoundation.Ptev.l/81.0 -2- uvA-c-0871
Wendy's International, Inc., chose as its trademark the concept of the "old fashioned" hamburger. This was a hamburger made from fresh beef that was cooked to order and served directly from the grill to the customer. So that customers could see what they were eating, o'old fashioned" hamburgers were square in shape so as to extend beyond the round buns on which they were served. The unique shape also differentiated a Wendy's hamburger from those of other restaurants. Mr. Thomas felt that one way for Wendy's to remain price competitive and still serve a better quality product was to limit the number of menu items. He thus decided on four basic productshamburgers, chili, french fries, and Wendy's Frosty Dairy Dessert. The standard soft drinks, milk, and coffee were also available.
Wendy's old fashioned hamburgers were pattied fresh daily from 100 percent pure domestic beef and served "hot 'n juicy" in accordance with individual customer orders. Customers could choose either a single (one %-lb. patty), a double (two %-lb. patties), or a triple (three %-lb. patties).
With the many condiments available, Wendy's was able to offer variety (256 possible hamburger combinations) even though its menu was limited to four basic items.
Wendy's chili was prepared daily using an original recipe. It was slow simmered for from 4 to 6 hours and served the followin g day. Each eight-ounce serving contained about a quarter pound of ground beef. The same beef patties were used in making chili as were served as hamburgers.
Although it was sometimes necessary to cook beef patties solely for use in making chili, most of the meat for Wendy's chili came from "well-done" beefpatties that could not be served as "hot 'n juicy" old fashioned hamburgers. These "well-done" hamburgers were refrigerated and used in making chili the following day.
Wendy's french fries were prepared from high quality potatoes and were cut slightly longer and thicker than those served by most other fast-food hamburger chains. The Company used specialized fryers designed to cook the inside of these bigger potatoes without burning the outside.
Wendy's Frosty Dairy Dessert was a blend of vanilla and chocolate flavors that was too thick to drink through a straw. It was served with a spoon to be eaten as a dessert, but some customers ordered a Frosty in place of a soft drink. Whether served as a dessert or as a dairy drink, the Frosty was a distinctive and popular menu item.
Growth
The first Wendy's restaurant opened in Columbus, Ohio, in November 1969. The second
Wendy's opened in 1970, restaurants three and four opened in 1971, and restaurants five, six, and seven opened in 1972. In addition to these seven Company-operated stores, two franchised restaurants were openedin1972. As shown in Table l, a substantial increase occurred in the number ofWendy's restaurants opened between 1973 and1978,the majority ofwhich were franchised units.
F' -J- IJVA-C-O871
Table I
Number of Restaurants in Operation r973-1978 1973_
I7
l5
32
r97 4
46
47
93
197 5
93
159
252
1976 t977 r978
Comp any Restaurants 288
Franchised Restaurants
Total Restaurants
174 231
346 67 4_ 1.1 19 s20 905 1,407
Both Company and franchised restaurants were built to Company specifications as to exterior style and interior decor. Most were free-standing, one story brick buildings, substantially uniform in design and appearance, and constructed on approximately 35,000 square foot sites with parking for
35-40 cars. Free-standing restaurants contained about2,400 square feet and included a cooking and food preparation area, a dining room designed to seat 92 customers, and a pick-up window to serve drive-thru customers.
Wendy's restaurants were usually located in urban or densely populated suburban areas, and their success depended upon serving a large volume of customers. As of December 3l,1978,the
288 Company restaurants were located in 18 multi-county areas in and around the cities listed in
Table2.
Tab\e 2
Company Restaurants
December 3l , 1978
Columbus, Ohio
Cincinnati, Ohio
Dayton, Ohio
Toledo, Ohio
Atlanta, Georgia
Tampa, Sarasota, St.
Petersburg and
Clearwater, Florida
Jacksonville, Florida
Detroit, Michigan
32
t9
24
l0
28
20 ll l1
Indianapolis, Indiana
Fort Worth, Texas
Houston, Texas
Dallas, Texas
Oklahoma City, Oklahoma
Tulsa, Oklahoma
Memphis, Tennessee
Louisville, Kentucky
Syracuse, New York
West Virginia
12
9 l8 1l
10
l0 ll t2
I
32
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There were no franchised restaurants located in any of the market areas served by Company restaurants. Company Revenues
Wendy's revenues came from four principal sources. As shown in Table 3, these were: sales made by Company restaurants, royalties paid by franchise owners (franchisees), technical assistance fees paid by franchise owners, and interest earned on investments. The increase in the percentage of total revenues that resulted from royalties during the five-year period covered by Table 3 was primarily caused by the substantial increase that occurred in the number of franchised restaurants relative to the number of Company restaurants.
Table 3
Percentage Revenue Composition
197 4-197 8
Year Ended December 31
Revenues:
Company-operated restaurants Royalties
Technical assistance fees Interest and other income 1974 1975
94.2t% 93.37%
3.33 4.26
1.53 1.70
.93
100.00%
.67
100.00% r97 6
90.16%
6.40
2.t6
t.28
100.00%
2.04
1.36
100.00%
1.87
1.35
100.00%
1977 1978
87.rA% 84.13% 9.s0 r2.6s
Revenue from sales made by Company restaurants was recognized as soon after the sales occurred as was practicable. Because the amount of each Company restaurant's daily net sales was to be reported to corporate headquarters in Dublin, Ohio, by 8:00 a.m. the next day, these sales were generally recorded by the corporate accounting staff the day after the sales were made.
Wendy's franchise agreements stipulated that every franchisee must pay to Wendy's
International, Inc., a technical assistance fee of $15,000 (as of December 31, 1978) for each restaurant the franchisee agreed to build within the franchised area.l The due date for payment of the technical assistance fee (sometimes referred to as a franchise fee) was negotiated with each franchisee. The earliest due date was at the time the franchise agreement was signed; the latest due date was 30 days prior to the opening of each restaurant. tunlike most other fast-food chains, Wendy's granted franchises for geographic areas (i.e., one or more counties) rather than for individual restaurants.
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According to Wendy's management, the technical assistance fees did not contribute to
Company profits inasmuch as they were generally fully expended on providingavariety ofservices to franchise owners prior to the opening of each restaurant. These services included: site selection assistance, standard construction plans and specifications, initial training for franchise owners and restaurant managers, advertising materials and assistance, national purchasing agreements, and operations manuals.
Technical assistance fees received anytime prior to the opening of the related franchised restaurants were recorded by the Company as "deferred technical assistance fees." Technical assistance fees were recognized as revenue at the time the franchised restaurants commenced operations. Once a franchised restaurant was opened, franchise owners had to pay Wendy's
International, Inc., a royalty of 4 percent of gross sales. In connection therewith, franchisees were required to submit to the Company weekly sales reports (due the following Monday) for each restaurant. Payment ofthe royalty was made on a monthly basis and was due, along with a monthly sales report, by the 15th of the following month. Royalties were recognized on an accrual basis at the end of each month based on the weekly sales reported by franchisees. If necessary, these monthly accruals were adjusted at the time the royalty payments were received from franchisees.
Wendy's did not select or employ any personnel for franchisees, nor did the Company sell fixtures, food, or supplies of any kind to franchisees. Also, unlike many other restaurant chains,
Wendy's did not derive revenue from owning the franchised units and leasing them to franchisees.
All of Wendy's franchise owners either owned their franchised restaurants or leased them from independent third parties. l Interest and other income represented the amounts earned on investments, principally certificates ofdeposit, bankers acceptances, and commercial paper. These amounts were recognized by the Company on an accrual basis as earned.
Chili and the Wendy's Way
Wendy's was founded on the belief that the combination of product differentiation, market segmentation, quality food, quick service, and reasonable prices would produce a successful company. This combination was often referred to by Mr. Thomas as the "Wendy's Way." The decision to include chili as one of the original menu items was made after careful consideration of the most desirable product mix in keeping with the Wendy's Way.
The first and most important of Wendy's products was, of course, the 'oold fashioned" hamburger. French fries were the second item included on the menu, primarily because so many customers ate french fries with their hamburgers. It was at this point that a product decision needed to be made that would enhance the successful implementation of the Wendy's Way.
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Wendy's management knew that the only way their restaurants could serve old fashioned hamburgers directly from the grill in accordance with individual customer orders, and still be able to serve them quickly, was for the cooks to anticipate customer demand and have a sufficient supply of hamburgers already cooking when the customers arrived at the restaurants. The problem with such an approach, however, was what to do with the hamburgers that became too well done whenever the cooks overestimated customer demand and cooked too many hamburgers. Throwing them away would be too costly, but serving them as "hot 'n juicy" old fashioned hamburgers would result in considerable customer dissatisfaction.
The solution to this dilemma was in finding a product that was unique to the restaurant industry and that required ground beef as one of the major ingredients. Thus, Wendy's o'rich and meatS/" chili appeared on the menu of the first Wendy's restaurant and remained on the menu thereafter. Preparing the Chili
Wendy's chili was prepared daily by the assistant manager or an experienced crew member, in accordance with Wendy's own recipe. It was slow simmered in a double boiler on a separate range top for a period of from four to six hours. While cooking, the chili had to be stired at least once each hour, and at the end of the day it was refrigerated for sale the following day.
Normally, it took between l0 and 20 minutes to prepare a pot (referred to at Wendy's as a batch) of chili. First, the 48 Vq-lb. cooked ground beef patties needed for a batch were obtained, if available, from the walk-in cooler. These patties were ones that had been "well-done" sometime during the previous three days. Most ofthe time it was not necessary to cook any meat specifically for use in making chili, although the need to do so was more likely to occur during the months of
October through March when approximately sixty percent oftotal annual chili sales occurred. If, as only happened approximately ten percent ofthe time, it became necessary to cook meat specifically for use in making chili, the number of beef patties needed were taken from the trays of uncooked hamburgers that had been prepared using a special patty machine, at the rate of 120 patties every five minutes, earlier that morning. On the average, it took ten minutes to cook forty-eight hamburger patties.
Before placing the meat in the chili pot, it had to be chopped into smaller pieces. This generally took about 5 minutes to do. The remaining ingredients then had to be obtained from the shelves and mixed with the meat. This process also took about five minutes to complete, after which the chili was ready to be cooked. The quantities and costs ofthe ingredients needed to make a batch of chili and the labor costs associated with the different classifications of restaurant personnel are shown in Tables 4 and 5. Other direct costs associated with the chili included: serving bowls, $.035 each; lids for chili served at the carry-out window, $.025 each; and spoons, $.01 each.
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Table 4
Chili Ingredients and Costs
Ouantity + Cost
1 No. l0 can of crushed tomatoes $1.70lcan
5 46 oz. cans of tomato juice .51/can
I Wendy's seasoning packet .45/packet
2 No. l0 cans ofred beans L32/can
48 Cooked %-lb. ground beef patties (12 lbs. of ground beef) 1.25/lb.
Note: The batch ofchili described above yielded approximately 57 eight-ounce servings.
Table 5
Restaurcnt Labor Costs
Description Cost
Store Manager $336.54lweek (salary)
Co-Manager 4.58/hour
Assistant Manager 4.08/hour
Management Trainee 3.98/trour
Crew 2.90/hour
Note: Payroll taxes and other employee-related costs averaged about 8 percent ofthe above amounts.
Profitability
The selling prices for all of Wendy's products sold by Company restaurants were set at corporate headquarters. Although some price differences existed among restaurants in different locations, representative prices for 1978 were $.75 per serving for chili and $.79 for a "single" hamburger. Chili sales comprised about 5 percent of total sales compared to about 55 percent for hamburgers. As shown in Exhibit l, Wendy's cost of sales, as a percent of retail revenues, increased to 57 percent in 1978 from 55 percent in1977. This increase in the cost of sales percentage was caused by two principal factors. First, ground beef prices increased substantially during 1978.
Second, the minimum wage increased by 15 percent as of January l, 1978.2
2Wendy's included all restaurant labor costs in cost of sales.
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With the sharp increases in beef prices expected to continue throughout 1979,management foresaw funher declines in chili's profitability. There was, however, some disagreement among those involved in the product-line decisions about how the present profitability of chili should be determined. On a full cost basis, chili had the lowest gross profit percentage. If as some management personnel argued, the meat used in preparing the chili was considered to be either a joint-product with or by-product from Wendy's old fashioned hamburgers, then chili's profitability improved dramatically. The more the issue was discussed, the less management seemed to agree.
As the initial test-marketing of the salad bar had been quite successful, some decision regarding whether chili should be dropped from Wendy's menu would probably have to be made within the next six months. Dropping chili would certainly solve the problem of how it should be costed. Management was concerned, however, about the long-run impact of such a decision on total
Company profitability.
Questions
1. How was Wendy's able to achieve its financial success and to grow so rapidly at atime when the fast-food business appeared to be saturated?
2. What benefits might have resulted from Wendy's "limited menu" concept? What were the disadvantages ofsuch a concept?
3. Why was Wendy's drive-thru window successful when many other quick-service restaurant chains had been unsuccessful at implementing the same concept?
4. On a full-cost basis, how much does a bowl of chili cost Wendy's to make? How does chili's gross profit percentage compare to the other basic products?
5. How much do you think that it costs Wendy's to make a bowl of chili?
6. Should Wendy's drop chili from its menu?
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Exhibit I
WENDY'S CHILI uvA-c-O871 Statement of Income
I)ecember 31,
Revenue:
Retail operations
Royalties
Technical assistance fees
Other, principally interest
Costs and expenses:
Cost of sales
Company restaurant operating costs
General and administrative expenses
Depreciation and amortization of property and equipment
Interest
Income before income taxes
Income taxes:
Federal:
Current
Deferred
State and local taxes
Total taxes
Net income
Net income per common and common equivalent share Weighted average of common and common equivalent shares outstanding
Dividends per common share for the Years Ended
1978 and 1977
1978
$ 164, 67 6,7 45
24,7 47 ,219
3,670,000
2.640"410_ l 95 ,734,37 4
94,065,707
36,019,093
14,729,5 1g
4,543,3 10
_ 2"905.27 6
I52.,162.991
43,57 I,469
17,925,000
1.01 3.000
1 g,93 9,000
- 1.41 9"600
20.356.600
$ 2 3,214,869
$1.66
14,004,598 t977 $t t 4,200,696
12,466,352
2,672,500
1,781.706
1 3 1 ,121,254
63,1 l3 ,541
24,269,7 53
9,485,844
3,243,570
2.569,I29
102.681.837
28,439,417
I 1,95 1,700
3 36.300
12,299,000
r ^24,I.000
13.529"000
$ 14,910,417
$1.08
13,895,7 r1
$. l4 $.1 25