Wednesday, April 14, 2010

Why mandatory calorie counts might be good for business: Calorie listings, part 1

This weekend I went to the Cheesecake Factory for the first time in awhile and noticed a couple big changes to the menu. The first thing that struck me: apparently the Mondo Burger is now a thing of the past - a fossil of the economic expansion, of the SUV era. More interestingly though, they now list calorie counts aside each meal. As had never happened before during my various cheesecake visits our table conversation morphed quickly into calorie comparisons. The question: is the Factory pissed that we are talking calories? Do the calorie counts hurt their business?

Calorie listings are a hot topic right now. As obesity rates grow faster than your neighbors butt (as measured in percentages of course), mad people have been calling for legislation to force fast-food chains to plaster their mcwalls with dietary information. The health care bill included something like this – companies with over 20 franchises are now required to more prominently display their caloric realities. Next to the price, which is next to the glossy picture of your sandwich, will soon rest the other price: the nutritional price.

But how will Obama’s fascist, Armageddon encouraging, government take over of the fast-food industry affect McDonald’s numbers? Is this a bad thing for the chains?

Obviously, a lot of chains aren’t down with the new rules. To get hella people to eat one of the billions of Big Mac’s sold, McDonalds has to create a situation where the benefits of getting the hamburger (the taste, the ambiance, an excuse to play the monopoly game) outweigh the costs (the price cost and the nutritional cost). The magnitude of the “nutritional cost” is determined by two factors: the caloric content, and the consumer’s awareness of the caloric content. In other words, the nutritional cost of a high calorie meal is heavier when the buyer is aware of the calorie information. I care less about the 2000 calories in my Big Mac if I am blissfully unaware of their existence. So by mandating full disclosure, the law in effect increases the cost of the hamburger, by strengthening the nutritional cost. Purveyors of fat thus start to fret, as they see the cost-benefit calculations of their customers finding a new equilibrium.

There is some uncertainty here though, we could actually argue that calorie listings will increase business. Here’s how: as I witnessed at the Cheesecake Factory, the inclusion of calorie information on menus sends our minds dizzily into realms we’ve never before been. Suddenly, when deciding what to eat, we are no longer just cross-referencing food item and price – there is now another important factor in our decision-making process, calories. Our thought process used to go like this “I really want to get the chicken taco, which is $14, but I’d also be ok with the chicken burrito, which is only $11.” A lot of times, we’d pick the burrito. But now, our conversations are like this “I want either the chicken burrito, which has 1800 calories, or the chicken taco, which has 1200 calories”. A second ago we picked the burrito because it was cheaper, now we pick the tacos without thought to price because they are healthier.

What has happened? Why did we make the switch from taco to burrito? (and as an aside, why is there always a CPK next to a cheesecake factory?) The posting of calorie information at the Cheesecake Factory increases the cost of my burger by increasing my awareness of the calories. But the inclusion of the calorie info simultaneously decreases the price cost of the burger by discouraging my full realization and comprehension of the price. Under the new laws, we are no longer as transfixed on the price as the premier decision making factor, as we are too preoccupied cutting calories. The effect of calorie listings on the cost-benefit calculations is therefore ambiguous, and might even turn out to weigh in the chains favor.

This hints at a whole new level of competition; when calories are on the menus CC Factory and CPK are not just in competition for who can give me the best food for the lowest price, but now also who can give me the best food for the lowest calories. If I was a tenured economics professor with a lot of time, I think I might try and come up with a new branch of economics: price competition is dead, calorie competition is today’s thang.

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