WEN – MOVING OUT OF THE SHADOWS

This week was a big week for the people at Wendy’s International, Inc.! Since 2005, the Wendy’s management team has been on a very long road of asset rationalization and speculation about the future of the company and the brand. The disruption that this has caused to the Wendy’s system has been substantial as franchisees and employees are constantly worried about their personal being and not focused on running the business. Basically, there has been no brand TLC and no new products.

The new CEO, Roland Smith, must get the organization to refocus on the Wendy’s brand. Also to the degree that Arby’s will not be lost in a corporation that did not have the focus of a pure restaurant company, it should perform better too. Roland Smith needs to get the brands off the treadmill of sameness, and provide consumers a reason to eat at Wendy’s and Arby’s.

It’s important to remember that the restaurant industry is a zero sum game. It’s not a coincidence that the mismanagement of the Wendy’s brand has coincided with outsized gains in same-store sales (market share) for both McDonald’s and Burger King. Clearly, part of the success of McDonald’s and Burger King has come on the heels of better advertising, new products and the demise of casual dining. Prior to 2004, when McDonald’s was in shambles, Wendy’s was a clear beneficiary of incremental market share. It’s a cycle that has been repeated many times in the restaurant industry. I’m betting that history repeats itself again.

The new organizational structure allows each business to be dedicated to building each brand independently, an important first step. The new vision for the organization will focus around the slogan, “Serving Fresh Ideas Daily.” According to management, the “Wendy’s/Arby’s Group, Inc. is committed to driving [its] business through fresh, innovative ideas, fresh, high quality food and a fresh, responsive approach to [its] changing business needs.”

At both brands management must be focused on taking aggressive actions to grow customer traffic, but not at the expense of margins. Currently, WEN is promoting three items at $0.99 that appears to be gaining traction in certain markets. This initiative is short sighted and will not have staying power. Over the long term, the focus should be on upgrading the breakfast offering, offering new products and providing a stronger, more relevant marketing campaign. To that end, the company has said that it plans to reformulate its coffee and retool morning-meal products; new marketing will emphasize the quality of the food.

Management has also stated that it is now focused on customers between the ages of 24 and 49. Looking at the changes in the demographic patters in the U.S., the focus on older customers could be rewarding. The trends for the 18-24 age group over the next 10 years don’t look good (please refer to my August 11 post titled “Young Adult Per Capita Meal & Snack Occasions are Declining”). Additionally, MCD and BKC are already slugging it out for that customer base.

At this point in time, I believe the franchisees system is rallying the troops behind Roland Smith and his management team. Everybody involved inside and outside the company knows there is really only one way to get the stock higher; bring back the customers!