Article

Wendy's plans to refine value messaging after 'challenging' Q3

CEO admits to winning some share from a struggling McDonald's.

November 7, 2014 by Alicia Kelso — Editor, QSRWeb.com

Wendy's turned in its third quarter results this week, which included a 2-percent increase in company-owned same-store sales, and a 0.5-percent increase at franchised units.

Though positive on both fronts, CEO Emil Brolick called the quarter "challenging" and cited headwinds such as high commodities as a reason for not meeting expectations. The company also plans to refine its value messaging moving forward, as Brolick said this may have impacted performance as well, particularly in a highly competitive segment.

"We believe in our high/low marketing message strategy, but also recognize the need to refine how we bring it to life," he said during Thursday's earnings call.

For Q3, LTOs offered on the premium side included the smoked Gouda chicken on brioche and the pretzel bacon cheeseburger and pretzel pub chicken sandwiches. The BBQ pulled pork trio has also been "in line" with expectations, Brolick said.

However, the company lost momentum in the price-value segment toward the end of the quarter and has added incremental media to promote its Right Price Right Size menu, alongside the BBQ pulled pork ads.

Brolick said the overall QSR segment has increased its price-value messaging throughout the past few months.

"Some of those have gotten more aggressive," he said, adding that Wendy's, conversely, has had higher-end promotions.

"I think it’s generally projected that about 25 percent of the marketplace is what we’d characterize as price-value in the overall QSR marketplace," he said. "If you would look at the last 10 quarters in the industry, the price-value customer growth has been stronger than the non-price-value customer growth … You have to deal with this group of consumers."

What has worked well for Wendy's in the past is the simultaneous promotions of a high-end product and a value product, compared to periods when there is just a high-end message running.

"What we see is the price-value marketplace isn't totally homogenous – some people are attracted by the value menu, some are coupon users and some are users of the higher end promoted product that has been discounted," Brolick said. "There are some refinements we can make."

As with every brand, Wendy's will focus this messaging strongly toward the millennials and will put more weight into digital and social media.

Technology investments

That focus will be supported with more resources and investments being put toward consumer-facing technology with platforms such as mobile ordering and payment, and loyalty programs.

These initiatives provide potential benefits, such as consumer convenience, increased transactions, higher check, faster speed of service and a seamless brand experience, Brolick said.

"(Consumer-facing technologies) are something that consumers are very interested in because we are moving from a service to a self-service world out there, but also we see that as having an upside in terms of reduced labor in our restaurants eventually," he added.

Labor inflation

These investments also come as Wendy's expects wage inflations to continue through 2015. CFO Todd Penegor said the company is factoring in the state-by-state minimum wage pressure and "working hard to leverage technology" and other initiatives that can mitigate some of that impact.

Among the "other initiatives" is an individual development plan created for team members that demonstrates how people can quickly move up from a minimum wage starting spot, Brolick said.

"This is a business that provides people a tremendous opportunity, and I think we’re getting much more effective at communicating that internally," he said.

During the call, the company announced it was cutting G&A costs by $30M, which will include job losses, according to Columbus Business First. The company won't confirm how many employees at its corporate headquarters in Dublin, Ohio, will be affected.

Penegor cited a 10 basis point decrease in restaurant margin – due mostly to commodities pressures – as one driver behind this decision.

"Given our expected higher cost structure in 2015 and beyond, due primarily to record high beef costs, wage inflation and the implementation of the Affordable Care Act, we are taking proactive steps to strengthen our economic model and realign our G&A resources to focus on investments and consumer-facing restaurant technology, and accelerated restaurant development," Brolick added.

Winning share?

Also during the call, Brolick said Wendy's has no plans to revisit breakfast anytime soon, despite the success of the daypart in the industry.

"Our goal is to get to $2 million AUVs in the United States or in North America, and the assumptions we’ve made to get there do not include us having breakfast," he said.

Executives were also asked if Wendy's was capturing some market share from McDonald's, which has been struggling all year.

"I do think that we have benefited from that," Brolick said, adding, "We don’t try to get too analytical about who we’re taking share with, we want to just continue to build our share."

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