Wendy's finds value-premium balance

This week, Wendy's reported its fourth quarter 2012 same-store sales were down a slight 0.2 percent year over year. CEO Emil Brolick said the fourth quarter started off strong with the launch of the Bacon Portabella Mushroom Melt, but fizzled through the end of the year because of a focus on the premium offering Mozzarella Chicken Supreme when its rivals were rolling out value promotions.

Although Wendy's was losing share from frugal consumers, Brolick said the company is more worried about beating its own sales than what rivals are doing.

"We're focused on getting better and having a layered mix of marketing messages out there that include high-end premium products, our core items and then our price-value messages that provide what we believe will ultimately prove to be traffic-driving messages as well as a great mix that provides the economic model that we need to be successful," he said.

Wendy's righted the ship with the January launch of its Right Price, Right Size menu.

Consumer pressures

The QSR segment has shifted to a value strategy as consumers navigate higher gas prices, a payroll tax increase and delayed tax refund checks.

"While we can't control these forces, we certainly can control how we think about this great Wendy's brand and how we bring this brand to life," Brolick said. "Having a consistent price-value message is essential. It's not just what you pay that is important, but what you get for what you pay. We are working to be sure consumers understand this."


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The new menu includes six items for 99 cents, and eight items from $1.19 to $1.79. This two-tiered pricing strategy has resulted in a higher degree of franchisee adherence, improved sales and enhanced margins on price-value offerings, Brolick said.

While promoting its new value menu throughout the year, Wendy's will also continue to focus on premium-priced items. This strategy began with the Bacon Portabella Melt and Spicy Chicken Guacamole club launches.

"We also continue learning on flatbread grilled chicken and other initiatives that treat consumers to a new QSR food experience that they typically have to pay considerably more for. We've begun to see signs of this effort paying off as we successfully built share of large hamburger and large chicken sandwiches and sold more large sandwiches than in the previous year," Brolick said.

Image Activation incentives

Wendy's will also continue to focus on its image and people activation initiatives put into place last year, with higher standards for operations, new marketing and branding efforts and reimaged restaurants.

In 2011, Wendy's reimaged 10 restaurants that drove average sales increases of 25 percent. In 2012, the company reimaged 48 restaurants with similar results. This year, Wendy's is on track to reimage 100 company-operated restaurants.

The company is offering an incentive program to qualified franchisees who complete Image Activation restaurant reimages, which was expanded to include Tier 2 and Tier 3 reimages. About 20 percent of the total system is expected to be completed in the new image by the end of 2015.

To accelerate the program, Steve Hare, chief financial officer, said Wendy's has committed $145 million to fund new restaurants and reimages in 2013, a 100 percent increase over 2012.

"Over the next three years, we expect to invest $440 million to $500 million in Image Activation, including the $145 million in 2013. With more than $400 million on the balance sheet and ongoing cash flow generation, we have the financial flexibility to fund these growth initiatives and also return cash to our shareholders," Hare said.

An important component of the reimaging initiative is getting the system on a consistent POS platform. Brolick said POS updates are outdated in a high percentage of the system.

"There are also franchisees, however, who have quite recently made important investments in modern POS hardware as well as software. They will eventually have to transition out of that into the common platform that we have identified, which is NCR's Aloha," Brolick said. "To do the things we want longer term, they are eventually going to have to change."

Those long term plans are shaped by consumer trends toward increased technology use. Hare said Wendy's wants to be able to work directly with customers who want more access with the brand, and eventually may want to order and pay through their mobile phones.

"We need to be able to keep up with what our customers expect. Technology is moving very rapidly. So (a consistent POS system) is something I hope we can achieve over the next couple of years fairly quickly," Hare said.

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