Hamburger and Wendy Essay Example for Free

Hamburger and Wendy Essay Executive Summary Wendys offers a variety of fast food. The food selection ranges from hamburgers, French fries, salads, chicken, potatoes, and chili. Wendys income is based on the sale of fast food. The demand of Wendys service is highly elastic. A change in price will affect demand for products. Wendys market structure is an oligopoly and has two main competitors; McDonalds and Burger King. In an oligopoly, the market is dominated by a few large producers of a homogeneous or differentiated product. Because of their fewness, oligopolies have considerable control over their prices, but each must consider the possible reaction of rivals to its own pricing, output, and advertising decisions (McConnell Brue, 2005). Since there are many substitutes, Wendys has to be willing to keep their prices and quality of food relative to competitors. McDonalds and Burger King offer substitutes to Wendys food. Advertising and promotional offers can help Wendys stay competitive. Wendys also has to be observant of economic trends. Raises in inflation and food costs will affect the demand for fast food. However, inflation and food costs should also affect McDonalds and Burger King. Therefore, Wendys market share should not be affected if they raise prices collectively with McDonalds and Burger King. In the future, there is a chance for a healthy fast food restaurant to enter the market. Society is leaning towards a more health conscience population and the fast food industry will have to adjust. Wendys and its competitors currently offer salads. Wendys should consider offering healthier menu items and increase advertising to gain market share. Investing in advanced technology will also keep Wendys competitive. More technology will result in higher productivity and lower average total cost. Description of Utility of the Good or Service Wendys is a fast food restaurant that provides an alternative to home cooked meals. The convenience of their products is not a necessity but can be considered as a luxury. In the past, women were not in the work force and stayed home to tend to household chores. Chores included tending to the children, cooking and cleaning. In the twentieth century, women had begun working outside of the home. In addition, there has been an increase with single-parent homes. The work day has also increased in hours. These factors have increased the demand for an alternative to home cooked meals. Wendys offers fast food at an affordable rate. Time that would have been spent in the kitchen can now be spent with family or running errands. Fast food also serves as an alternative to traditional restaurants that seat customers and offer full course meals. The meals offered at traditional establishments are priced higher than fast food restaurants. In addition, the time spent at a traditional restaurant is significantly more than time spent getting food at a fast food restaurant. For added convenience, most fast food restaurants offer seating for customers who wish to dine-in. Description of Substitutes and/or Complementary Products Wendys competes in local, regional, national, and international markets. Wendys mainly competes with Burger King and McDonalds on all market levels. Burger King and McDonalds offer the same types of foods as Wendys. Each fast food chain, however, offers something that the others do not. For instance, Burger King and McDonalds sell fish sandwiches all year, while Wendys only sells fish during Lent. On the other hand, Wendys offers chili while Burger King and McDonalds only sell chili in certain markets, or not at all. Wendys doesnt offer many complimentary items. Items sold at Wendys can be eaten alone or with other products. French fries usually complement sandwiches but can be eaten alone. Wendys offer a combination meal that includes a sandwich, fries and a drink since the items are usually purchased together. With the change in culture to a more health conscience environment, Wendys allows side salads as a substitute for French fries. In the immediate future, there may be a chance for a healthy fast food restaurant to enter the market. In general, the oligopolies in the food industry have large marketing budgets that hinder others from entering into the market. In addition, the members of the oligopoly can begin a price war to deter other entrants into the industry. However, it is conceivable that a healthy fast food restaurant may emerge in the near future. The fast food industry may have difficulties advertising against a healthy fast food restaurant, since the current culture is health conscience. Price Elasticity of Demand The price elasticity of demand is relatively elastic. If McDonalds and Burger King have promotional sales and Wendys does not follow suit, the demand curve for Wendys food will shift to the left, reflecting a decrease in demand. Due to the decrease in demand, Wendys will have more supply than usual. The supply curve will shift to the right. On the other hand, if Wendys raised the price on their food and other competitor prices remain the same, demand for Wendys food will decrease. Another factor of demand for Wendys food comes from a healthier culture. The shift in society has been to a more health conscience population. Demand for fast food had decreased as a result of high fat content in many of the foods. Wendys can adjust to a decrease in demand by increasing promotions and advertising. Having a promotional low-fat sandwich and extensive advertising will result in the demand curve shifting to the right. Another method to counteract a decrease in demand is to offer reduced prices for popular selling items. For example, Wendys could offer fifty cent junior cheeseburgers for a two week period. This type of promotion will get consumers back into Wendys and should boost the sell of French fries, since the two are usually sold together. To counteract the demand for a healthy fast food restaurant, Wendys will have to promote healthy items. Wendys has taken steps to include nutritional facts on their website and offer healthy menu items. They have increased their selection of salads and have collaborated with the American Diabetes Association to help familys select menu items for a healthier lifestyle (www. wendys. com). Advertising healthier menu items is an important part of countering restaurants that offer health food. Issues that Affect Consumer Demand and Price. Oligopolies are affected by the price competitors charge for similar products. The market share should remain constant if oligopolies collectively increase or decrease prices for similar products. Issues that affect consumer demand for fast food include changes in national, regional, and local economic conditions, consumer preferences and spending patterns, demographic trends, consumer perceptions of food safety, weather, traffic patterns, the type, number and location of competing restaurants (www. wendys-invest. com). For instance, fast food on highways and toll roads are priced higher than residential areas. The higher price can be charged on the roads and will not affect demand because travelers have few substitutes and will pay the higher price. Residents, on the other hand, can cook at home and have more substitutes than a traveler. The same is true for demographics. A restaurant in a metro area with a higher cost of living will have prices higher than a restaurant that is not located in a metro area. Demand for the higher priced items will not decrease because the cost of living is higher. The location of competitors will greatly affect price and demand. If there are many substitutes available, consumers will not buy an expensive product. In an oligopoly, a company has to be aware of competitors prices and predict what impact their own prices will have on competitors. The previously mentioned issues will continue to affect Wendys in the future. Wendys should remain competitive if their prices remain relative to their competitors. Wendys has to remain aware of the location of immediate competitors and competitors prices. Cost Component Factors such as inflation, food costs, legal claims, labor costs and benefit costs, affect administrative expenses (www. wendys-invest. com). Labor and Benefit costs are minimal expenses for Wendys compared to other industries. Wendys usually pays minimum wage and the majority of its employees are part-time. Therefore, benefits costs are low. Wendys is affected by inflation and food costs. However, the benefit that an oligopoly affords Wendys is they can expect competitors to react to increase inflation and food costs, as well. Increased prices should be realized by all competitors. Technology and productivity are indirectly proportional to average total cost. By increasing technology, productivity will increase. For example, a large grill will allow multiple hamburger orders to be processed at one time. Productivity increases for hamburgers. As a result, the average total cost to process on sandwich decreases. Wendys also has incorporated an automatic coin changer. This allows the coin portion of a customers change to be automatically dispensed by the register. Cashiers no longer have to count out someones change. This reduces processing time and allows for more customers to be served. In the future, inflation, food costs, legal claims, labor costs and benefit costs will continue to be a cost for the fast food industry. Advanced technology can aide in faster processing of customers and free up monies allocated for labor. For example, robotic arms can process all orders for fries. The culture has evolved into a ? get rich quick society. Frivolous law suits can pose as an added expense in the future, as well. The time and effort to investigate and disprove claims can be expensive. Wendys was recently involved in a severed finger scandal. Wendys official state that Wendys quarterly earnings fell nearly $2 million dollars after the scam (www. money. cnn. com). Market Structure Component. Wendys is an oligopoly. An oligopoly is a market structure that contains few large sellers. Most likely, there are barriers to enter the industry. The sellers have interdependence in pricing and output decisions. Oligopolies consider responses of rivals in pricing decisions. Strategies for pricing and output decisions include retaliatory pricing and advertising (McConnell Brue, 2005). Retaliatory pricing is one strategy that may govern how Wendys reacts to anothers price and output decision. Wendys can sale their sandwiches for a lower price than McDonalds and Burger King. However, Wendys could lose money by slashing prices and may have to raise prices or layoff employees to compensate for lost monies. Price slashing may work as an immediate competition tool, but should not be a long term solution for competing. Advertising is another strategy that governs how Wendys can compete with anothers price and output decision. Advertising can be more effective than price matching. By providing information about competing goods, advertising diminishes monopoly power and results in greater economic efficiency. Successful advertising can boost demand, lower long run average total cost due to increased output, and enable firms to enjoy economies of scale, (Muryn, n. d. ). Successful advertising campaigns may also raise the cost of entry to potential competitors. In the future, Wendys has to be more health conscience. McDonalds and Burger King are making advances towards healthier menu items. To stay competitive, Wendys should make more strides to display healthy menu items. Some of the advertising budget has to be directed toward health conscience consumers. Promotional campaigns should introduce the public to healthier items offered by Wendys. The market share for Wendys should remain competitive with the introduction of healthy menu items. Conclusion Wendys is an oligopoly that competes with McDonalds and Burger King. Demand is relatively elastic. To stay competitive, Wendys must stay aware of the competitions prices, location and menu items. Wendys should also know what current economic trends, costs, and societal shifts affect demand for their product. Wendys should use increased advertising as a long term tool to stay competitive. References CNN (2005). Wendys Frosty, Retrieved May 15, 2005 from http://www. money. cnn. com/2005/05/10/news/midcaps/wendys_frosty McConnell R. C. , Brue S. L. (2005). Economics principles, problems, and policies, 16th ed. New York: McGraw-Hill/Irwin. Muryn, Jack (n. d. ). ch25. ECO 204, Retrieved May 26, 2005, from http://www. washington. uwc. edu Wendys (2005). Eating Better Together, Retrieved May 30, 2005 from http://www. wendys. com/food/US_nutrition_topics. jsp Wendys-invest (2005). Safe Harbor Statement, Retrieved May 30, 2005 from http://www. wendys-invest. com/safeharbor.