The Wendy's Company flatly admitted it fell short of first quarter 2012 expectations in part because its W cheeseburger launch was approached wrong.
Wendy's North America Company-operated restaurants generated a same-store sales increase of 0.8 percent in the quarter. This is the fourth consecutive quarter of positive same-store sales. Franchise same-store sales in North America increased 0.7 percent during the quarter.
Although the numbers were positive, they fell well below the company's expectations and weren't strong enough to produce EBITDA results consistent with its plan for the year, according to CFO Stephen E. Hare.
"Compounding the challenges created by softer sales was an unfavorable mix of products sold. The impact of the W cheeseburger, which along with our anticipated elevated commodity cost, combined to produce a decrease in our year-over-year margin," he said. "In hindsight, the W's recommended price in December of $2.99 was too low, especially considering that it has more beef at 4.5 ounces than the Dave's Hot 'N Juicy with 4 ounces at a recommended price of $3.49."
Wendy's attempt to reposition the W by raising the à la cart price to $3.19 failed to produce the desired results. The goal of the W was to feature a "mid-tier" burger in its lineup and drive trade up from its 99 cent value menu.
"We saw the opposite effect, causing trade down from our premium hamburgers. The positioning of the W clearly was not what it needed to be. As a result, we will not promote the W again nationally," Hare said.
He added that the W cheeseburger in December started to show signs of diluting Wendy's marketing message and cannibalizing some of the success of Dave's Hot 'N Juicy line.
"Relative to the competition, our marketing messages were not as impactful as needed. And as a result, we produced positive same-store sales but below our expectations," Hare said.
North America company-owned same-store sales increase was a result of an increase in average check, partially offset by a slight decrease in transactions. In January, the chain promoted its My 99 Value Menu with a focus on the Jr. Cheeseburger Deluxe and the Cheesy Cheddar Burger. In February, it promoted Dave's Hot 'N Juicy Cheeseburgers. In March, most markets promoted either the North Pacific Cod sandwich or the W cheeseburger.
Total revenues increased in the first quarter of 2012 by $10.7 million or 1.8 percent versus the prior year. Income from continuing operations attributable to The Wendy's Company was $12.4 million, a $12.7 million increase over the first quarter of 2011.
Focus on Recipe to Win
Wendy's CEO Emil J. Brolick expressed disappointment with the company's first quarter and said the company's priority is to find its brand rhythm.
"One of the most visible changes is the introduction of our new ad campaign featuring the tagline, Now That's Better, which has been well-received by consumers," he said.
Also, in April, Wendy's added direct mail as another media layer to increase brand awareness and to drive the trial of core products such as cheeseburgers, chicken sandwiches and entrée salads. Another focus for the company is the continued rollout of its reimaged restaurants.
"The competitive bar has been raised. And our Image Activation initiative is the core dimension to our Recipe to Win," Brolick said. "We understand that it's not as simple as a pretty, new restaurant. We must elevate all the touch points of our brand – our restaurant, our people experience, our service experience, consistency of food presentation and our brand communications. The end game of reimaging is to reframe how consumers think about and engage with the Wendy's brand, and in so doing, reframe the competition."
Consumer insight shows that the most popular features of the reimaged restaurants are the ambience, fireplaces, lounge seating, WiFi and TVs, as well as the ordering queue unique to QSRs. Sales, Brolick said, have increased in all channels, with the biggest increase coming from dine-in sales.
The company plans to reimage 50 restaurants this year, and build 20 new restaurants with the new design. It will do so on a tiered investment approach to help franchisees.
Additionally, in light of the W's lackluster performance, Wendy's is in the process of shifting its barbell strategy. Brolick said there is currently "too much weight" on the lower end. The company will test changes to the My $0.99 Value during the second and third quarters.
From a marketing approach, the company will continue to leverage its new tagline, "Now That's Better," as well as the "red-headed consumer advocate" and Wendy Thomas.
"The red-headed consumer advocate charmingly challenges food lovers' meal choices so they can discover the better option, Wendy's. She is contemporary, witty, helpful and engaging. And she sets an expectation for the brand experience," Brolick said. "We have received frequent mentions and positive feedback via social media about this campaign, which gives us optimism that we are headed in the right direction."
Wendy Thomas, on the other hand, connects the traditional values of the brand with today's consumers by placing a bigger focus on "fresh preparation and honest food." She will be featured throughout the calendar year.
"We are counting on the uniqueness of Wendy's relationship with the brand and her father to separate us out from the QSR competition," Brolick said.
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