Our client is a global fast food restaurant that offers a wide range of breakfast and rest of day products including burgers, salads, fries, and beverages, and offers combo bundles. Over the last ~5 years in the US, our client has seen relatively flat guest count, but a decline in profitability. They have launched several
large national advertising campaigns focused on highlighting their "value" products which have not turned around profits the way they had hoped. The head of the US business has asked us to help him understand why gross margin is decreasing, and specifically to take a look at his menu's pricing.
- Is there an issue with the menu pricing structure? If so, what would you recommend to restructure the pricing?
- What is the overall implications to volume and gross margin with a revised pricing structure?
Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Case exhibits” section
Paragraphs highlighted in blue can be verbally communicated to the interviewee
Paragraphs highlighted in orange indicate hints for you on how to guide the interviewee through the case.
Question 1: Potential Framework
Can you help the client identify how its current pricing architecture is impacting profitability?
- Competitive position: Are they the low price option? Do they compete in premium products?
- Product mix and product offering: Do we make different margin on different product tiers?
- Product evolution: Has there been in shift in the ratio of one product to another?
Data provided on request prior to driving the case (prior to framework or after):
- The market is essentially flat in terms of guest count. We don't have specific margin data on competitors yet, but we believe pricing is not an issue for other players.
- The client is generally viewed as the leader in Value products (i.e., products priced around $1)
- Our client has a combination of value, core and premium products at different price points
- We sell between 2-3x more Value products than core products (depending on the item)
- Our client has essentially created an "anchor" of the Value products and cannot raise the price. We've had to increase prices on the rest of the menu to accommodate
Question 2 (when candidate asks about product mix): Exhibit 1 - Current product pricing and cost data
We actually have some data on our client's current product mix and price point. What are your observations and what can you infer from this data?
Exhibit 1 can be shared with the candidate.
- Despite increasing costs as I move up the product chain, I actually make a higher margin (both $ and %) on premium products
- There is no discount for the core meal vs. a la carte ordering. We are not incentivizing customers to trade-up
- There is no incentive curve on the nuggets –i.e., the cost/nugget actually increases as customers order more
- The gap between value sandwiches and core/ premium sandwiches seems to be too large. Customers can actually create their own "value combo meal" for cheaper than the cost of a core entree
[Exceptional candidates would calculate margins proactively]
Question 3: Recommendation
Given this, what do you think the client should do to revise pricing?
This list is not exhaustive, so you may need to push the candidate to think about one of the last two points.
- Pre-price items to new gross margin % threshold
- Pre-price items to competitor prices
- Conduct pricing sensitivity analysis for each product in each market
- Cross-price elasticity analyses for each product in each market (understand how the change in price A will impact price B demand)
Question 4: (when candidate suggests pricing elasticity analysis) Exhibit 2 - Product price sensitivity
We did some elasticity calculations and have a bit more data on volume impact at different price points for a few key items. What would the impact be to profitability at each price point?
Exhibit 2 can be shared with the candidate.
- Candidate will utilize the volume and price data to calculate total profit expectations:
- Cheeseburger: $0.75 price/$0 margin; $1 price/$250 margin; $1.25 price/$450 margin; $1.50 price/$375 margin
- Bacon cheeseburger: $2 price/$1,000 margin; $2.50 price/$1,200 margin; $3 price/$1,000 margin; $3.50 price/$500 margin
- Best price is $1.25 for cheeseburger, $2.50 for bacon cheeseburger
Question 5: Brainstorming
Take a moment and brainstorm the possible risks of this pricing reset. What are some of the key issues the client could run into?
Lost guest count from raising the bottom of the menu
- How do we ensure the trade-up happens? Marketing will be key in the roll-out
- Competitor response – what if someone makes strong investments to attract our Value customers?
- New price structure alters company's brand –formerly viewed as Value leader, but pricing is attempting to move customers up in product quality
- Will require significant awareness of new pricing to drive guest count/transactions –need investment in ad dollars
- Most fast food restuarants operate as franchisees –how do we get owner/operator buy-in?
- The client needs to think about how to pass through cost increases across the menu over time. It will be critical to keep the established architecture
- Does the price structure vary by market (i.e., depending on cost of living, competitive density, etc.)? Does it make sense for us to roll-out the solution to all restaurants or a subset?
Question 6: Synthesis
If the client asks for your initial recommendation, what would you say?
- Our client has been very anchored on Value products, which have low profitability, and there is a large gap between Value and Core/Premium pricing
- I would recommend adjusting Value items upwards and Core/Premium downwards to lower gap and drive increased gross margins. At a price point of $1.25 for the value cheeseburger and $2.50 for the core cheeseburger, we can increase our gross margins from $1,250 to $1,650
- However, there are a number of risks our client will need to manage through in order to successfully bring this change to the market, such as managing communication of changes to customers, potential competitor response, etc.
- Key next steps will include internal and external communication, including developing messaging to owners/franchisees and an external marketing campaign