Freakonomics: A thirsty economist walks into an A&W Root Beer joint...

A bucket of KFC Extra Crispy fried chicken is displayed October 30, 2006 in San Rafael, California. KFC is phasing out trans fats and plans to use zero trans fat soybean oil for cooking of their Original Recipe and Extra Crispy fried chicken as well as other menu items. KFC expects to have all of its 5,500 restaurants in the U.S. switched to the new oil by April 2007.

TEXT OF INTERVIEW

Tess Vigeland: Let's talk about food, my favorite topic aside, of course, from money. This week, Yum Brands released its latest profit report. The company owns Taco Bell, KFC, and a whole host of other fast food brands, including A&W Root Beer. The company made $350 million in the past three months. Lots of that growth from overseas sales.

In fact, Yum opened 180 new KFCs in China this year, but it closed two dozen A&W Root Beer restaurants here in the U.S. And the result has at least one Yum customer scratching his head.

Joining us to talk about it is Marketplace's newest addition, our Freakonomics correspondent, Stephen Dubner. Welcome to the show!

Stephen Dubner: Hi Tess, thanks for having me.

Vigeland: Your book and our show have quite a bit in common -- trying to look at the, I suppose you would say, human side of the economic equation. I think we could have some fun here.

Dubner: I certainly hope so. And you're right, it's not so much about the numbers per se, but what the numbers can tell us about how people actually behave and why they behave. So you were talking about Yum Brands a minute ago, and how its U.S. growth has slowed. As it happens, just the other day, I was having a conversation about one of the Yum Brands with Steve Levitt, my "Freakonomics" co-author, who teaches economics at the University of Chicago.

Steven Levitt: The other day I was thirsty, and I happened to pass by an A&W Root Beer. So I went to the drive-thru, and I said, I'd like an A&W root beer please. And the voice came over the microphone and said, 'I'm, sorry but we're out of A&W root beer, could I get you something else?' And I thought that didn't seem like a very good way to run a restaurant. If you're called A&W Root Beer, the one thing you might try to keep in stock was root beer.

Dubner: Kinda like a bank running out of money?

Levitt: Yeah, or KFC running out of chicken.

Dubner: Oh you've had that happen to you too.

Levitt: OAnd I've had that happen to me too. I was truly shocked when I went up to the counter and I asked for a bucket of chicken and they told me that they were out of chicken.

Vigeland: Oh my, a ship without a rudder; a car without wheels! Wow, that seems like a rather ridiculous business strategy. But Yum Brands owns both KFC and A&W Root Beer, and the company as we said is actually making money. So whatever this strategy is -- it's working!

Dubner: It's important to remember that Levitt is just one guy telling one anecdote, and as social scientists have to constantly remind themselves: the plural of anecdote is not data.

Vigeland: Or trend.

Dubner: Or trend, exactly. Although for a journalist, two is a trend, just so you know. That said, Levitt's experience does seem to at least jive with what we're seeing in the Yum Brands report.

Vigeland: All right, point taken. But is there any economic reason why a KFC might stock too little chicken, or A&W not have any root beer?

Dubner: Well it may be that with the U.S. growth so bad that Yum is skimping on resources here, but I'm no economist. Let's hear what the actual economist, Steve Levitt, has to say -- I asked him.

Levitt: I've hypothesized that it has to do with the income level of the customers, and that wealthier customers are less willing to tolerate incredibly bad service. I saw this when I spent a year visiting at Stanford University and I lived in Palo Alto. The share of rich people in Palo Alto is almost unparalleled.

Dubner: Did you say unparalleled, or unbearable?

Levitt: No, unparalleled. I enjoyed it, actually. But, as a consequence, the service was unbelievable.

Dubner: So that's a function of a well-run business or it's a function of the employees adapting to the level of demand of customers?

Levitt: I think the business can decide, do they want to pay more and have good workers? Or do they just want to coast along, do they just want to provide the minimum amount of service, and get by? It costs money to provide good service; businesses adapt to that.

Dubner: So, you went to this A&W twice within like three days and they had no root beer. What happens the next time you drive by that A&W root beer and you're thirsty?

Levitt: Well, I'm gonna have to see if they've got the root beer yet, right?

Vigeland: So basically, Stephen, the argument here is that the Palm would never run out of filet mignon.

Dubner: Right, because they've got a different kind of clientele who's more sensitive to that and A&W perhaps is aware that their clientele is not.

Vigeland: Oh boy. Well I guess I don't understand the logic here, of having a brand that is known for X, and being out of X!

Dubner: Well like the bank that runs out of money, which you don't want to happen, you do have to consider all the forces that go into it. And at some point, part of it may be management, part of it may be resources, part of it may be one guy or gal woke up and had a bad day. On the other hand, when you're thinking about it from the corporate end, as a business, your concern is that that one guy does not create for you a poor reputation, and that's what we saw here.

Vigeland: And I would guess for the most part that we customers don't make a stink about it.

Dubner: Well, I'll tell ya. An interesting thing happened just this week: Sun Chips, the Frito-Lay quasi-natural, quasi-healthy potato chip -- which my family happens to love and consume -- they introduced a new biodegradable, environmentally friendly bag.

Vigeland: Right, and it was really, really crinkly.

Dubner: Extremely crinkly! I hadn't read about this but we had a bag in the back of my car, my kid's reading in the back of the car, and I was driving out to the beach this summer: this noise, it sounded like a hundred little old ladies at once uncrinkling their hard candy in the theater. It was unbelievable. It turns out that this week Frito-Lay said, we're getting rid of the bag. Partly, that was a reaction to an organized effort on Facebook by Frito-Lay customers who said, hey we like your chips, your bag stinks. So that's a case where the customers were heard.

Vigeland: To the barricades, I say! All right, well let's end it on that. And we want to know from the listeners out there: what should a customer do when confronted by exceptionally bad customer service? Tell us how you'd respond at our sister website, FreakonomicsRadio.com. Stephen Dubner, it has pleasure to have you on the show.

Dubner: Thank you very much Tess, take care.

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