The Wendy’s Co. chief executive Emil Brolick said during the company's first-quarter earnings call that the brand would adjust its marketing calendar to bring about stronger sales growth in the second half of the year after revenue fell below expectations in the first quarter.
For the March 31-ended first quarter, Wendy’s net income fell sharply to $2.1 million, or 1 cent per share, compared with $12.4 million, or 3 cents per share, a year earlier. Results for the first quarter of 2012 included an after-tax gain of about $18 million on the sale of certain investments, Wendy’s said.
Revenue increased 1.8 percent to $603.7 million during the period. Same-store sales rose 1 percent at company-owned restaurants and 0.6 percent at franchised locations in North America, despite challenging calendar shifts involving New Year’s Day and Easter, the company noted.
Wendy’s national messaging jumped around during the period, Brolick explained, as the January launch of its Right Price, Right Size value platform gave way to two weeks of advertising fish sandwiches for Lenten season and then a five-week period when local marketing co-ops were free to market whatever they wanted.
“When we went to that local pillar, the messaging didn’t carry the day,” he said. “By definition, you’re more fragmented because local [demographic marketing areas] can run different messages.”
Going forward, the brand needs to keep consistent messaging in front of all customer groups, he said, meaning ongoing ads for Right Price Right Size for value-conscious consumers and sustained commercials for premium products for other guests.
“We have to evolve to where we have more continuity against a price-value message, as opposed to a pillar approach,” Brolick said. “We don’t want to move away from our premium messaging, because we’re building sales there, but we have to address that price-value consumer.”
For instance, in April while Wendy’s promoted the Flatbread Grilled Chicken sandwiches, sales of the chain’s large chicken sandwiches rose to their highest level in nine years, Brolick said. The chain also has been growing sales of its large hamburgers and salads.
But Wendy’s lost market share for the “price-value consumer” dependent upon 99-cent menus and other value platforms, he said. The brand’s approach to solving that dilemma via simultaneous, ongoing advertising is what Brolick characterized as “the power of ‘and.’”
“We’re not stepping away from the high end; we have some outstanding products coming into the pipeline,” he said. “Our strategy has to put pressure against high-end items but also recognize that 20 percent of the overall business out there in quick service is the price-value shopper. Some of the growth we’ve seen through very strong sales of Flatbread Grilled Chicken have been offset by share losses on the price-value end of the business.”
Building upon remodels
Wendy’s plans to accelerate the opening of its “Image Activation” remodeled stores this year, from 68 since the start of the program in 2011 to about 200 incremental reimages this year. The remodel system includes three different tiers of investment.
Not all remodels or new-look builds will be Tier I projects, which were nearly all of the remodeled stores that began in 2011 and continued last year.
Wendy’s also will start executing Tier II and Tier III remodels that involve lower development costs — around $550,000 for Tier II and $370,000 for Tier III — but still target sustained sales lifts in the range of 18 percent to 20 percent, compared with pre-Image Activation sales levels.
Over the next three years, Wendy’s will invest between $440 million and $500 million in capital expenditures for the Image Activation program and projects to have half of all company-owned restaurants, or 20 percent of the total domestic system, reimaged by the end of 2015, chief financial officer Steve Hare said.
Wendy’s announced a new financing program for franchisees to adopt the Image Activation look, working with GE Capital to provide loans. More than 100 franchisees have already applied for the program, he said.
“With GE we’ll provide credit support in the way of first-loss protection in the early stages,” Hare said. “We think this loan portfolio is fairly low-risk, and we wanted something on the table early on, because our franchisees are looking to move right now. This is an early-adopter financing program.”
Brolick added that less capital-intensive rebuilding in Tier III projects has helped inform Wendy’s on how best to reduce the cost of its major Tier I projects and would appeal to many franchisees looking for return on investment in the high teens. A handful of Tier III remodels have been completed during the first few months of 2013.
“We really believe that the Tier III program is going to become more of the workhorse of the system for Image Activation,” he said. “Early results from those first few Tier III restaurants in terms of sales are very attractive.”
The positive same-store sales impact from remodeled stores is expected to offset that drag projected on same-store sales this year from the discontinuation of breakfast in certain markets, Brolick said.
Wendy’s operates or franchises more than 6,500 restaurants in the United States and 27 foreign markets.