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Thursday, December 23, 2004

Fast-Food Business Strategy

    Posted by Adam Crouch

Source: Hardee's
I've posted before about the move by McDonald's towards more healthful food, and also about their unorthodox marketing techniques. Frequent commenter Salas raises a related point: If healthful food is so great for McDonald's, what about Hardee's, which has taken the opposite tack?
Hardee's, meanwhile, last month added the Monster Thickburger to its menu. With two one-third-pound beef patties, four strips of bacon, and three slices of cheese, the burger has 1,417 calories and a whopping 107 grams of fat.

McDonald's Corp.'s Big Mac, with 560 calories and 30 grams of fat, doesn't even come close.

Conventional wisdom says that if you want to survive as #2, be the opposite of #1. Get all the customers that don't like what #1 has to offer.

A great example of this is Target. While other retailers have been facing financial ruin in the face of Wal-Mart's rock-bottom prices, Target has been thriving. Why? They've positioned themselves just slightly upmarket. While Wal-Mart is seen as being dingy, Target is seen as a source for "cheap chic" -- stylish, high-quality products at very low prices. Their prices are slightly higher than Wal-Mart's, but the quality is perceived to be better, so they're still able to make a good "value for money" proposition.

It often pays to ignore conventional wisdom, but in this case the conventional wisdom really is wise. If there's a diverse range of preferences, it's inevitable that the #1 player won't be adequately addressing many of them. Addressing them is the key to surviving as #2, and is often your best shot at becoming #1 yourself.

The healthful food strategy of McDonald's has been a phenomenal success with families and health-conscious people, but that's only part of the fast-food market.

I did construction work in high school, and we ate fast food almost every day. In fact, if you go into a fast-food restaurant at lunch-time, it'll be jam-packed, generally with blue collar workers. There will be some office workers, but most of them are more health-conscious, and have a full hour for their lunch break, so they're more likely to go to traditional restaurants.

People who do manual labor, on the other hand, often don't care if food is fattening, as long as it's good -- they'll be working it off anyway. Besides, counting calories is "girly". "Real men" want a thick, juicy slab of meat -- the more the better.For those who haven't been manual laborers: I can't emphasize the importance of "macho-ness" enough. The tougher you are, the more respect you get. It makes sense when you're working in a dangerous field -- who wants to work with a wuss, whose fear and lack of endurance gets in the way of getting the job done?

These guys are extremely important. They make up most of the lunch trade, which is fast-food's busiest time of the day.

The "Monster Thickburger" at Hardee's is a perfect fit for this demographic, and they've done a terrific job at marketing it. Their ads feature a muscular guy, with the slogan "they're not for little boys, so they don't come with little toys." Brilliant. Absolutely brilliant.

I can see the fast-food market evolving such that McDonald's is the favorite among families and women, Hardee's is the favorite for the blue collar lunch trade, and Taco Bell picks up the people who feel like Mexican food that day.

What's left for Burger King and Wendy's?

Burger King has been trying to beat McDonald's at its own game, and been reasonably successful at it. They've imitated the family-attracting strategies of McDonald's, building quasi-"play places" and quasi-"Happy Meals", while trying to position themselves as being higher quality.

For all of the reasons I discussed in my post about the strategy of McDonald's, I think that Burger King will be left in the dust in their competition with McDonald's for families (unless they change their strategy). But they'll likely continue pursuing it, due to the big investments they've made in building playgrounds in their restaurants.

One big thing that has been boosting them for the past few years is luck: Burger King signed a toy deal with DreamWorks SKG, while McDonald's signed one with Disney. Disney's movies have performed so badly lately that McDonald's is even trying to get out of their contract, while DreamWorks movies have done very well.

At the end of the day, fast-food is first and foremost a convenience game: if your restaurant happens to be the first one someone sees when looking for food, you'll get the sale. The plethora of Burger Kings really helps here. But many fast-food restaurants are grouped together -- it's common to see McDonald's, Burger King, Wendy's, and Hardee's all next to each other. Burger King will likely lose marketshare in these match-ups, and Hardee's will continue to grow and expand, until it has a level of ubiquity on par with McDonald's and Burger King.

As for Wendy's, the one thing they have going for them is their hours -- if you're looking for quick food at midnight, it's either Wendy's or a 7-11 burrito. It works well: every time I've been to a Wendy's at these hours, there's been a huge line-up in the drive-thru. But you don't want your competitive advantage to simply be that you're open later. McDonald's or Hardee's can easily do the same thing, and wipe out your advantage. I don't see anything other than hours that Wendy's has going for it.

So if I was advising Burger King or Wendy's, what would I say? Here are the options, as I see them:

1. Beat Hardee's with the blue collar lunch crowd.

Their Monster Thick Burger is a new brand proposition for them. It shouldn't be too tough to knock them from that perch and beat them, especially since Burger King and Wendy's have far more restaurants than Hardee's does.

2. Dominate Breakfast

The breakfast trade is also something that is often underestimated by outsiders. I remember doing a case study in an MBA class about fast-food's morning coffee sales, and it really surprised me how big it is.

All of the fast-food restaurants are basically doing the same thing in this space, and there's a lot of room to differentiate. Carl's Jr (owned by Hardee's parent) is doing some interesting stuff here with a breakfast burger.

Adding new types of breakfast food won't be enough to "dominate breakfast" however. Why not offer breakfast food all day? Remember the bit from Big Daddy where Adam Sandler was so excited about being awake early enough for the McDonald's breakfast? Many other people would also like a sausage and egg muffin later on in the day. But the real reason for doing this isn't for those afternoon sales -- though that's a big side benefit. The real reason is to get people hooked. To associate your chain with damn good breakfast sandwiches. This will "grow the pie" of breakfast customers by getting more people interested in having a fast-food breakfast, as well as diverting people who already go to a fast-food joint for breakfast to your chain, rather than the competitor.

Sheetz gas stations are also doing some really cool things in the breakfast space, in a way that also ties well with #4. But that is a topic for a future post.

3. Go Upscale

This is what Arby's has been doing lately. They've been offering "homecooked"-type food, at a premium price. Things like entire roast chickens, Chipotle-style burritos, steak, etc. They've also begun renovating their restaurants with much nicer decor: fireplaces, big solid chairs, nice carpeting, and flat-panel screens.

I've been convinced for years that high-end fast-food is a neglected and potentially very profitable niche. The small Madeline's chain of French food does this well, and is much more upscale than Arby's, but I haven't seen it much elsewhere. It's doesn't take a rocket scientist to figure out that many people with above-average income are very busy. They would love to be able to get high-quality, fancy-restaurant-caliber food quickly, and they'd be willing to pay a premium for it. But this is an almost completely ignored niche.

Doing this requires a very large capital outlay to renovate existing restaurants. There's also the question of brand: will people be willing to believe that Wendy's is now upscale? Going all the way with this, to fancy-restaurant-caliber food, will definitely be very difficult and risky with their existing brands. But making an Arby's-style move to this space, going half-way, can work well. As with #1, if Burger King or Wendy's is willing to make this move, their ubiquity will help them to beat out Arby's, despite their headstart.

4. Be the Kings of Speed

People eat fast food because it's convenient. If you have to wait in line for 10 minutes, you're not much better off than if you went to a sit-down restaurant. If Burger King or Wendy's can nail this, they can trump the advantages that McDonald's has.

There's a lot of room for improvement in efficiency. Why have the people who collect the money and pass out the food also be the ones who take the order? This causes unnecessary delays, because they can't take money or hand over food right away, because they're busy taking an order. McDonald's has experimented with using a centralized call center to take orders, and I remember reading about one fast-food chain developing software to predict someone's order based on what car they were driving. The electronic readouts some chains use to show your order, as well as how much you need to pay, cut down on delays from customers counting money and making sure their order is right.

There's bound to be many more ways to increase efficiency. And once you get to the point of being much faster than your competitors, hype it. Why not offer a time guarantee, like pizza chains do? "Less than 5 minutes in the drive-thru, or it's half off".

5. Find a different niche

There's bound to be other niches out there. Find one and claim it. Don't keep chasing the shadow of McDonald's.

Related Posts
- Goodbye Golden Arches: McDonald's UK to replace logo with a question mark (temporarily)
- McDonald's uses graffiti to woo the US Latino market

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