This Fast-Food Chain Is Planning to Make It Big

Gaurav is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Do not evaluate Wendy’s (NASDAQ: WEN) by its quarterly report. It is true that the performance wasn't inspiring in the first quarter with revenue of $603.7 million falling short of analyst estimates of $615 million and adjusted earnings of $0.03 just matching predictions. Same-store sales growth in North America was also just about 1%.

But if we look closely at the well-planned moves that the company is making, we will find that Wendy’s is slowly and steadily positioning itself for a much bigger game. 

Quality food

For any restaurateur, it is always the quality of food and menu innovation that steals the game. And this is where Wendy’s scores big.

The company is regularly coming out with new offerings which beat the regular quick-serve fare and look more in the league of fast-casual chains. The Asiago Ranch Chicken Club, Baconator, Bacon Portabella Melt, etc. are all cases in point. The latest in this area is the upcoming pretzel-bacon cheeseburger, which has created lots of buzz.

Wendy’s has correctly inferred that people are more inclined toward healthier options these days. So toward the beginning of the year, we saw a limited-time fish sandwich made with North Pacific Cod hand-cut fillet. In March, there was the five-grain flat-bread grilled-chicken sandwich and in May we saw a fresh salad every day made in three different sizes.

Technomac says Wendy’s is always preferred by consumers over McDonald’s (NYSE: MCD) and Burger King when it comes to food quality and salads.

Upscale interiors

Wendy’s began its image activation program in 2012 whereby it started renovating its restaurants to provide a fast-casual like ambiance. The modernized restaurants have flat-screen televisions, Wi-Fi, faux leather chairs, and even cozy fireplaces.

This initiative is carried out at three different investment points. The tier-one is the costliest and most of last year’s remodeling fell in this category. Subsequently, Wendy’s has come out with tier-two and tier-three plans, which are less expensive but the results are no less dramatic. More than half of the re-imaging in 2013 will be tier-two and tier-three models. The company will be completing 200 re-images this year, up from 48 last year.

Franchisees are upbeat about the renovations and the company has received as many as 100 applications from them for the re-images.

It is estimated that tier-one renovations can yield up to 25% increases in sales while tier-two can improve sales by 15%. Tier-three sales improvements will also be noteworthy. In fact, the company believes that the tier-three investments will yield the strongest returns. Once the incremental sales start pouring in, Wendy’s can put up mind-boggling numbers.

Value menu promotions

A recent area of concern for Wendy’s has been its weakness in the value-menu segment. While it does have its tiered ‘Right Price, Right Size’ menu featuring items priced between $0.99 and $1.99, what it lacks is consistency and good promotions at the $0.99 price point. This weakness resulted in some loss of market share, as well.

But now the company has woken up to the importance of the $0.99 items and promotions and is planning to have six items at this price. It will also engage in aggressive promotions of its value offerings. This should have a positive effect on the same-store sales numbers going forward.

Global expansion

Until 2009, Wendy’s was operating only in North America. However, since then, the company has decided to foray into other international markets and the result is some 374 franchised locations in 26 countries apart from the US and Canada. The company intends to embark on an aggressive international expansion strategy.

The latest on this front is that Wendy’s has recently entered into a long-term agreement with the ‘Eljuri Group’ to launch 20 restaurants in Ecuador. During the first quarter, Eljuri already launched the first two in Guayaquil, a coastal city with a population of 2.3 million.

Wendy’s also opened its second outlet in Argentina and will be adding outlets in Singapore, the Middle East, North Africa, Japan, Russia, and in the Philippines. An increasing global footprint will be an added opportunity for generating long-term growth for the company.

Market dynamics

Earlier it was believed that the fast-food industry is recession proof, but the current weak eating-out environment has proved this wrong. People have indeed become more reluctant to spend money on restaurant food and when they do splurge, they often prefer healthier options.

But the irony of the situation is that neither the quintessential quick-service restaurants like McDonald’s nor the healthy eateries like Chipotle Mexican Grill (NYSE: CMG) are having it easy.

McDonald’s reported a 1.2% decline in same-store sales in the US in the first quarter. Then, with super-aggressive promotions of its dollar menu, the chain attained a positive 0.7% comp in April. The company is sacrificing its margins to remain viable in the current scenario. Meanwhile Chipotle saw its same-store sales slow down to just 1%.

While this does not mean that either McDonald’s or Chipotle will stop growing, it points to the fact that all chains are having to work doubly hard to achieve their desired targets.

McDonald’s is introducing innovative menu items like Egg White McMuffins, McWraps, etc. while bringing back bestsellers like McRibs. It is also deliberating on introducing full-day breakfast.

Chipotle, on the other hand, is fueling growth through aggressive store expansions and already added 48 new outlets in the first quarter of 2013. It has about 1,458 stores, which is not a lot for a restaurant chain. This leaves lot of room to grow. The company is looking to add between 165 and 180 outlets throughout the year.

Simultaneously, it is working on a menu expansion as it prepares to nationally roll out a new spicy tofu-based menu called Sofritas. It recently launched a premium Patron Margarita, as well. It has also started catering services in 14 states and plans to go nationwide by the end of the third quarter.

So by no means is it going to be easy for Wendy’s or any other chain to make a clean sweep. Each chain will have to carve a niche for itself to defy the odds. And Wendy’s is trying to do just that.

What are Wendy’s chances?

The company has taken the right steps in the right direction. It is embarking on a growth path in both its home and international markets. It is trying to differentiate itself from rival hamburger chains by providing better quality food and an ambient restaurant environment. The stepped-up value promotions will further improve its competitive edge. As the new initiatives start bearing results, Wendy’s can see some really rapid growth.

McDonald’s turned in a dismal year in 2012, underperforming the broader market by 25%. Looking ahead, can the Golden Arches reclaim its throne atop the restaurant industry, or will this unsettling trend continue? Our top analyst weighs in on McDonald's future in a recent premium report on the company. Click here now to find out whether a buying opportunity has emerged for this global juggernaut.

Gaurav Basu has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus