Burger Wars 2002 Case Simulation This Case Simulation was prepared by Edwin Hartnell ([email protected]) working with the Georgia Institute of Technology (www.gatech.edu). Abstract— In 2002 a price war broke out between McDonald’s, Burger King, and other USA fast-food hamburger restaurants. This Case Simulation offers a case study of those market dynamics and suggests questions for class discussion. A software simulated replica of the 2002 fast-food hamburger market is then presented. Students are asked to use the provided data analytics tools to an- alyze the simulation and answer pertinent questions of interest to the business leaders involved. A final challenge asks students to extend the market simulation to test an outstanding hypothesis. 1 ABOUT CASE SIMULATIONS 1.1 Overview Case Simulations are a combination of Case Studies and Market Simulations. 퐶푎푠푒 푆푖푚푢푙푎푡푖표푛 = 퐶푎푠푒 푆푡푢푑푦 + 푀푎푟푘푒푡 푆푖푚푢푙푎푡푖표푛 Case Simulations extend business and economics case studies by reproducing key market dynamics in a software simulation. Students can actively explore this simulated environment to analyze the problems presented in the case. Data ana- lytic tools are provided alongside the simulation to answer specific questions. Student solutions can be tested in software before recommendations are made. 1.2 Market Simulation Details The software simulation runs an Agent-Based Model (ABM) built upon Main- stream Economics. Consumer Agents make Rational Decisions based upon their Willingness To Pay (WTP) and Consumer Surplus for goods and services. Ven- dor Agents can follow the rules of Game Theory to maximize profitability. The simulation runs within a Data Analytics platform called KNIME. This plat- form, along with the Market Simulation extension, must first be installed by stu- dents before the Market Simulation workflow can be explored and analyzed. 2 CASE STUDY Everybody blamed McDonald’s for starting the price war [i][ix]. Value menus and steep promotions were not new to fast-food. But what McDon- ald’s did in 2002 traumatized an industry already suffering from economic re- cession. 2.1 Background The fast-food industry had seen phenomenal growth since McDonald’s was founded in 1948. By 2001, McDonald’s had reached 30,000 restaurants globally [xii]. But in 2002 the industry was hurting. Figure 1: In 2002, McDonald's controlled 43% of the fast-food market. Second-place Burger King controlled 18.5%, and third- place Wendy's controlled 13.2% [vii]. Starting in 2000, McDonald’s store revenues had been declining at a quarterly rate of 0.4%. For an average store, that meant 35 fewer transactions and $155 less in sales per day [iii]. Its “Made For You” strategy, designed to catch Burger King’s higher quality and faster speed, was failing to improve sales [xi]. The wider economy was suffering from a recession caused by higher gasoline prices [ii]. But McDonald’s blamed the slump on the a la cart segment. That is, on those customers who bought individual items off the menu rather than complete meals [iii]. By the middle of 2001, others in the industry were making big adjustments. Burger King’s slim profit margins and declining market share caused its parent company to put it up for sale [vii]. Wendy’s was the exception. By targeting adults and offering higher-quality, more nutritious food cooked to order [vii], Wendy’s was growing at about 3% annually [x]. Wendy's customers spent about $4.75 per visit, while McDonald’s customers spent $4.25, and Burger King customers spent $3.50 [viii]. "People pay more because it's a better burger," said John Glass, a financial analyst at CIBC World Markets. "They don't discount, never have and never will. They maintain their margin." [vii] Wendy’s had established its 99-cent menu in 1989, though they had always been careful to exclude their high-end sandwiches [xii]. McDonald’s had a history of offering 99-cent promotions on its Big Mac [viii]. And Burger King had occasion- ally offered temporary promotions for its high-end Whopper, though by 2000 they had also decided to cease all discounting of their high-end products [viii]. 2.2 Price War In September 2001, Burger King temporarily cut the price of its Double Cheese- burger from $1.89 to 99-cents, along with ten other items, to reinvigorate sales. But following Wendy’s lead, Burger King deliberately excluded its flagship Whopper sandwich from the promotion [xi]. McDonald’s felt they were running out of options. Their Teenie Beanie Babies promotion was a huge hit with kids [xii], but that would not address the prob- lematic a la cart segment. And McDonald’s had been historically slow to expand its menu. No new burgers had been introduced between 1972 and 1985, with subsequent offerings being mostly failures [iii]. The Big N’ Tasty, introduced in 1996, was a rare success. When critics accused it of being an imitation Whopper, McDonald’s responded by saying “Adding let- tuce and tomato to a hamburger is not rocket science.” [xv]. In November 2002, McDonald’s decided to launch a national Dollar Menu and the price war began in earnest. The Dollar Menu covered 8 of its products, in- cluding three of its premium sandwiches: the Big N’ Tasty, the Double Cheese- burger, and the McChicken sandwich [iii]. The permanent price reduction of high-end sandwiches was something the in- dustry had not seen before. McDonald's said it intended to stick with its Dollar Menu for 18 months.[i] In the weeks following the introduction of the Dollar Menu, the total number of transactions at McDonald’s increased. Sales of McDonald’s Big N’ Tasty sand- wich and the McChicken sandwich doubled [i]. McDonald's had hoped this momentum would result in a revenue surge. But the new menu also resulted in a 25% decline of Extra Value Meals sales [iii]. Total same-store revenues continued to slip [ii]. The bad news kept coming. In December 2002, McDonald’s warned investors that the company expected to report its first quarterly loss since going public 37 years earlier [iv]. Other fast-food chains were also hurting. Jack in the Box expected sales to drop by 2.7%. The Carl’s Jr. chain suffered a 5% sales drop [ix]. And Burger King slashed its selling price from $2.26 billion to $1.5 billion [iv]. "They've created a senseless price war," said Robert A. Doughty, a Burger King spokesman. "That has put a lot of competitive pressure on us and others, too." [i] Larry Tripplett, who owned seven McDonald's stores, hoped the price-cutting would end soon. "There's no profit in selling a huge sandwich for a dollar," he said [ix]. i Kilman, S. (2002, November 8). Leading the News: Diageo Says Industry Price War Is Crimping Its Burger King Sale. Wall Street Journal, A.3. ii Business Brief—McDonald’s Corp.: Big N’ Tasty Will Be Pulled From Costly Promotion Plan. (2003, February 18). Wall Street Journal, A.18. iii Parry, M. (2004). McDonald’s: The Hamburger Price Wars. Darden Business Publish- ing, 13. iv Leung, S. (2002, December 18). Leading the News: McDonald’s to Serve Up First Loss— Reeling From Price Wars, Fast-Food Chain Warns Charges Could Increase. Wall Street Journal, A.3. v MacArthur, K. (2004, July 26). Rivals not lovin’ McD’s comeback. Advertising Age, 2. vi Vignali, C. (2001). McDonald’s: “think global, act local” - the marketing mix. British Food Journal; Bradford, 103(2), 97–111. http://dx.doi.org/10.1108/00070700110383154 vii Bertin, O. (2002, June 28). Wendy’s making minced meat out of McDonald’s. The Globe and Mail. https://go.openathens.net/redirec- tor/gatech.edu?url=https://search.proquest.com/docview/383967029?accountid=11107 viii Ballon, M. (2002, August 17). Wendy’s bucks the burger-price war: As McDonald’s dis- counts its Big Mac, the home of the square burger refuses to cut corners: [Final Edition]. The Gazette, C4. ix Peltz, J. (2002, December 22). Getting Deep-Fried in the Burger Wars; McDonald’s sales slow, profits fall as price cuts wreak havoc on a saturated market. Can management re- verse the slide?: [HOME EDITION]—ProQuest. Los Angeles Times. https://search.proquest.com/docview/421768273/E0F31E3C4580414BPQ/3?accountid=11 107 x Zuber, A. (2002). Discounting not a quick fix for fast feeders—ProQuest. Nation’s Res- taurant News, 36(47), 1,54+. xi Veiga, A. (2002a, December 25). Burger war leaves more casualties than victors. The Charleston Gazette; Charleston, W.V., 13A. xii Gereffi, G., & Christian, M. (n.d.). Food Production Systems, Trade, and Transnational Corporations: A Global Value Chains Approach to Consumption and Healthy Diets. 30. xiii Loose, C. (1998, June 8). ED-101 R13 Did Somebody Say Teenie Beanie Babies.pdf. The Washington Post, C01. xiv Gibson, R. (2001, November 27). McDonald’s in Southern California Hopes Cheap Food Will Revive Sales. Dow Jones Newswires. xv Bloomberg News. (1997, September 18). McDonald’s Has No Plan for New Burger. New York Times, D8. 3 DISCUSSION QUESTIONS These questions can be prepared by students after reading the case and before an instructor-led class discussion. 1. What are the possible reasons sales were declining from the a la carte seg- ment? 2. Why were McDonald’s and Burger King suffering more than Wendy’s? 3. Should McDonald’s, Burger King, and Wendy’s change which customer segments they were targeting in 2002? 4. If Burger King were the first to introduce an extended 99-cent promotion of its Double Cheeseburger, was it fair to blame McDonald’s for starting the price war? 5. With falling sales, and pressure from franchisees and investors, what choices did McDonald’s have in November 2002? 6.