DUBLIN OHIO —“The beginning of the problem really was when Gordon Teter died.”
So says restaurant securities analyst Joe Buckley of Bear Stearns in New York, referring to the late Wendy’s International Inc. chief executive. After Teter’s passing in 1999, followed by Wendy’s founder Dave Thomas’ death in 2002, Wendy’s found itself adrift, Buckley said, lacking focus, struggling under the weight of a flurry of fast-casual chain acquisitions and lost without Thomas, its most successful product pitchman. —“The beginning of the problem really was when Gordon Teter died.”
“The new management team [led by Jack Schuessler] didn’t believe fast food had a bright enough future and started investing in fast-casual brands,” Buckley said. “That was really the beginning of the problem, not just because Baja Fresh [Mexican Grill] was a disaster, but because it distracted management.” —“The beginning of the problem really was when Gordon Teter died.”
Today, Wendy’s, with 6,600 units worldwide, still is struggling to regain the footing it had during its heyday in the 1990s. Even in the current environment, where quick-service brands are reaping the benefits of consumers’ trading down from higher-priced restaurant fare and their desire for value and convenience, Wendy’s is one of the few fast-food brands posting negative to slightly positive same-store sales rather than the high-single-digit figures being reported by such chains as McDonald’s, Burger King and Jack in the Box. —“The beginning of the problem really was when Gordon Teter died.”
Sources in the advertising world say Wendy’s has yet to find a marketing messenger as engaging as Thomas, who spoke of the chain’s premium ingredients and offerings for 13 years starting in 1989. The jury is still out as to the effectiveness of Wendy’s current “Red Wig” campaign, which recalls the red pigtails of Thomas’ daughter and logo symbol Wendy while focusing on the brand’s “fresh, never frozen” beef. From a financial standpoint, observers say, Wendy’s is bobbing in the waters, still undergoing a board-sanctioned “strategic review” that began last April. The outcome is uncertain, and only one bidder, Nelson Peltz’s Triarc Cos., parent to the Arby’s brand, has confirmed a buyout offer for the No. 3 burger brand. —“The beginning of the problem really was when Gordon Teter died.”
Wendy’s has always said the review wasn’t focused only on a possible sale, but could also result in a large recapitalization or other internal move. The company, however, has yet to offer any comment on the progress of the board’s review. All options grow even more uncertain, sources contend, because of the still-tightened credit markets. —“The beginning of the problem really was when Gordon Teter died.”
Wendy’s isn’t blind to its struggles. —“The beginning of the problem really was when Gordon Teter died.”
“This is an extremely important time in Wendy’s history,” the company said in a statement to Nation’s Restaurant News, “and our leadership team is fully committed to protecting and growing this great brand for the long term.” —“The beginning of the problem really was when Gordon Teter died.”
The question remains, though: How did Wendy’s, a brand that in the past placed first in consumer surveys and once owned the lucrative Tim Hortons chain among four other diversified holdings, and had a market capitalization of more than $3 billion, fall so far so fast? Today, Wendy’s only noncore holding is a 29-percent stake in Pasta Pomodoro, a full-service Italian chain based in San Francisco, and the company’s market capitalization is about $2 billion. —“The beginning of the problem really was when Gordon Teter died.”
Numerous sources said it was the result of an almost-perfect storm comprised of a management team that lost focus, the reawakening of competitor McDonald’s after years of difficulty, and the pressure from activist investors who recognized Wendy’s struggles and demanded change. —“The beginning of the problem really was when Gordon Teter died.”
“Years ago, Wendy’s was way up there in terms of consumer loyalty,” said Robert Passikoff, founder and president of Brand Keys, a New York-based brand and customer engagement consulting firm. “First, the trend in quick service was quality, and [Wendy’s] was kicking the heck out of everyone. Second, it was Dave [Thomas]. He was a very comfortable fit with the audience.” —“The beginning of the problem really was when Gordon Teter died.”
But times change, Passikoff said, and after years of placing first in brand studies starting in 1997, Wendy’s currently places behind Subway, McDonald’s, Quiznos, Burger King and KFC. —“The beginning of the problem really was when Gordon Teter died.”
“Part of it was that Dave passed away and some of it was that Wendy’s lost its way,” Passikoff said. “They went with a choice strategy that says customers can have what they want…but you tell me where you can’t get that. The message is not engaging.” —“The beginning of the problem really was when Gordon Teter died.”
At the very time that Wendy’s allegedly “lost its way,” segment leader McDonald’s was reinventing itself after years of slowed sales, slipping customer satisfaction and a lack of menu innovation. The Oak Brook, Ill.-based chain started to develop salads and chicken sandwiches, and it focused on speed of service, customer service and cleanliness, all of which were Wendy’s long-time strengths, said analyst Buckley. —“The beginning of the problem really was when Gordon Teter died.”
“You could argue that McDonald’s actually stole pages out of Wendy’s playbook,” he said. —“The beginning of the problem really was when Gordon Teter died.”
Finally, the activist investors showed up. Investors William Ackman of Pershing Square and Peltz, who invested in Wendy’s through his Trian Fund Management hedge fund, publicly called on the beleaguered company to improve shareholder returns through the spinoff of Wendy’s most profitable holding, Tim Hortons. —“The beginning of the problem really was when Gordon Teter died.”
Wendy’s purchased Tim Hortons, a Canadian coffee and doughnut concept, in 1995 for about $400 million. The move was seen by many as the most successful acquisition in restaurant industry history. Ackman and Peltz, among others, saw the hidden value of Tim Hortons and demanded a spinoff of the brand to benefit Wendy’s shareholders. —“The beginning of the problem really was when Gordon Teter died.”
After a long battle, during which Peltz gained three board seats at Wendy’s and Schuessler was asked to resign, Tim Hortons, which represented about 32 percent of corporate revenues in fiscal year 2005 and about 58 percent of operating income, was divested in 2006 through a partial public spinoff. The transaction netted Wendy’s about $716 million, and a special shareholder dividend netted Wendy’s shareholders a bit more than 1.35 shares of Tim Hortons stock for each Wendy’s share held. The deal represented about $4 billion in equity. —“The beginning of the problem really was when Gordon Teter died.”
“By the time the activists surfaced, Wendy’s was already in a bad spot,” Buckley said. “That’s why they surfaced, and the Tim Hortons divestiture was the right move. Everyone saw that.” —“The beginning of the problem really was when Gordon Teter died.”
Still, the spinoff removed the curtain that had covered up all of Wendy’s troubles. The company, with one core brand and agreements to sell the others—even at a loss, as seen when Baja Fresh was sold in 2006 for $31 million four years after it was purchased by Wendy’s for $275 million—became a buyout target. Peltz, with his large holding in Wendy’s and his history with the chain, became the most likely buyer, many said. —“The beginning of the problem really was when Gordon Teter died.”
But many franchisees have said that they do not view a Wendy’s under the arm of Peltz as a positive development. —“The beginning of the problem really was when Gordon Teter died.”
Gene Carlisle, chief executive of Carlisle Corp., a franchise company with about 100 Wendy’s in Mississippi, Arkansas, Louisiana and North Carolina, has said in the past that he wasn’t convinced Peltz’s gang was right for the Wendy’s system. —“The beginning of the problem really was when Gordon Teter died.”
“I think they have good intentions,” he said. “At the same time, I don’t know them.” —“The beginning of the problem really was when Gordon Teter died.”
He continued: “I think what they saw is that senior managers could operate more effectively and efficiently with a focus on [the Wendy’s] brand only, and I’m OK with that. I would not be OK with Wendy’s being taken over.” —“The beginning of the problem really was when Gordon Teter died.”
Franchisees have banded together to push management to further communicate with restaurant operators when it comes to Wendy’s strategic review. In a September 2007 letter to Wendy’s board, a franchisee group representing more than 1,000 units said it had “watched with mounting concern the slow decline of [the Wendy’s] brand due to mismanagement and an apparent lack of concern or oversight by the board of directors.” —“The beginning of the problem really was when Gordon Teter died.”
“As a result of this decline,” the group wrote, “the company has become vulnerable and is now up for sale.” —“The beginning of the problem really was when Gordon Teter died.”
In response, Wendy’s has released a flurry of both internal and public documents stating management’s commitment to the Wendy’s brand, its franchisees and all employees. —“The beginning of the problem really was when Gordon Teter died.”
“We’ve made significant progress in the past 12 months,” Wendy’s chief executive Kerrii Anderson said in an October 2007 statement. “The foundation of our business is stronger today thanks to the performance of our restaurant crews, operators, franchisees, and field and corporate employees.… That said…we have much more to accomplish.” —“The beginning of the problem really was when Gordon Teter died.”
Most recently, Wendy’s said it had “exciting plans” for this year aimed at driving unit-level performance and meeting customer needs. The company said it would focus on its “core” menu offerings of burgers and chicken sandwiches. To that end, Wendy’s pulled its line of Frescata deli sandwiches at the end of December. The Frescata sandwiches, when first introduced in April 2006, helped boost traffic enough to push Wendy’s to a positive same-store sales result in May 2006, the first such uptick in more than a year at the time. Recently, however, the company said the product had simply run its course. —“The beginning of the problem really was when Gordon Teter died.”
Wendy’s said it would instead push new products, such as the Stack Attack, a 99-cent double cheeseburger which focuses on value. Meanwhile, other sandwiches, such as the Jalapeño Cheddar Double Melt, will attempt to meet consumer demand for premium quick-service menu items. The company also said it would push its breakfast offerings and beverage items, and focus on the snack and late-night dayparts. —“The beginning of the problem really was when Gordon Teter died.”
Analysts are divided on whether this dual focus on value and premium offerings, which has been successful at chains like McDonald’s, Carl’s Jr. and Hardee’s, will be a winning combination for Wendy’s, considering it is playing catch-up with the competition. —“The beginning of the problem really was when Gordon Teter died.”
John Ivankoe at J.P. Morgan Securities Inc. said he doesn’t see Wendy’s efforts “driving marked same-store sales improvement.” —“The beginning of the problem really was when Gordon Teter died.”
“Despite increased marketing and new products, Wendy’s is losing relevance relative to competition,” he said. —“The beginning of the problem really was when Gordon Teter died.”
Still, Jeff Omohundro at Wachovia Capital Markets LLC said in a recent report that Wendy’s current promotions “may represent an effective marketing strategy…that could potentially benefit sales and traffic in coming periods.” —“The beginning of the problem really was when Gordon Teter died.”
“It will be just basic blocking and tackling at this point,” analyst Buckley said of Wendy’s possible turnaround. “It will be a slow go.” —“The beginning of the problem really was when Gordon Teter died.”