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Project Documentation
August, 2008
Juan Andrade
Lucia Cerrilla
Ricardo Haneine
Kenichi Ishizaki
Alejandro Martinez
Jorge Milke
Alfredo Tsutsumi
Developed a pricing recommendation for a master franchiser of
multiple fast food chains facing a sudden rise in costs
Diagnostic
Results
• An immediate price increase recommendation for the most important products of the fast food companies was offered
• Client gained detailed visibility of the impact of costs of specific elements in the operating margins of its companies
• A unified pricing adjustment framework and model based on price elasticity was delivered to the Client
• A market segmentation proposal for each fast food chain was developed, including the relative position of competitor
products and the space of maneuver to alter prices given those of the competition
Lessons Learned
• Client did not have complete • Highly competitive industry with • Planning and developing an in-
visibility of the impact of inputs in few players facing similar depth client information request
its margins sudden increases in prices of process is essential before
core inputs initiating the analysis, and
• Structured pricing models and moreover when there is a tight
pricing evaluation processes • According to cost structure and timeline
were not in place market strategy, market players
are willing to afford pressure in • Basic statistic and econometric
• Client did not have a clear value costs to gain market share modeling may serve as a rapid
proposition and market tool to evaluate pricing
segmentation of products (and of • Price sensitivity particularly strategies (measuring elasticity
competitors) high for low-end products and with real numbers)
offered in low-income locations
• Client had historically adopted a • Final results validation process
rudimentary (general • Price adjustments in the with client is crucial before final
adjustments for the whole industry had historically presentations
portfolio) and follower role in adopted a leader-follower
price adjustments model
Project Timeline
Day 1 Day 10
Acum. Tax Impact Acum. Acum. Estimated Acum. Tax Impact Acum. Acum. Estimated
Gross Margin Margin Gross Gross Margin Margin Gross
Profit Growth Reduction Profit Profit Growth Reduction Profit
Jan – Jun Jan – Aug Jan – Jun Jun – Aug Aug Jan – Jun Jan – Aug Jan – Jun Jun – Aug Aug
2008 2008 2008 2008 2008 2008 2008 2008 2008 2008
Source: Income Statements January 2007 to June 2008; Supply Chain July 2008 Inflation Information; A.T, Kearney analysis
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Pricing Strategy
33.6 25.7
50.8 6.6 5.4 445.8
388.3 Operating
117.3 Margin
Operating (26.3%)
Margin 118.4
(30.7%)
Cost of
Cost of Inputs
Inputs 328.5 (73.7%)
(69.3%) 269.9
Sales to Pizza Cost Increase Exchange Rate Supply Volume Effect Combined Sales to Pizza
Chain (Acum. of Inputs Effect Effect Company Effect Chain (Acum.
Jan-Jun 2007) Margin Effect Jan-Jun 2008)
Notes: (1) Client had a business unit that supplied basic inputs to the Pizza Chain and Hamburger Chain Business Units
Source: Client Supply Business Unit Sales Information; A.T. Kearney analysis
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Pizza Chain Business Unit
Initial Pizza Cost of Exchange Supply End of Year Cost of Exchange Supply Mid Year Forecast
Cost Inputs Rate Effect Business Pizza Cost Inputs Rate Effect Business Pizza Cost Pizza Cost
Effect Unit Effect Effect Unit Effect
Jan Jan – Dec Jan – Dec Jan – Dec Dec Jan – Jun Jan – Jun Jan – Jun Jun Dec
2007 2007 2007 2007 2007 2008 2008 2008 2008 2008
Source: Client Supply Business Unit Sales Information; A.T. Kearney analysis
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Pizza Chain Business Unit
For the Pizza Chain the analysis focused on the products that
represented 83% of revenues and 85% of the operating margin
130
100
Large
Medium Pizza • Selected products
Pizza
(three) corresponded to
Monthly Sales by Product
Extra margin
Soda 600 ml Large
Pizza
10 • Prices for all
Cinnamon
Bread socioeconomic
Cheese segments (four) were
Fries Bread Double Extra
Large Pizza
considered(2)
Chicken Personal Pizza
Wings
Glazed Pizza 8" • Analysis was focused on
Cinnamon direct sales(3) (which
Bread Chicken Nuggets
1 represented 50% of
sales)
0 40 90 140 80
Unitary Margin
($MXN)
Q = P + I + E
Quantity Price Average Other Control
Demanded Household Variables
Income
• Quantity Demanded • Real Unit Price • Average Household • Publicity Index(2)
Income(1):
- Monthly sales volume of - Estimated as the total - Normalized spend in
large, medium and revenue of product - Household income by publicity
extra large pizzas for divided by volume socioeconomic level
the last 5 years (low, medium, high) • Number of Stores
- Adjusted to account
- By segment (low, the latest monthly - National Household - Monthly number of
base, high, premium) consumer price index Income and POS locations
level Expenditure Survey
- By ingredient (1 to 2 (INEGI-ENIGH)
ingredients and 3 to
9 ingredients)
Notes: (1) Estimated using annual household income by socioeconomic level and extrapolating by a monthly index of industrial activity
(2) Index constructed from the expenditure in national and regional/local publicity
Source: Client Monthly Sales, Price and Publicity Spend 2003-2008; Sigma Markets; Mexico Census Bureau (INEGI); A.T. Kearney analysis
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Pizza Chain Business Unit
(High) Competition
Price-Elasticity of Demand(4)
Notes: (1) Includes medium, large and extra large pizzas that were sold on a stand-alone basis (with no additional products)
(2) Parenthesis denotes the price of the pizza by store type (Special, Base, High, Premium)
(2) Sales by product captured from January 2008 to Jun 2008 (including VAT taxes)
(3) Quantity demanded sensitivity due to changes in price
Source: Monthly Sales by Product 2003 – 2008
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Pizza Chain Business Unit
Notes: (1) Menu price: price offered in 2x1 promotions, Buffet price: price offered for ordinary days
Source: Client Pizza Chain Business Unit Marketing Information; A.T. Kearney analysis
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Pizza Chain Business Unit
Immediate • Adjust prices in all products taking into account expected annual inflation for
adjustment for next year (approximately 3% considering the expected CPI index for the
inflation(1) following year)
• Increase that number of promotions (i.e. 2x1 days) with brand alliances (i.e.
High Elasticity 2x1 coupons offered with allied brands and companies)
Products
(Elasticity greater • Attach low-end supplementary products to pizzas
than 1)
• Offer unique promotions for the lowest purchasing power store locations
Notes: (1) Client had already adjusted prices by 1.6%. So the true increase would be 1.4% and not actually 3%
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Pizza Chain Business Unit
67.3% 4.0%
0.4% 0.3% 63.4% 1.0% 64.4%
Jan – Jun Jan Jan – Jun Jun – Aug Aug Sep – Dec End-of-Year
2007 2007 2008 2008 2008 2008 2008
26.7 -24.6
4.4 117.3
23.3 -0.3 Operating
17.6 Margin
Operating 118.4 (13.0%)
Margin
(12.7%) 13.4
Cost of
Cost of 117.4 Inputs
Inputs (87.0%)
92.0
(87.3%)
Sales to Ham. Cost Increase Exchange Rate Supply Volume Effect Combined Sales to Ham.
Chain (Acum. of Inputs Effect Effect Company Effect Chain (Acum.
Jan-Jun 2007) Margin Effect Jan-Jun 2008)
Notes: (1) Client had a business unit that supplied basic inputs to the Pizza Chain and Hamburger Chain Business Units
Source: Client Supply Business Unit Sales Information; A.T. Kearney analysis
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Hamburger Chain Business Unit
Initial Cost of Exchange Supply End of Year Cost of Exchange Supply Mid Year Forecast
Hamb. Cost Inputs Rate Effect Business Hamb. Cost Inputs Rate Effect Business Hamb. Cost Hamb. Cost
Effect Unit Effect Effect Unit Effect
Jan Jan – Dec Jan – Dec Jan – Dec Dec Jan – Jun Jan – Jun Jan – Jun Jun Dec
2007 2007 2007 2007 2007 2008 2008 2008 2008 2008
Source: Client Supply Business Unit Sales Information; A.T. Kearney analysis
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Hamburger Chain Business Unit
HAMB. MEAL
SPECIAL
ECO HAMB A MEAL
40 /CH-BACON
($MXN million)(1)
HAMB. /CH-
SUPREME KIDS HAMB./CH BACON MEAL
X 29 MEAL
MEDIUM Selected products
30 SIZE
ECO DOUBLE
CHICKEN FINGERS
(29) correspond to
CRISPY MEAL
HAMB. MEAL
BIG HAMB.
84% of revenue
LARGE
SIZE
MEGA
JR HAMB./CH
MEAL
MEAL and operating
FINGERS
20 CONE MEALS margin
SUPREME
2 X $49 JR. FINGERS
FINGERS GRILL MEAL
ECO CRISP
MEAL
SPECIAL CHEESE MEAL
STICKS JR. HAM. LARGE
10 CONO
MEAL $25 CHICKEN FRENCH SPECIAL B DOUBLE HAMB.
JR DOUBLE CAESAR FRIES MEAL /CH – BACON
DOBLE HAMB. MEAL
0
0 10 20 30 40 50 60
Unitary Margin
($MXN)
Notes: (1) Logarithmic Axis
Source: Client Hamburger Business Unit Financial Information; A.T. Kearney analysis
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Hamburger Chain Business Unit
Q = P + I + E
Quantity Price Average Other Control
Demanded Household Variables
Income
• Quantity Demanded • Real Unit Price • Average Household • Competence Index (2):
Income(1):
- Weekly sales volume of - Estimated as the total - Monthly prices for
meals, kids meals, and revenue of product - Household income by similar products from
most important divided by volume socioeconomic level main competitors
individual products for (low, medium, high)
2007 and 2008 - Adjusted to account • Number of Stores
the latest monthly - National Household
consumer price index Income and - Monthly number of
level Expenditure Survey POS locations
(INEGI-ENIGH)
Notes: (1) Estimated using annual household income by socioeconomic level and extrapolating by a monthly index of industrial activity
(2) Competence Index : Index constructed from monthly prices by similar products from their main competitors
Source: Client Weekly Sales; Main competitors pricing information; Sigma Markets; Mexico Census Bureau (INEGI); A.T. Kearney analysis
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Hamburger Chain Business Unit
40
Annual Sales by Product
Price-Elasticity of Demand(2)
Notes: (1) Sales by product captured from January 2008 to Jun 2008 (including VAT taxes)
(2) Quantity demanded sensitivity due to changes in price
Source: Weekly Sales by Product 2007 – 2008
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Hamburger Chain Business Unit
Source: Client Hamburger Chain Business Unit Marketing Information; A.T. Kearney analysis
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Hamburger Chain Business Unit
• Adjust prices in 5.3% for all products, maintaining aligned prices with product
segments and to cover reduction in margin from early 2008
Immediate • In particular:
adjustment for • Increase 3 pesos to all Kids, Jr. meals and individual products, with
inflation(1) exceptions (i.e. ice cream cones, large and medium size modifiers)
• Additional increase in 1 peso for medium and large size modifiers
Low Elasticity
Products
(Elasticity near or • Don’t increase prices, in addition to specific inflation
below 1)
High Elasticity
Products • Increase promotions
(Elasticity greater • Introduce value/price products, i.e. Low-end products ($10 & $15)
than 1)
67.9% 2.6%
65.0% 0.4% 3.5% 65.0%
2.1% 60.3% 0.2% 1.8% 61.9%
VAT
2.9%
Accum Accum Net Accum Margin Est. Gross Beef Prices Est. Gross Beef Price Gross Profit
Gross Profit Profit with margin reduction Profit increment increase Profit increment increase
with VAT VAT reduction
Jan – Jun Jan – Jun Jan – Jun Jun – Aug Aug Oct Aug 2008 Dec 2008 Oct 2008 Ago 2008 Ago 2009
2007 2007 2008 2008 2008 2008
Competence, market
Costs Pricing Strategy
segments and products
• Agree transactional principles • Get into deep in market • Simplify pricing structure for
between the Supply, Pizza analysis and the the Pizza Chain Business Unit
Chain and Hamburger Chain understanding of the • Align pricing structure to value
Business Units: Supplier costs, market/product strategy of proposition and elasticities
margin and exchange rate main competitors
effect • Define strategy for promotions
• Articulate value proposition to accordingly to goals in each
• Standardize process between market segments and segment/market
Corporate Finance (Holding), products offered by main
the Supply, Pizzas Chain and competitors • Evaluate impact from
Hamburger Chain Business adjustments in prices
• Asses relevant attributes from continuously over revenue
Units, as well as with suppliers each value proposition and and profit
• Establish a systematic validate according to price
communication channel and competence • Agree processes, roles and
between the Holding, the responsibilities for further
• Design products to follow-up at Business Units
Supply, Pizzas Chain and complement portfolio and
Hamburger Chain Business and Holding levels
market segment targets
Units
• Develop market intelligence
tools to facilitate market
assessments
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