However, in its quest for becoming more upscale, is The Wendy’s Co (NASDAQ:WEN) turning away the regular value-oriented customers who constitute the main traffic in any fast-food chain?
First-quarter revenue missed expectations
Same-store sales increased 1% at the company-owned stores and 0.6% at franchised stores. The overall revenue was $603.7 million against the $615 million predicted by analysts polled by FactSet. Adjusted earnings of $0.03 matched expectations.
While the company attributed the soft revenue to bad weather and holiday timings, there are some underlying trends that are disturbing.
The number of transactions was actually lower than in the year-ago quarter. The same-store sales growth came from mix and pricing alone. Next, the company admits losing market share in the value-menu segment.
The importance of value menu
Overall trends suggest that people are less enthusiastic about value meals in general. In 2012 restaurant traffic based on deals fell 3% while non-deal based visits grew by 2% according to NPD. But there are few compelling facts that underline the importance of the value-menu concept for Quick Service Restaurants or QSRs.
Firstly, value items typically priced around $1 have become an integral part of the menu at QSRs. This has stopped being a special deal and has become something that people expect. So people are often disappointed if a chain does not have enough of these.
Secondly, chains like Chipotle Mexican Grill, Inc. (NYSE:CMG) and Panera Bread Co (NASDAQ:PNRA) have emerged to provide much better quality food, albeit at a premium. People who are willing to foot a higher restaurant bill are preferring these eateries more and more over regular QSRs.
Finally, there is the “barbell” strategy. This implies that while the chains would lure customers into their restaurants with value items, they would hope that people would occasionally order higher-priced items, which carry bigger margins.
Wendy’s not providing enough value?
Unlike other chains that have a straight dollar menu, The Wendy’s Co (NASDAQ:WEN) has a tiered “Right Price, Right Size” structure where items priced between $0.99 up to $1.99 are bunched together. The company had launched this around the beginning of the year.
The message that it wanted to send is that it is not just about inexpensive items. It sought to give its customers better than QSR-quality food at QSR-like prices.
The step was indeed in the right direction but where the company lagged was that it did not adequately emphasize its $0.99 items, which are the real crowd-pullers. Also, a lot of the $0.99 items were not consistently available.
No wonder The Wendy’s Co (NASDAQ:WEN) saw its market share slipping in this all-important segment.
It is not going to be easy
The good thing is that management has realized that the chain needs to strengthen its value-menu proposition. It has said that throughout the year it will emphasize its dollar menu in all its promotions. It will also consistently have six solid items at the $0.99 slot. This way it will try to get back some of its lost customers from rivals.
But the task is going to be anything but easy with both rivals McDonald’s Corporation (NYSE:MCD) and Burger King Worldwide Inc (NYSE:BKW) getting aggressive on the value side.
Dollar Menu is Big Mac’s mission of the year
When McDonald’s Corporation (NYSE:MCD) gets aggressive it becomes a raging war. Already in April, the company surged past analyst expectations by posting a positive 0.7% growth in same-store sales in the U.S. against the negative 0.5% that analysts had predicted.
McDonald’s Corporation (NYSE:MCD) will give the U.S. its maximum attention, owing to the fact that both in Europe and Asia, the same-store sales trends are negative. Europe is down 2.4% in April on account of the general economic situation and Asia/Pacific, Middle East and Africa is down 2.9% on account of the avian flu epidemic in China.
The company has openly announced that it will sacrifice its margins willingly in the U.S. in order to increase market share. And so far it has been successful in doing just that.
Burger King is leaving no stone unturned
Burger King Worldwide Inc (NYSE:BKW) has also woken up to the fact it needs to promote its value items more. What has resulted is heightened promotion around the company’s dollar menu.
This has already made an impact on the sales trends. Although first-quarter same store sales declined 3% in the US and Canada, March sales were much better following the value promotion and the same trends continued in April.
Burger King Worldwide Inc (NYSE:BKW) is trying different avenues for its value campaigns. In addition to putting the Jr Whopper sandwich on the value menu at $1.29, the company is also trying out a daily discount program in some test markets in the U.S. It is offering one combo meal on all weekdays at a promotional price of $4.99.
Wendy’s biggest bet
The Wendy’s Co (NASDAQ:WEN) is spending heavily on modernization. While McDonald’s and Burger King are also focused on renovation of their stores, Wendy’s is being the most aggressive in this front. It is getting Wi-Fi, flat-screened televisions, high-quality seating arrangements and even fireplaces. The idea is to differentiate itself from McDonald’s and Burger King and provide more ambient and up-market restaurant environment.
It will be interesting to see what the comps look like when the company starts getting the benefits of its remodeling together with its value promotions.
Summing up
The Wendy’s Co (NASDAQ:WEN) is trying to create a niche for itself by providing better quality food and better eating-out experience. However, it has so far ignored its value menu, which been a major driving force in the QSR segment. With NPD predicting a 1% decline in 2013 in fast-food sector traffic, the market conditions are looking to test even the biggest players. It is time that Wendy’s got its act together in the value arena.
The article Where Did Wendy’s Fall Short? originally appeared on Fool.com and is written by Eshna De.
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