Reproducible Sheets
Fast-Food Chains Upgrade Menus, and Profits,
with Pricey Sandwiches
by Shirley Leung
For years, growth-obsessed fast-food chains expanded
around the world without noticing the potential of a
75-cent item on their own menus. Only after that
item—the humble cup of coffee—became the highpriced beverage behind Starbucks Corp. did fast-food
executives search their kitchens for other undiscovered
stars.
Now they think they’ve found one: the sandwich.
Lately, small restaurant chains with big ambitions
have been racking up impressive sales by offering
Americans upscale sandwiches as an alternative to
burgers and fries. Some of those outlets, such as Cosi
and Briazz, have names designed to convey European
sophistication. Others, such as Corner Bakery Cafe
and Panera Bread Co., have names that emphasize
their use of fresh bread. All of them hope to win a big
following among the nation’s aging and increasingly
health-conscious baby boomers. . . .
Above 99 Cents
Though overall fast-food sales growth has been
waning for years, growing numbers of American
consumers have proved willing to pay as much for a
sandwich as for the $4 cappuccino to go with it. That’s
big news in an industry long accustomed to promoting
99-cent hamburgers or chicken nuggets. And it is
making even some fast-food veterans rethink their
marketing strategies. For example, roast-beef specialist
Arby’s Inc., a unit of Triarc Cos., has launched a new
line of Market Fresh sandwiches, which are served on
thick slices of bread, instead of a bun, and cost about
$4 apiece, about 50 per cent more than its average
fare. . . .
In the US, sales of custom-made sandwiches are
rising 15 per cent a year, much faster than the 3 per
cent growth rate for hamburgers and steaks, says
Technomic Inc., a Chicago food-consulting firm. That
helps explain why Panera Bread Co., the largest player
in the premium-priced sandwich category, saw its
share price nearly triple last year.
Panera, which is based outside St. Louis, rang up
sales of $529.4 million for 2001, up 50 per cent from
the previous year, and it is expected to report an about
80 per cent increase in net income for 2001. The
company had average sales per store of $1.75 million
in 2001, compared with McDonald’s $1.6 million. In 4
p.m. trading on the Nasdaq Stock Market Monday,
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Panera’s shares rose $3.28, or 5.3 per cent, to $64.65
on volume of 758 500 shares, more than double its
average daily volume for the past three months.
Panera and some other high-end sandwich chains
also sell gourmet coffee, meaning that success on a
national scale could steal sales from their role model,
Starbucks. But the chains vying to carve out an empire
based on sandwiches face a challenge that Starbucks
never did—a field of well-funded competitors.
Starbucks, which expanded to roughly 4100 stores in
North America in little more than a decade, was
helped by a dearth of big-chain competition. Even
today, its largest competitor, Diedrich Coffee Inc.,
based in Irvine, California, has a total of only 380
outlets.
“Very Difficult”
“The probability of any of these sandwich chains
becoming a Starbucks is a major question,” says
Dennis Lombardi, Technomic’s executive vice
president. “It is going to be very difficult.”
Yet the prospect of spinning prosperity out of a
commodity long taken for granted, of dotting the
landscape with a recognizable logo, of becoming
synonymous with a particular product, is proving
seductive. . . .
Until recently, the sandwich was hardly
considered cuisine. According to popular lore, it was
invented solely to allow the Earl of Sandwich to eat
without leaving the gaming table. Its culinary status
sank even farther when the fast-food industry began to
tout it as a low-cost meal, available at most big
purveyors for as little as 99 cents.
By contrast, the new sandwich shops treat
sandwich-making as an art. Fresh-baked bread is the
basis of their strategy for improving the sandwich’s
image. Sure, the tomato slices are fresh, and the meat
is carved off homestyle roasts. But the big difference
is what some of the chains call “artisan bread.”
Panera employs professional bakers at $13 an hour
to make bread from scratch throughout the day.
Together, Panera and Smyrna, Georgia-based Atlanta
Bread Co. offer more than two dozen kinds of bread,
including asiago cheese, nine grain, kalamata olive,
and sundried tomato. At New York-based Cosi Inc.’s
restaurants, bread that’s been out of the oven for 30
minutes or more is tossed away unused.
© Oxford University Press (Canada) 2003. Permission to reproduce for classroom use restricted to schools purchasing Economics Now.
Reproducible Sheets
Fast-Food Chains Upgrade Menus, and Profits,
with Pricey Sandwiches (continued)
The finished products feature names as fancy as
the coffee specialties at Starbucks. The menu blurb
describes Panera’s Frontega Chicken Panini as:
“Smoked and pulled white-meat chicken, red onion,
mozzarella, tomato, chopped basil, and our chipotle
mayo, on our rosemary focaccia.” Compare that with
the Big Mac: “Two 100-per-cent-beef patties, sesameseed bun, American-cheese slice, Big Mac sauce,
lettuce, pickles, onions, salt, and pepper.”
Of course, the price of the Frontega is $5.75, about
$3 more than for the typical Big Mac. The average
check is $6.25 at Panera and $8 at Cosi, more than
twice that at most burger joints. But the chains can
make these prices stick because of a major shift in the
demographics of fast-food customers.
The industry’s traditional diner is male, between
five and 24 years old, and typically short on cash. But
now that youthful segment of the population is
expected to grow by only 5 per cent over the next
decade, while the 45- to 64-year-old population will
grow about 30 per cent, according to the US Census
Bureau. And compared with previous generations in
their current age group, baby boomers are less likely to
eat at home. Pressed for time, they want food fast.
Moreover, the growing availability of healthier and
higher-quality sandwiches has eroded their loyalty to
fast-food burgers.
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“If the value is there, I’ll certainly pay the price,”
says Karen Davis, a 45-year-old Chicago real estate
developer and self-described former burger fan who
says she, her husband, and nine-year-old daughter visit
Panera about five times a week.
Subway Restaurants still dominates the sandwich
arena, with more than 13 200 US outlets. Until lately,
the privately held chain competed with other fast-food
purveyors on price, charging about $3 a sandwich. But
18 months ago it, too, started going after more affluent
consumers. The chain now offers as many as five
different breads, including Asiago Caesar and
Sourdough. “We made the food more interesting,”
says founder Fred DeLuca.
Likewise, some of the nation’s other fast-food
chains are seeking to rev up their sales growth by
adding gourmet sandwiches or premium breads to their
menus. But some of them are finding that many of the
new sandwich diners also want atmosphere, something
that Subway and many other more traditional fast-food
chains may be ill-equipped to provide. . . .
Source: Shirley Leung, “Fast-Food Chains
Upgrade Menus, and Profits, with Pricey
Sandwiches,” from Wall Street Journal Online, 5
February 2002. Reprinted by permission.
Questions
1. Is the growing popularity of the sandwich best represented as a movement along the demand curve,
or a shift of the whole demand curve? Briefly explain.
2. Your text explains five basic changes that can change customer demand for a product. Consider each
one, and in a sentence or two, decide if it applies to the sandwich story.
3. What long-range effect might the popularity of the sandwich have upon “traditional” fast food? Have
you noticed any changes in the fast-food outlets you patronize?
© Oxford University Press (Canada) 2003. Permission to reproduce for classroom use restricted to schools purchasing Economics Now.