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Managerial Accounting – The Wendy’s Company

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    Dave Thomas was a man with a vision. He began his career in Columbus, Ohio in 1969 when he purchased a Kentucky Fried Chicken (KFC) franchise that was unprofitable. Dave turned that franchise into a profitable business and sold it back to KFC at a substantial profit. Dave had also co-founded Arthur Treacher’s Fish & Chips and was very familiar with the quick-service industry. However, hamburgers were Dave’s favorite food and he could not get a decent hamburger in town without waiting 30 minutes and so the idea of Wendy’s became a reality.

    Dave had a vision for Wendy’s; to provide consumers with bigger and better hamburgers that were cooked to order, served quickly, and reasonably priced. The trademark for Wendy’s is “old-fashioned” hamburger which is what Dave wanted to provide to his customers.

    Dave chose to limit the number of items on his menu which allowed him to be price competitive and still serve better-quality products. His core items were hamburgers, chili, french fries, and Wendy’s Frosty Dairy Dessert. With the condiments available Wendy’s was able to offer 256 possible hamburger combinations along with soda and other drinks.

    Hamburger patties were made daily with 100% pure fresh beef and chili was made daily using a secret recipe and from mostly overcooked patties from the day before. Overcooked patties were the result of anticipating high demand for hamburgers, thus cooking for high demand, and actually having a lower demand. Throwing away the overcooked patties would be very costly but by finding a unique product to reuse the patties Wendy’s was able to recover part of the loss. Thus, Wendy’s “rich and meaty” chili became one of the four core menu items.

    Wendy’s grew very rapidly and by the end of 1978 had a total of 288 company restaurants and 1119 franchised restaurants. By 1985 revenues had exceeded $1 billion and in 1986 reported a loss of $5 million. During the late 80’s and 90’s Wendy’s started a program of aggressive growth both domestically and internationally. It was during this time that the limited menu was abandoned but the four core items were still sold.

    In 2000 a new CEO and Chairman of the Board, John Schuessler, was elected. In 2002 Dave Thomas died and the company began it post-Dave era. The idea to remove one of the original four core items was considered and chili seemed to be the most likely. It represented a small percentage of sales and its true profit margin was a controversy. This is why the question arose, what is the actual cost of a bowl of chili? It was a question when the restaurant first opened and remains a question.

    Wendy’s was able to achieve its initial success and grow so rapidly at a time when the quick service hamburger business appeared to be saturated because Wendy’s went after a different segment of the hamburger market-young adults and adults. Wendy’s also created a unique and “old fashioned” hamburger that was square instead of round which allowed it to extend over the bun. Hamburgers were made from fresh 100% beef that was cooked to order and served directly from the grill to the customer. This allowed the customers to see what they were eating, making them feel much more comfortable overall with what they were ordering. Wendy’s also differentiated themselves from other quick-service places by serving their Frosty Dairy Desert and chili.

    Success from Wendy’s drive-thru windows was a combination of several things. I believe that the uniformity of the building, the advertising strategy and the location which was usually located in urban or densely populated suburban areas. I also think that the limited number of menu items helped facilitate orders being given out faster.

    I calculated that it costs $1.06 to make an eight-ounce bowl of chili using the full-cost basis. Out of pocket cost was figured at $1.10 per eight-ounce serving. A bowl of chili costs $1.06 using the full cost method of using direct costs. Based on just the direct cost I would drop the chili.

    However, so many factors are not shown which could impact profitability. In the winter when chili sales are high do people come for a hot bowl of chili and buy and hamburger? Chili is one of Wendy’s core products and by dropping it would it cause them to lose customers who purchase chili and other items? Another item to consider is the price of the ingredients. Can the same quality of ingredients be purchased at a lower cost?

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