Reference no: EM132678175

Consider the Cost

• "You're our food guru. They are offering the same size pizza as we do, but for $2.00 less. How can they do that?" asked Kevin Gustafson to Sara Leiboda. Sara was the Director of Operations for the seven-unit Brooklyn Pizza House restaurants. Kevin was the company President. Brooklyn Pizza House was known for its mid-priced, but very high-quality, thin crust pizza.
• Located near the main campus at State University, the company's target market are students who attend the school. The advertising programs in use by the company were clever and effective. Business and profits were good. But now Kevin and Sara were discussing the new $9.99 pizza promotion that had just been announced by their major competitor.
• "They changed their cheese topping formulation Kevin," replied Sara. "They increased their use of pizza cheese by another 25 percent. One of my friends works in their central production kitchen. That's where they process and prepackage the pizza ingredients for delivery to their stores. My friend says they changed their 75/25 mozzarella/pizza cheese ratio to a 50/50 ratio. As you know, we only use 100 percent mozzarella cheese on all of our pizzas."
• "Why would they do that?" asked Kevin.
• "Well," replied Sara, "It's simple. Pizza cheese is a processed cheese product that costs quite a bit less per pound than high-quality mozzarella. Pizza cheese can actually contain as little as 51 percent real cheese and still be sold as pizza cheese. It melts O.K., but it can't compare to the taste of real mozzarella. By using it, they can reduce their per-pizza costs and, because their costs are lower, they can reduce their selling prices. That's what they did. I guess they think it will increase their sales, reduce their food cost percentage and ultimately increase their profits."

Problem 1: Why do you think this competitor decided to reduce the quality of cheese used in its pizzas?

Problem 2: Do you think students at the University will notice the change? Would you advise Kevin and Sara to make the same change to their pizza formulation? Why?