Case Analysis: Profitability of Wendy's Chilli.

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Dave Thomas, the founder of Wendy's restaurant, opened his first restaurant on November 15, 1969 in Columbus, Ohio. Dave was born in Atlantic City, New Jersey on July 2, 1932. He was adopted at six weeks old by Rex and Auleva Thomas. Dave moved from state to state with his father when his mother passed at the age of 5. At the age of 12, Dave obtained his first job at a restaurant in Knoxville. Thus, he began his love for the restaurant business. At the age of 15, Dave dropped out of high school to work full time in the restaurant business. While working full-time at the Hobby House restaurant, Dave met Colonel Sanders, the founder of Kentucky Fried Chicken (now KFC). In 1962, Dave was offered the opportunity to turn around four failing Kentucky Fried Chicken restaurants in Columbus, Ohio. Utilizing his past experience, Dave turned the restaurants around, sold them back to KFC, and immediately became a millionaire all at the age of 35. He then co-founded Arthur Treacher's Fish and Chips.

Dave again capitalized on his experiences in restaurant management when he decided to establish his own restaurant. Since hamburgers were his favorite food, Dave decided to start a restaurant that would serve a quality hamburger without a 30 minute waiting period. Named for his eight year old daughter, Dave started Wendy's. In order to focus on quality and remain competitive, the menu was limited to four basic products excluding beverages. The product line included hamburgers, chili, french fries, and Wendy's Frosty Dairy Dessert.

Wendy's hamburgers patties consisted of ¼ pound of 100 percent pure domestic beef, served as a square shaped patty rather than a round shaped patty, and served "hot 'n juicy" in accordance with individual customer orders. The french fries were sliced slightly longer and thicker from high quality potatoes and cooked in specially-designed fryers to allow the inside to be cooked without burning the outside. Wendy's Frosty Dairy Dessert is a thick blend of vanilla and chocolate flavors and must be served with a spoon as a dessert rather than a straw.

Wendy's chili is the fourth basic menu item. Whenever the cook overestimated customer demand, beef patties stayed on the grill beyond the recommended time. This caused the beef patties to be well done. To avoid customer dissatisfaction, Wendy's used the "well done" beef patties that had been refrigerated from the previous day and could not be served to customers. Each eight ounce serving contained about a quarter pound of ground beef. Wendy's chili is prepared by the assistant manager or an experienced crew member using an original recipe. The labor cost for the assistant manager and crew member is listed in Table 1. The cost to prepare the chili is listed in Table 2 below. Table 3, illustrates the direct cost associated with the production of chili.

Table 1. Labor costs for assistant manager or a crew member to prepare chili in 1978

Table 2. Ingredients and costs in 1978.

Table 3. Direct cost for 1978

In the event of a shortage of overcooked patties, beef patties were cooked for the sole purpose of inclusion in the chili. In order to prepare a pot of chili, it took 10 to 20 minutes of preparation time. This process required chopping the meat into small pieces, adding the other ingredients and stirring the batch six times. Sixty percent of the total annual sales for chili occurred during the months from October to March. The chili product has the lowest gross profit margin. The 1978 labor and additional direct costs are listed in Table 4 below.

Table 4. Cost of Chili Preparation, Overall Cost of Chili and Profit of Chili.

In November 1979, Wendy's became the first national restaurant chain to introduce a Salad Bar on the menu. Initial test marketing of the salad bar concept had been successful. This innovative idea also posed a dilemma. If Wendy's was to follow their limited menu concept, the salad bar would potentially replace chili since it had...
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