Chili Sales The selling prices for all Wendy's' products sold by company restaurants were set at corporate headquarters. Although some price differences existed among restaurants in different locations, representative prices for 2001 were $0.99 for an 8-ounce serving of chili, $1.59 for a 12-ounce serving of chili, and $1.89 for a single hamburger. Chili sales were seasonal, and comprised about 5% of total Wendy's store sales compared with about 55% for hamburgers. As shown in Exhibit 1, Wendy's consolidated cost of sales, as a percentage of retail revenues, increased to 63.8% in 2001 from 63.1% in 2000. Food costs in 2001 reflected a 13.4% increase in beef costs, which was partially offset by a 1.6% selling price increase. Retail sales increased by 6.5%, and net income increased by about 14% during 2001. Required 1. How was Wendy's able to achieve its initial success and to grow so rapidly at a time when the quick-service hamburger business appeared to be saturated? 2. What benefits might have resulted from Wendy's limited menu concept? What were the disadvantages of such a concept? Why was the concept eventually discontinued? 3. Why was Wendy's drive-through window successful when other quick-service restaurant chains had been unsuccessful at implementing the same concept? 4. How much does a bowl of chili cost on a full-cost basis? An out-of-pocket basis? 5. For determining the true profitability of chili, how much does a bowl of chili really cost? 6. Would you recommend dropping chili from the menu? Why or why not? Wendy's chili was prepared daily by the assistant manager, in accordance with Wendy's secret recipe. It was slow-simmered in a double boiler on a separate range top for a period of four to six hours. While cooking, the chili had to be stirred at least once each hour, and at the end of the day it was refrigerated for sale the following day. Normally, it took between 10 and 15 minutes to prepare a pot (referred to at Wendy's as a batch) of chili. First, the 48 quarter-pound cooked ground beef patties needed for a batch were obtained, if available, from the walk-in cooler. This took about one minute. These patties had been well-done sometime during the previous three days. Most of the time, it was not necessary to cook meat specifically for use in making chili, although the need to do so was more likely to occur during the months of October through March when approximately 60% of total annual chili sales occurred. If, as only happened approximately 10% of the time, it became necessary to cook meat specifically for use in making chili, the number of beef patties needed were taken from the trays of uncooked hamburgers that had been prepared using a special patty machine, at the rate of 120 patties every five minutes, earlier that morning. On average, it took 10 minutes to cook 48 hamburger patties. Before it was placed in the chili pot, the meat had to be chopped into small pieces. This generally took about five minutes to do. The remaining ingredients then had to be obtained from the shelves and mixed with the meat. This process also took about five minutes to complete, after which the chili was ready to be cooked. The quantities and costs of the ingredients needed to make a batch of chili and the labor costs associated with the different classifications of restaurant personnel are shown in Tables 4 and 5. Other direct costs associated with the chili included serving bowls, $0.035 each; lids for chili served at the carry-out window, $0.025 each; and spoons, $0.01 each. Table 4. Chili ingredients and costs. Quantity Description Cost 1 No. 10 can of crushed tomatoes $2.75/can 5 46-oz. cans of tomato juice $1.25/can 1 Wendy's seasoning packet $1.00/packet 2 No. 10 cans of red beans $2.25/can 48 Cooked quarter-pound ground beef patties (12 lb. of ground beef) $3.50/lb. Note: The batch of chili described above yielded approximately 57 8-ounce servings. Table 5. Restaurant labor costs. Description Cost Store Manager $800.00/week (salary) Co-Manager $12.50/hour Assistant Manager $10.50/hour Management Trainee $7.00/hour Crew $5.75/hour Note: Payroll taxes and other employee-related costs averaged about 10% of the above amounts. Exhibit 1 WENDY'S CHILI: A COSTING CONUNDRUM Statement of Income for the Years Ended December 31, 2001, and 2000 (in thousands, except per-share data) 2001 2000 Revenue: Retail operations Other, principally interest $1,925,319 465,878 $2,391,197 $1,807,841 429,105 $2,236,946 Costs and expenses: Cost of sales 1,229,277 Company restaurant operating costs 406,185 Operating costs 91,701 General and administrative expenses 216,124 Depreciation and amortization of property and equipment 118,280 International charges Other expense 1,722 Interest, net 20,528 $2,083,817 1,140,840 382,963 86,272 208,173 108,297 18,370 5,514 15,080 $1,965,509 Income before income taxes Income taxes 307,380 113,731 271,437 101,789 Net income $ 193,649 $ 169,648 Net income per common and common equivalent share $1.65 $1.44 $0.24 $0.24 Dividends per common share Data sources: Wendy's annual reports, 20002001. Chili Sales The selling prices for all Wendy's' products sold by company restaurants were set at corporate headquarters. Although some price differences existed among restaurants in different locations, representative prices for 2001 were $0.99 for an 8-ounce serving of chili, $1.59 for a 12-ounce serving of chili, and $1.89 for a single hamburger. Chili sales were seasonal, and comprised about 5% of total Wendy's store sales compared with about 55% for hamburgers. As shown in Exhibit 1, Wendy's consolidated cost of sales, as a percentage of retail revenues, increased to 63.8% in 2001 from 63.1% in 2000. Food costs in 2001 reflected a 13.4% increase in beef costs, which was partially offset by a 1.6% selling price increase. Retail sales increased by 6.5%, and net income increased by about 14% during 2001. Required 1. How was Wendy's able to achieve its initial success and to grow so rapidly at a time when the quick-service hamburger business appeared to be saturated? 2. What benefits might have resulted from Wendy's limited menu concept? What were the disadvantages of such a concept? Why was the concept eventually discontinued? 3. Why was Wendy's drive-through window successful when other quick-service restaurant chains had been unsuccessful at implementing the same concept? 4. How much does a bowl of chili cost on a full-cost basis? An out-of-pocket basis? 5. For determining the true profitability of chili, how much does a bowl of chili really cost? 6. Would you recommend dropping chili from the menu? Why or why not? Wendy's chili was prepared daily by the assistant manager, in accordance with Wendy's secret recipe. It was slow-simmered in a double boiler on a separate range top for a period of four to six hours. While cooking, the chili had to be stirred at least once each hour, and at the end of the day it was refrigerated for sale the following day. Normally, it took between 10 and 15 minutes to prepare a pot (referred to at Wendy's as a batch) of chili. First, the 48 quarter-pound cooked ground beef patties needed for a batch were obtained, if available, from the walk-in cooler. This took about one minute. These patties had been well-done sometime during the previous three days. Most of the time, it was not necessary to cook meat specifically for use in making chili, although the need to do so was more likely to occur during the months of October through March when approximately 60% of total annual chili sales occurred. If, as only happened approximately 10% of the time, it became necessary to cook meat specifically for use in making chili, the number of beef patties needed were taken from the trays of uncooked hamburgers that had been prepared using a special patty machine, at the rate of 120 patties every five minutes, earlier that morning. On average, it took 10 minutes to cook 48 hamburger patties. Before it was placed in the chili pot, the meat had to be chopped into small pieces. This generally took about five minutes to do. The remaining ingredients then had to be obtained from the shelves and mixed with the meat. This process also took about five minutes to complete, after which the chili was ready to be cooked. The quantities and costs of the ingredients needed to make a batch of chili and the labor costs associated with the different classifications of restaurant personnel are shown in Tables 4 and 5. Other direct costs associated with the chili included serving bowls, $0.035 each; lids for chili served at the carry-out window, $0.025 each; and spoons, $0.01 each. Table 4. Chili ingredients and costs. Quantity Description Cost 1 No. 10 can of crushed tomatoes $2.75/can 5 46-oz. cans of tomato juice $1.25/can 1 Wendy's seasoning packet $1.00/packet 2 No. 10 cans of red beans $2.25/can 48 Cooked quarter-pound ground beef patties (12 lb. of ground beef) $3.50/lb. Note: The batch of chili described above yielded approximately 57 8-ounce servings. Table 5. Restaurant labor costs. Description Cost Store Manager $800.00/week (salary) Co-Manager $12.50/hour Assistant Manager $10.50/hour Management Trainee $7.00/hour Crew $5.75/hour Note: Payroll taxes and other employee-related costs averaged about 10% of the above amounts. Exhibit 1 WENDY'S CHILI: A COSTING CONUNDRUM Statement of Income for the Years Ended December 31, 2001, and 2000 (in thousands, except per-share data) 2001 2000 Revenue: Retail operations Other, principally interest $1,925,319 465,878 $2,391,197 $1,807,841 429,105 $2,236,946 Costs and expenses: Cost of sales 1,229,277 Company restaurant operating costs 406,185 Operating costs 91,701 General and administrative expenses 216,124 Depreciation and amortization of property and equipment 118,280 International charges Other expense 1,722 Interest, net 20,528 $2,083,817 1,140,840 382,963 86,272 208,173 108,297 18,370 5,514 15,080 $1,965,509 Income before income taxes Income taxes 307,380 113,731 271,437 101,789 Net income $ 193,649 $ 169,648 Net income per common and common equivalent share $1.65 $1.44 $0.24 $0.24 Dividends per common share Data sources: Wendy's annual reports, 20002001