Wendy’s able to achieve its initial success and to

Wendy’s Chili: A Costing Conundrum

Wendy’s
International Inc. is a hamburger quick-service restaurant which was founded in
1969 in Columbus, Ohio, by David Thomas. By 1972, Wendy’s had seven
restaurants, seven company operated stores and two franchised restaurants were
opened.  Over the years, Wendy’s
continued to grow and expand geographically. The success of Wendy’s is
attributed to the efforts of Thomas who used product differentiating strategies
to make Wendy’s stand out from its competitor. He aimed to provide good quality
hamburgers quickly at a suitable price. Wendy’s served hamburgers the
traditional “old fashioned” way. Its limited menu items were popular. However,
when the company saw declining profitability, Wendy’s had to seriously consider
changing its traditional ways by expanding the product line and discontinuing
the production of products which result in losses e.g. the chili.

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How was Wendy’s able to achieve its initial
success and to grow so rapidly at a time when the quick service hamburger
business appeared to be saturated?

One of the main
factors behind Wendy’s success was its founder David Thomas. Thomas had the
experience of running Kentucky fried chicken and Fish & chips profitably. Thomas
ran both fast food restaurants successfully and was able to make profits by
selling these profitable franchises. He realized that there was a need for
quick-service traditional well-cooked hamburgers which was not addressed by the
market. Hence, he opened Wendy’s to address this need. When he started this restaurant,
he had a vision on which he based the entire company chain.

Another reason
why Wendy’s initially achieved success and growth was that Wendy’s targeted a different
segment from other quick-service hamburger businesses. They targeted young
adults and adults rather than youngsters. Furthermore, Wendy’s distinguished
itself from its competitor by providing “old fashioned” hamburgers in a quick
service business. Due to the uniqueness of the concept, the restaurant was a
novelty for the customers.

Moreover, Thomas
had a goal to provide its customers with “bigger and better hamburgers cooked
to order”. For this reason, the hamburgers were cooked to order and made daily
with fresh beef. They were served directly from the grill to the customers.
This was done because when customers will see what they are eating they will be
more satisfied. Another part of the goal was that the hamburgers should be
“served quickly”. This was because he wanted his customers to get good
hamburgers without “waiting 30 minutes or more”. Thomas’s last goal which led
to the success of the company was that the hamburgers should be reasonably
priced. For customers it was very satisfactory to get a hot ‘n juicy hamburger
quickly at a suitable price.

Thomas also differentiated Wendy’s
product by adding two unique features. Firstly, Wendy’s served hamburgers in
traditional square bun rather than the round buns used by all other quick
service restaurants. These square burgers were popular amongst the customers
who thought they were the best tasting hamburgers compared to other
competitors. This unique feature helped Wendy’s get ahead of its competitors.
Wendy’s faced direct competition from other fast food chains like McDonalds and
Hardees during the mid-sixties to the seventies. Each company had to have a
unique feature which helped them gain competitive advantage. For Wendy’s this
feature was “limited menu” items.  Four main
products were offered; hamburgers, chili, French fries and Wendy’s’ Frosty
Dairy Dessert. Even though the menu items were limited, these were all highly
in demand. They offered up to 256 possible combinations for their core product
I.e. hamburgers. Chili and the Frosty Dessert were Wendy’s traditional and
original recipes which were always highly demanded. This was another product
differentiation strategy.

Wendy’s was also
the “originator” of the drive through window in the fast food chain. The
novelty and uniqueness of this concept helped Wendy’s increase the sales
tremendously in the initial years. By the time other fast food competitors
implemented this concept, the novelty was long gone.

This mix of
product differentiation, reasonable prices, fast service, quality product and
market segmentation was the reason why Wendy’s was able to grow so quickly and
become so profitable initially. Thomas called this the “Wendy’s’ Way”. 

What benefits might have resulted from
Wendy’s’ “limited menu” concept? What were the disadvantages of such a concept?
Why was the concept eventually discontinued?

 When Thomas started the hamburger quick
service restaurant his focus was to serve good hamburgers quickly. In order to
achieve this Thomas decided to have a limited menu. Limiting the menu to four
main products allowed Wendy’s to control its cost and better forecast the
demand for their products. Thus, as the cost remained low Wendy’s was able to
gain price competitive while serving good quality food.  Forecasting demand for four products is far
more accurate and easier compared to estimating demand for a large variety of
products. Another advantage of this limited four item menu was the increase in
efficiency in providing quick service to the customers. Having fewer products
on the menu saved the cooking time for the food being served.   Additionally, this “limited menu” concept was
also a product differentiating factor for the firm. This concept made Wendy’s
stand out amongst its competitors. It was a successful marketing strategy as
well as customers were able to remember the Wendy’s menu. The Products became
well known around customers and good word of mouth brought in more customers.

This feature
also offered different condiments. As many as 256 hamburger combinations were
available, even if there were 4 basic items in the menu. These kind of
value-added features were not offered by the competitors at the time.  In addition to this, as mentioned in the last
question, Wendy’s was able to reduce its cost and offer more reasonable price to
its customers. This factor became a source of competitive advantage and helped
attract and retain customers.

On the other
hand, there were a number of disadvantages as well for this limited menu
concept. Firstly, Wendy’s provided less variety for the customers at the time
when the competitors were offering a vast selection of products. This gave
other firms competitive advantage over Wendy’s as far as the product varieties
were concerned. Also, the limited menu excluded the customers who were
vegetarians or people, especially children, who preferred chicken to beef.
Therefore, this concept limited the target market. Wendy’s also would not be an
ideal place for holding dinners or family outings as the menu does not suit the
needs of all the people in the group or family.

As more and more fast food chain
started opening across the US, the pressure on Wendy’s begin to grow. In order
to keep up with the competition, Wendy’s eventually had to discontinue the
limited menu concept. Furthermore, customer’s demands were also changing. People
now look for variety when they visit a restaurant. Hence, it was important for
Wendy’s to diversify into other products. As Wendy’s expanded it introduced
salads and chicken sandwiches. This helped them grow their target market from
adults and young adults to vegetarian and children.

Why was Wendy’s’ drive through window
successful when other quick-service- restaurant chains had been unsuccessful at
implementing the same concept?

Wendy’s was the
first fast food firm to come up with the concept of drive-thru windows. Wendy’s
implemented this concept in the 1970s. This made Wendy’s stand out from other
fast food chains and gave Wendy’s an early competitive advantage over other
firms in the industry.  As this concept
was a novelty for the customers, it became a big hit amongst Wendy’s
customers.  When the competitor
implemented this concept, it had lost its original appeal and excitement.
Therefore, Wendy’s was able to successfully implement this concept at its
restaurants while the competitors were struggling to do so.  Another reason for the success of Wendy’s
drive thru was that Wendy’s franchises were located in highly populated area.
This meant that the drive thru had a large customer base to serve in these
locations.

 How
much does a bowl of chili cost on a full cost basis? An out-of-pocket basis?

The costing of
the chili is done on the out-of-pocket basis. In order to calculate the cost of
the chili, it is critical to look at the cooking process of the chili. Chili
takes around 35 minutes to be prepared before putting it on the stove to simmer
for six to eight hours. According to the case study, it took around 10 to 15
minutes to prepare the pot. It took one minute to get the cooked beef. On
average, it took ten minutes to cook 48 pieces of beef if the beef was not
previously cooked. 5 minutes were spent chopping the beef and other five
minutes were spent adding more ingredients to the pan. Exhibit A shows the
calculation of the total time taken to prepare the pot before it is left to
simmer.

It is not
mentioned in the case which member of the staff was responsible for preparing
the chili. Therefore, for ease of calculations, it is assumed that all the
staff apart from the manager was directly involved in making the chili. The pay
per hour of each worker is given n table 5 of the case.

Furthermore, the
ingredients used to make the chili were listed in table 4 of the case. It
required one can of crushed tomatoes, five 46 ounce can of tomato juice, one
packet of Wendy’s seasoning packet, 2 cans of red beans and 48 pieces of cooked
beef to make a 57 8 ounce serving of chili. The individual cost of these items
are shown in Exhibit B. Exhibit B also shows calculations of the total cost of
making fifty seven 8 ounce serving of chili. Cost of one 8 ounce chili turns
out to be $1.14. If the chili is packed than the cost of package was also
included in the price. A packed chili cost $1.21.

For determining the true probability of
chili, how much does a bowl of chili really cost?

In full cost
basis of accounting all costs associated with the production of a product is
considered. The cost can be variable, direct or indirect. The advantage of this
is that when all costs are incorporated in the price of the product, the
decision makers can make more informed decisions about the product. This is
because the cost represents the full cost of producing the product. However,
full cost accounting is far more complicated and might need far more
assumptions. This reduces the accuracy of the product cost and might result
into poor decision making.

In out-of-pocket
cost accounting, only the costs which require a cash payment in the short term
are considered. Other costs are not considered while calculating the product
costs and are often not reimbursed.

 The costing done on the out-of-pocket basis
seems most appropriate to determine the cost of the chili. It is difficult to
use full cost basis in order to determine the cost of the chili. This is
because it is hard to allocate the managers salary to the chili. Also, the
chili is left to simmer for more than six hours in which time it had to be
stirred at least once. Allocation of cost of labor during these hours would be
very complicated. Hence, Out-of-pocket basis will serve the best purpose.

Would you recommend dropping chili from the
menu? Why or why not?

The decision
about whether or not to drop chili from the menu depends on what the Wendy’s
management wants to achieve. If profitability of the product is their main
concern then they should drop chili from the menu. This is because while chili
costs $1.14 per 8 ounce it is selling at a price of $0.99 per 8 ounce. This
means that for every 8 ounce sale of chili Wendy’s earns a loss of $0.15.

While making
such decisions, it is important for the company to look at other factors beside
the individual profitability of the product. Chili for Wendy’s is an integral
product. This is because not only is it one of the four core products but it is
also used in the hamburgers. Wendy’s loyal customers,  who like the chili, will be lost.
Furthermore, the goal of Thomas when setting up Wendy’s was to make a
quick-service restaurant that provided “old fashioned” hamburger. In order to
maintain the core values of the firm keeping chili in the menu is essential.

I would
recommend keeping chili on the menu. This is because, over the years, chili has
become a traditional and well known menu item among Wendy’s customers. Dropping
this item will result in a loss of those customers who preferred the
traditional Wendy’s way. In order to reduce the loss on the chili, the price of
chili could be increased. Also, the cost can be reduced by bulk buying from the
suppliers or negotiating a lower price from the suppliers. 

According to Jim
Collins in his book “How the Mighty falls”, he explains that one reason why
successful companies fail is that they lose the focus on things that make them
great. If Wendy’s stop doing things the Wendy’s’ way, it might lose its appeal
to its loyal customers. Hence, it might end up losing its customers as well as
its competitive advantage.

 

 

 

 

 

 

 

 

 

 

 

Exhibit A

Time taken for Chili
Preparation

Prepare Pot

Cooking beef time

10

Chopping beef

5

Mixing Ingredients

5

Total Time

20

 

Exhibit B

Chili 8 ounce Cost

Ingredients

Qty

$

Total

No. 10 Can of crushed
Tomatoes

1

2.75

         2.75

46 oz. Can of Tomatoe
Juice

5

1.25

         6.25

Wendy’s Seasoning Packet

1

1

         1.00

No. 10 Can of red beans

2

2.25

         4.50

Cooked quarter pound,
ground beef patties

12

3.5

       42.00

Total cost of Ingredients

       56.50

Labor

Crew

0.33

25.75

         8.58

Cost of 57 Chilis

 

 

       65.08

Cost of one 8 ounce Chili

 

 

         1.14

Other Direct costs

Bowl

1

0.035

         0.04

Spoon

1

0.01

         0.01

cap

1

0.025

         0.03

Cost of Packaging

             0.07

Cost of a packed 8 ounce
Chili

 

 

             1.21