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Wendy’s Ponders ‘Appropriate’ Pricing

Filed under Burger, Pricing, Quarterly Call

Emil Brolick, who retired as Wendy’s CEO in May, used to give wonderful, thoughtful mini-lectures on industry issues occasionally during earnings calls. In February, I called his report a “QSR Tutorial.” I’m pleased that his successor, Todd A. Penegor, is maintaining that style.

Wendy’s Q2 reported included weak same-store sales—0.4%–but some gains, including a boost in company-store margins to 21.9%. But unlike several other QSRs that have reported tepid comps sales due to a decline in customer traffic, Wendy’s reported that comps were mildly positive “primarily due to an increase in customer count, partially offset by a slight decrease in our average per customer check amount, primarily resulting from changes in product mix.”

It’s tempting to assume that that “mix” shift points to the “4 for $4” deal as the culprit. Consumers traded down, right? Some, but Penagor shared some interesting rumnations on pricing, suggesting that the failure of higher-price LTOs such as the return of the Jalapeňo Fresco Spicy Chicken caused an imbalance. Penagor said Wendy’s needs to find to regain that pricing balance.

“If we look at the second quarter specifically, the 4 for $4 continued to perform well for us and it’s mixing as we would have anticipated within the quarter, especially as we brought some news with the Crispy Chicken BLT to continue to keep 4 for $4 fresh and ownable,” he told analysts. “Quite honestly, we were LTO heavy in Q2 with the Jalapeño Fresco Chicken Sandwich, the Ghost Pepper Fries, and the Mozzarella cheeseburgers, and these LTOs did not perform to our expectations. So, we had some prior priced items at a time when the consumer was skittish.”

Wendys 4 for 4.Jalapeno

As others have concluded, Penagor says the gap between food-at-home and food-away-from-home pricing is a critical factor. For the 12 months ended in June 2016, at-home prices declined by 1.3% while foodservice prices were up 2.6%. Penegor used a chart to show the impact.

Wendy's QSR Chart“This chart shows year-over-year traffic changes in the QSR industry going back to the beginning of last year. As you can see, traffic trends were improving throughout 2015, but in Q1 of this year, the trend reversed course and Q2 saw the downward trend continue,” he said. “We believe there are multiple drivers behind the recent slowdown, but the most notable reason appears to be the continued gap between the cost of eating at home and the cost of dining out, which is now at its widest point since the recession. While the recent shift in traffic trends is not favorable, we view this as a bump in the road when looking at the QSR industry’s long-term potential.

“QSR has consistently grown traffic share over the past 10 years, gaining over four share points in that time. This strong track record is driven by hitting on the three key components consumers look for when dining out: taste, convenience and affordability. Across the broader restaurant industry, QSR continues to win with consumers and this is why we are so confident that this segment of the restaurant industry is well positioned to succeed. We truly believe that Wendy’s offers a differentiated experience and is uniquely positioned to win by offering a new QSR experience at traditional QSR prices.”

Later he told an analyst who asked about the at-home/away-from-home gap, “When a consumer is a little uncertain around their future and really trying to figure out what this election cycle really means to them, they’re not as apt to spend as freely as they might have even just a couple of quarters ago. And it’s at a time where we’re still not seeing real wage growth, but we are seeing some of the cost of living move up when you get into what does it cost to own an home and operate your life in general. And there is a little bit of tightening on the disposable income, especially on the low-end. And that’s why it’s so important to make sure that you really have a balanced menu, you have some compelling value offerings, but you also delight every customer through some things with great food on your core and on your premium menu.”

Value, Penegor stressed, is giving customers a product at a price they think is fair. He said Wendy’s is looking at that closely. “What we need to do is make sure that the customer feels that our core and LTO items are appropriately priced for the value that we’re providing, and that’s not just what you put into the food, but that’s what you create as the total customer experience to make sure they feel good, that it’s worth what they pay.”

Wendy’s will return to telling “its unique brand story” about fresh, never-frozen beef and fresh ingredients in advertising, he said, beginning with the current revival of the Baconator and Baconator Fries.

Baconator & Baconator Fries

One Response to Wendy’s Ponders ‘Appropriate’ Pricing

  1. Wayne

    Sigh, I dislike the baconator, too much meat and little else. I miss the old Big Bacon Classic, that was a good one.