econlife - Does a Calorie Label Make Us Eat Less? by Elaine Schwartz

According to the 2010 Affordable Care Act (ACA), 2011 was the year that specified food vendors and restaurant chains with more than 20 locations had to post calorie counts. But because of “Big Pizza’s” resistance, they waited until 2018. Domino’s even said that their custom pizzas could have 34 million calorie permutations. Pizza Hut said it had 2 billon possibilities. (Is that possible?)

The ACA goal was to get us to eat fewer calories.

The Impact of Calorie Labels

In a recent study at one restaurant, researchers compared 1546 diners who did and did not have calorie labels on their menus. After the meal, the participants were asked about their calorie consumption.

A significant number of the group without the labels underestimated their calorie intake. Whereas they ordered meals with an average of 1341 calories, their average estimate was 1080. The size of the error ranged from 10 percent to more than 50 percent.

You can see below that the higher the calorie count, the larger the under-estimation:

Predictably, the group that had the menus with the calorie labels were more accurate. But not entirely.  Accuracy was up by 4 percent. Still, some underestimated their calorie intake and others overestimated. Men tended to pay less attention to the calorie totals.

At this point I was curious about the impact of knowing your calories. According to one recent study on what we order at fast food outlets, it did not make a huge difference. Using data from 104 restaurants before and after implementing the labeling law, researchers wound up with three years’ of transactions. From 50 million purchases, they observed that there was an initial decrease of approximately 60 calories. However, the decline was not sustained. It soon dwindled down to 23.

Our Bottom Line: Present Bias

A behavioral economist might have suggested that the calorie labels required by the Affordable Care Act will have a minimal impact because of our tendency toward a present bias. In the present, the cost of caloric restraint is considerable. We have a bias toward our current benefits and postponing the cost for later.

My sources and more: Always handy, this month’s NBER Digest alerted me to the calorie study. Then the BMJ had the fast food study.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - How To Get Speedier Fast Food by Elaine Schwartz

When you pull up to the  Naperville, Illinois McDonald’s drive thru, a voice says, ” Hey there, Welcome to McDonald’s. What would you like to order?”  Because it’s their voice recognition software, just be sure your daughter doesn’t shout from the back, “I want onion rings, Dad.” (This really is a problem—unless you plan to order them.)

Where are we going? To how McDonald’s competes.

Drive-Thru Speed

In 2012, average drive-thru time at McDonald’s was 188.83 seconds. Since then, adding  several seconds or more each year, the wait has gotten longer and longer. The reasons relate to more complexity, more accuracy, and more cars:

But still, McDonald’s has a problem. They know that compared to nine other fast-food chains, their wait is the longest. At the top for speed, Burger King was almost two minutes faster:

For now though, McDonald’s voice recognition software creates menus that reflect the weather and trendy items. It also encourages the extras like a donut stick with your McCafe. In the future, we can expect that employees will start an order while AI is still talking to the customer. We should eventually have more accuracy as data accumulates and recognition improves. But what really grabbed me was license plate scanning. Sort of like the barista who remembers your name and order, drive-thru technology might soon know what we want from our license plates.

Our Bottom Line: Monopolistic Competition

During the 1950s, a milk shake maker salesman named Ray Kroc realized that two brothers had unusually high milk shake sales. Visiting the McDonald brothers’ California roadside establishment, he saw how they speedily served a huge lunch time crowd with their version of mass production. Kroc bought their name, perfected the concept, and conquered a monopolistically competitive market. Because you just need a grill and hamburger meat, market entry is easy. We could say the same thing for a McDonald’s breakfast menu. But to be successful and have some price making power, you also require something unique—the monopolistic part. And that takes us to McDonald’s quest for the automation that achieves drive-thru speed, customizing, and accuracy as a product differentiator.

Along the following continuum, each McDonald’s restaurant would be close to monopolistic competition:

And speed has been one way that it has always competed.

My sources and more: The WSJ story on McDonald’s robots reminded me it was time to return to the drive thru and to QSR Magazine for the data. Then, if you want more about voice activation implementation and problems, this article had the detail (and was interesting) while Chicago media told about the Naperville restaurant. Finally, Yahoo Finance had the earnings call transcript where McDonald’s expressed its focus on drive-thru speed.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - (Mc)Wages Around the U.S. by Elaine Schwartz

At 162 million (or so), the U.S. labor force is large and diverse. So, when we say that wages are 2.9% higher than last August, it sounds simple. But it really is not.

Where you live can determine what you earn.

McWages

It’s tough to compare wages around the United States. Yes, lots of people could be called auto workers or potato and computer chip makers. However, depending on the region, we would find that similar sounding jobs can be rather different.

But not for McDonald’s.

Looking at McDonald’s “basic crew” employees, we can compare “apples to apples.”  At a Hamburger University campus, you can get a similar education. And, at your local McDonald’s, no matter where, you follow the same operations manual. Or as Princeton professor Orley Ashenfelter and his co-author Štěpán Jurajda explained, you have “standardized capital.”

Wages

Because those McDonald’s jobs are so similar, we can get a more accurate picture of wage differences. In 2016, 29 states and 41 cities deviated from the federal hourly minimum of $7.25. Ohio had a minimum wage of $8.10 then (now it’s $8.15) while Pennsylvania was at the federal minimum (and still is) for its privately employed work force. The impact on the McWage was evident. In Ohio, it was $8.35 and Pennsylvania, $7.81.

Similarly, across the nation, people’s McWage rates differ for almost identical work. In the following map, the darkest blue areas take us between $8.75 and 13.00 an hour while the next lighter blue is $8.05-$8.75. At the bottom, in very light blue and almost white, we go from an hourly wage of $8.05-$7.50 to $7.50-$7.25:



Purchasing Power

Correspondingly,  McDonald’s workers’ purchasing power is not the same. With one hour of wages, an Ohio employee can buy 2.05 Big Macs while a Pennsylvania employee could get 1.81. But for the highest purchasing power, we have to go to Nebraska, Minnesota, and North Dakota where one hour of work gets them 2.3 Big Macs. At the other end are Maine and Louisiana where workers can buy approximately 1.7.



As for Big Mac prices, there is a whopper of a difference. Big Macs varied in 2016 from a (median) high of $8.36 down to $2.76.

Our Bottom Line: The Zigzags in the British Coastline

The authors of the Princeton paper point out that much of our labor force information is from surveys that are general. While they let us compare workers with a similar education and occupation, they don’t convey the massive differences among these workers.

Instead, because the Princeton paper looks more closely at the McWage worker, it can show us (for example) the “negative employment impact of Chinese imports.” Their point is that a close look not only unveils a correlation but also the potential for greater insight. If we know precisely who is affected by changes in trade, we can design programs that target them.

So, while our focus has been McDonald’s basic crew employees, we are really talking about an immensely varied labor force. When the Labor Department tells us that wages have increased by 2.9% ($.77) during the past year, they are referring to a current national hourly average of $27.16. But you can see that the average, while important, can obscure a much more complex situation.

In the same way, Benoit Mandelbrot, the father of fractal geometry, told us that the closer you look at Great Britain’s coastline the more you see. From a distance, it is a curved line. However, looking closely, we see countless indents and zigzags.

So too with the U.S. labor force.

My sources and more: While reading the McWage paper was a slog, its ideas were fascinating. Similarly, for a firsthand look at the statistics, the August employment report had the wage data and a link to wages in different industries. The one article I recommend is from CNBC about why fast food workers in North Dakota “bring home the Bakken.” It conveys ideally why McDonald’s pays a high wage rate there.

Please note that this post was slightly edited after publication to improve clarity.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - Solving McDonald’s Soggy French Fries Problem by Elaine Schwartz

Several months ago, McDonald’s said it had solved its soggy French fry problem. The firm assured a reporter that delivered fries would be crunchy. They just had to depart the restaurant when hot and fresh and arrive at our homes within 30 minutes.

For deliveries though, it might not be so easy.

We’ll start with McDonald’s first French fry problem…

A Consistent Crunch

Ray Kroc

One day in 1954, a curious milk shake maker salesman appeared at the McDonald’s restaurant near Pasadena, California. No one restaurant had ever before ordered ten of his Multi-mixers (simultaneously, each one could make five shakes). He personally wanted to see what hamburger restaurant could possibly require so many milk shakes.

The salesman’s name was Ray Kroc and he was amazed at what he observed. “Like ants at a picnic,” McDonald’s workers began their day carrying the meat and potatoes from a shed to the restaurant in a perfectly regimented fashion. They were dressed meticulously in trousers, white shirts, and hats. Close to opening time, lines of customers formed. When asked, many said they returned daily. Some left with bags full of the fifteen-cent hamburgers.

Immediately Ray Kroc grasped the potential of the McDonald’s operation. He asked the brothers if he could have the exclusive right to develop a national chain of McDonald’s franchises. “Yes,” was the answer (with much more negotiation) and the rest is history.

The French Fries

One of Kroc’s first problems was developing a consistent crunch for his French fries.  Although suppliers were providing the same russet potatoes and using precisely the same soaking and cooking techniques, still the franchises’ fries varied. Some would be perfect while others were too soggy.

After spending millions of dollars and hundreds of hours, McDonald’s researchers concluded that their storage and frying procedures needed tweaking. Storage time had to be three weeks—long enough for the sugars to turn to starches. Frying them, they had to be sure that the oil temperature did not rise more than three degrees above its lowest point. Then, with an electrical sensor maintaining the three-degree difference, they achieved a consistent McDonald’s crunch.

The Current Crunch

Maybe we should say déjà vu.

Now, McDonald’s seems to have an equally tough French fry problem.  Describing his French fries, an eater.com reporter wrote that the delivery had arrived within a half hour. However, only half were crispy and all were lukewarm.

Two days ago, the NY Times explained the solution in a lengthy article. Its focus was Lamb Weston, a McDonald’s French fry supplier. At one of its farms, Lamb Weston has been trying to figure out the kind of potato that would make a less limp fry. Concluding that water is the enemy, they’ve been using minimal irrigation through computers that monitor potatoes’ nutrient levels.

But that was only the beginning.

At the frying stage, they developed a new batter that, when combined with the new potatoes, will remain crunchy for almost an hour. (The current state-of-the-art is 12 minutes.) As you might imagine though, the fries’ journey from the restaurant to our homes could undo all. If that fry is placed next to a milk shake, both will wither. Appropriate ventilation and a moisture free environment are crucial. Ideally, they just need to put the French fries in a lightly folded paper bag.

Our Bottom Line: Monopolistic Competition

Last year, McDonald’s tested its delivery service in Florida. The next step was to offer it at 5,000 U.S. locations. Because they project a $100 billion market, you can see why a crispy French fry is so important.

French fries are their #1 delivery product:



As economists we can say that McDonald’s is trying to achieve product differentiation. Especially because they compete in a monopolistically competitive market, they have to make themselves better than other restaurants. As a market structure with many smaller firms that can easily enter and exit, monopolistic competition means that McDonald’s needs to stand out.




Having crunchy French fry deliveries would help.

My sources and more: Thanks to the NY Times for alerting me to the leap forward in French fry crunch technology. Then, Bloomberg and Eater had the McDonald’s facts as did excerpts from my Econ 101 1/2 about Ray Kroc.

Please note that today’s featured picture is from Eater.com.


Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - Who Will Care About the Starbucks Price Hike? by Elaine Schwartz

Starbucks just announced that a cup of brewed coffee will cost 10 to 20 cents more. While the price increase depends on where you live, a “tall” (their smallest size except for the “short”) probably is somewhere between 1.95 and $2.15 before tax.


Who agrees with Leah?

It could relate to Dunkin’ Donuts and McDonald’s, a Frappuccino, and a rubber band.

Substitute Products: Dunkin’ Donuts and McDonald’s

Thinking of the recent price hike, we need to ask if we have substitute products. I suspect the answer depends on the coffee drinker. Some have said that there is a coffee war among Dunkin’ Donuts, McDonald’s and Starbucks. If you agree, then the first battle started in 2002 when Dunkin’ Donuts announced a new line of espressos, cappuccinos, and lattes. As for McDonald’s, it entered the fray with McCafé in 2009. Lower priced than Starbucks, it offered its version of the latte, the cappuccino and the mocha to which it recently added a caramel macchiato, a vanilla cappuccino, and an americano.

If the three brands are interchangeable, then the price increase will make Starbucks less attractive. On a Starbucks graph, an economist would shift the demand curve to the left to display less demand because people were switching to cheaper substitutes.

Reference Points: Frappuccinos

Higher Starbucks prices can also take us to reference points. Tall, grande, and vente cups of coffee have always been the cheapest drinks at Starbucks. Because I buy the coffee that is custom made in their Clover machine, my price is closer to $3.00. As a reference point, that clover makes the price of a basic cup of coffee, even after an increase, look inexpensive. Similarly, compared to a Frappuccino, a higher priced plain coffee is still pretty cheap.

Our Bottom Line: Elasticity

Maybe though it all comes down to your elasticity. And that is where the rubber band enters the picture.

If price changes a lot and the quantity we buy remains almost the same, then our demand is inelastic. By contrast, if price swings have a big impact on buying, then our response is elastic. With elastic demand, like a rubber band, the quantity we demand stretches when price drops and contracts when its rises.

At Starbucks, we see inelastic demand from those consumers who believe Dunkin’ Donuts and McDonald’s are not substitutes. Similarly, pricey Frappuccinos that are reference points only reinforce inelastic demand. No matter what, consumers with inelastic demand buy their Starbucks coffees.

However, there is price point for all of us when our inelasticity becomes elastic. And that returns us to Leah’s Tweet.

My sources and more: After seeing the increase at WSJ, I went to Eater which is always good for food and drink insight. Meanwhile Refinery29 told a bit more and Money looked at the coffee wars. Finally, I even discovered the coffee war academic perspective here.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.