hot dog economics

Why McDonalds does not sell hot dogs?

• Actually in certain parts of the world they do!

• In Japan in certain restaurants hot dogs are sold for breakfast!

• In addition, some restaurants in the US have dabbled in hot dog sales.

The McHot Dog

• Sold in Japan as a breakfast item for 190 yen

• It is not uncommon in Japan to eat Hotdogs for breakfast

• The Meat is similar to a bratwurst

• Nutritionally healthier for you then some of the other traditional breakfast items

Economics related to why McDonalds does not sell hotdogs

• Financial Highlights 2010• Marketability– Relationship Marketing

• Profit– Costs– Pricing

• Competition• Diversity

Financial Highlights 2010

• "As a result, we generated strong sales and delivered profitable market share growth, along with higher global revenues, operating income and earnings per share.” -Chief Executive Officer Jim Skinner

Financial Highlights 2010

Year ended December 31, 2010*2010 2009

Revenue $24,074.6 $22,744.7Operating income $7,473.1 $6,841.0Net Income $4,946.3 $4,551.0

From 2009 to 2010, McDonalds experienced a 6% increase In total revenue.

* Dollars are in millions.

Financial Highlights 2010

McDonalds fares well despite the recession

• Global comparable sales had an increase of 5.0%• Revenues hit a record high of 24 billion

• Shareholders receive $5.1 billion via repurchases and dividends

Marketability

From McDonald’s Head Chef Dan Coudreat

• What do you take into consideration when developing a menu item?

• Taste• Sustainability – palates,

portability, ingredient volume

• Trends• Flexibility

Relationship Marketing

Why do consumers buy what they buy?

Consumers’ purchasing decisions are based on:

• Personal influences• Social influences• Institutional influences

Consumers want to simplify their buying and consuming tasks and maintain consistency.

Other McDonald’s Flops• Carrot Sticks: still available as an optional item in some US restaurants.• Fried chicken: This was no McNuggets. Though available in much ofAsia, it's off the menu in the US along with the

corn-on-the-cob that came with it.• Pasta: McDonald's tried the old favorites, spaghetti and lasagna, with garlic bread. Neither is available anymore in

the US.• Fajitas: The McDonald's version of this popular Mexican dish never took off, though it's still available in a few US

restaurants• Pizza: The company devoted an entire annual franchise meeting to talking up this fast-food favorite. Pizza survives

in Canada, but it is no longer in the US.• McLean Deluxe: This low fat sandwich debuted in 1991 to woo health conscious customers. It was erased from

the menu in 1996.

• The company has now emphasized that the heart of the company's menu will remain the same - the burger. 'We will extend our line, rather than going in more radical, different directions.'

Relationship Marketing

Relationship marketing reflects a sort of commitment made by the consumer to continue to patronize the particular marketer despite numerous other choices that exists.

Brand loyalty is a primary measurement of the relationship between consumers and companies.

The McSnack

• McDonald's strategy to develop snackable items fits with today's busy

• Convenience and portability are key considerations– Over 60% of sales are drive through generated

• Simplicity also plays a large role in determining which ingredients are in and which are out.

Ethnic Marketing

• McDonald’s is taking cues from various ethnic groups to develop menus and advertising

• This has already influenced new products:– The fruit combinations in McDonald's latest

smoothies, for instance, reflect taste preferences in minority communities

– Advertising for coffee drinks emphasized the indulgent aspects of sweeter drinks like mochas, a message that resonated with African Americans

Profit

• For McDonalds, if its not broken, don’t fix it! – McDonalds is doing very well

with its current slate and new menu item entry.

• Fast food chains have been doing very well despite a rough economy.

McDonalds Costs

• McDonalds is a primary indicator of commodity costs

• For 2011 McDonalds will likely raise prices to offset rising ingredient costs.

• Prices will rise 2.5 –3.5%

Economics of a Fast-food Retailer

Fast food companies provide inexpensive items to be competitive.

Low consumer prices must equal low manufacturing costs.

Revenue – expenses = profits

Therefore expenses must be low in order to pass profits along to shareholders.

Major Fast food Expenses• Labor• Ingredients• Marketing• Packaging materials

Pricing Strategies

Product Line Pricing• Product lines such as

Value meals or Happy Meals

• This is where there is a range of product or services the pricing reflect the benefits of parts of the range.

Penetration Pricing• This type of pricing allows

for the business to gain market share.

• An example is when McDonalds began to break into the coffee market. Consumers could get a free small coffee every morning.

Pricing Strategies

Promotional Pricing

• Periodic advertising for a product with discounted prices.

• An example is Two for $2 Egg McMuffins.

Value Pricing

• An approach used where external factors such as recession or increased competition force companies to alter price to retain sales.

• An example is the Dollar Menu.

Menu Overload?

• Some franchisers believe that recent additions the McDonald’s menu have created overload

• A majority of operators feel the menu has become too big, slowing service times and brand momentum.

Product Development

• Stage 1:Product Strategy Development• Stage 2:Product Design and Process

Development• Stage 3:Product Commercialization• Stage 4: Product Launch and Evaluation

Stage 1: Product Strategy Development

• This stage ends with decisions on the type of product to develop and the viability of the project for the company

• two main outcomes on which the decisions are based are respectively – the product design specifications (the product

concept) – the project evaluation (the product report).

Stage 2: Product design and Process Development

• At the end of this stage the decisions to be made by management can be divided into– the product – the production and distribution– the market– the financial predictions– the level of risk

Step 3: Product Commercialization

• At the end of this stage, the top management decision is to go on or to stop before committing to the large expenditure of the launch

Step 4: Product Launch and Evaluation

• At the end of this stage, top management decides the future direction of the product and its acceptance into the company's product mix.

• Management looks into whether the product will be expanded and whether addition products could be added to the product line