Wendy’s has a 99-cent problem, but it is not the complaint commonly heard in quick service that the brand’s value menu has too big a share of its sales.
Rather, the 6,500-unit chain’s Right Price Right Size menu is not attracting enough business.
Last week, during a first-quarter earnings call, brand officials disclosed that Wendy’s lost share of value-conscious consumers to rivals like McDonald’s, which continues to advertise its Dollar Menu aggressively. Chief executive Emil Brolick said Wendy’s started losing share of those customers at the end of January, when national advertising for the introduction of Right Price Right Size rolled off.
Even though the company reported same-store sales gains of 1 percent at company-owned stores and 0.6 percent at franchised units in the first quarter, erosion of Right Price Right Size sales offset gains from other initiatives.
“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.”
Brolick said Wendy’s would go back on the air with national commercials for Right Price Right Size, and those spots would cycle off for the rest of the year and would share time with commercials for other limited-time offers. Currently, the chain’s value menu ads are running concurrently with Wendy’s new Spanish-language ad campaign for Hispanic customers advertising the Frosty Waffle Cone for a suggested $1.49.
The campaign for Right Price Right Size would emphasize the 99-cent price point in the majority of its messaging, Brolick added.
Dennis Lombardi, executive vice president of Columbus, Ohio-based WD Partners, noted that Wendy’s was a pioneer in quick-service value menus and has a history and consumer perception around value. Thus, he said, if the company pivots back to consistent advertising of Right Price Right Size, it should be able to drive the traffic it needs from value-conscious guests.
“It’s a very easy fix,” Lombardi said. “They have to make sure they keep pace with some of the other players in the value game with a comparable price point and a competitive menu. I think they obviously do. That menu has items like a baked potato that are not very common in this space.”
One securities analyst covering the Dublin, Ohio-based company’s stock wrote that Wendy’s 1-percent gain in first-quarter same-store sales, which fell well below expectations, threatened to put the brand’s same-store sales guidance for fiscal 2013 — an increase of 2 percent to 3 percent — out of reach.
“We believe the weaker-than-expected first-quarter comps reflect the less effective marketing, but also the heightened competitive pressure from larger competitors focused on value,” Sara Senatore of Bernstein Research wrote in a research note. “While Wendy’s has benefitted from the success of its relatively higher-quality offerings, the company has been losing share among value-conscious consumers.”
The fact that Right Price Right Size was received so well in January demonstrates that Wendy’s has competed in the value space better and could do so again, she added. “But the fact that it experienced this kind of reversal highlights the uncertainty around sustainable comparable-sales growth,” she said.
Striking the right balance
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Wendy’s decision to increase national advertising around the Right Price Right Size menu across the rest of the year — accounting for more air time than a simultaneous campaign for its higher-end limited-time offers — acknowledges “an increasing bifurcation of consumers,” Brolick said.
He pointed out that price-conscious consumers still account for much of the traffic in quick service, even though a fair number of people have the capacity to pay more for a premium sandwich. The Flatbread Grilled Chicken sandwiches demonstrated that notion, Brolick said, pointing out that the limited-time offer drove sales of large chicken sandwiches to a nine-year high in the first quarter.
Yet despite a solid launch of the Flatbread line, loss of market share for the important price-conscious customer offset some of the sales growth Wendy’s built with the limited-time offer.
“We have lost share in the price-value arena, but basically have not had pressure against price-value messages since the launch of Right Price Right Size in January,” he said. “That’s why it’s apparent to us that this core group of 99-cent price shoppers, they’re heavy users often of quick-serve restaurants, and you need to continually remind them that you have products available for them every day, just because their economic situation necessitates that price point.”
Brolick stressed that the initial flight of advertising for Right Price Right Size in January produced a positive mix shift and a beneficial effect to restaurant-level margins for the first quarter. “That’s a significant point,” he said, “because remember, we moved from a situation when we had our My 99-cent menu, where we did not have a lot of continuity across the United States in terms of franchisee support.”
This time, he said, Wendy’s franchise operators are much more behind the system of six items being priced at 99 cents, with another eight items on the menu between $1.19 and $1.99. “What that’s done for us is it’s given our franchise partners some pricing flexibility on those eight items and got them more comfortable with having more continuity in terms of this decision,” Brolick said. “But again, we do feel the need to put more emphasis upon the pure-99-cent portion of this.”
Wendy’s operates or franchises more than 6,500 locations in the United States and 27 foreign markets.
Contact Mark Brandau at firstname.lastname@example.org.
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