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The Wendy’s turnaround story will not be complete until it can find ad advertising message that resonates with the consumer.

Today WEN is launching its biggest ad campaign in years with a focus on product quality and a new bacon cheeseburger meant to take on competitors’ premium burgers.  The tag line for the campaign is "You Know When It's Real" as it attempts to emphasize fresh ingredients and in-store preparation.

Thinking back to the initial success of the McDonald’s “I’m lovin it” slogan and Burger King’s rejuvenation of “The KING,” both advertising campaigns were critical in successfully driving incremental customers.  To date, Wendy’s has not benefited from the money it is spending on advertising and marketing.  For reference, Wendy's spent $305 million on ad time and space in the U.S. last year while McDonald's spent $820 million, according to TNS Media Intelligence.

Yesterday’s move in RT was interesting – the upgrade helped – but it’s over done.  For RT, the biggest red flag continues to be food costs.  Even with better reported sales than I was modeling for the quarter, food costs as % of sales were up nearly 300 bps with favorable YOY commodity costs!

RT’s company same-store sales were surprisingly good relative to the industry.  RT’s outperformance relative to Knapp Track grew to 4 points in Q1 versus 2.4% in 4Q09 (though softer prior year comparisons account for some of this outperformance).  RT’s traffic outperformance grew to 9-10% during the first quarter from 8-9% in Q4 so the company’s average check continues to be under increased pressure. 

Management addressed the issue of its lower average check and stated that it is focused on increasing its average check to the $12.50 to $14.50 range from its current mid-$11 range with some benefit expected as early as the second half of fiscal 2010.  Specifically, management thinks it will have some ability to take price in 2H.  The company is relying on this menu price increase combined with new products, changing menu mix with more appetizers and dinner items (dinner entrees have moved to 45% of sales from 25% last year) and reducing incentives as the company overlaps promotional efforts from January to help boost check going forward.  I was surprised by RT’s sales performance this quarter so the company could continue to surprise me but taking price in this environment without hurting traffic will prove difficult.  To that end, management stated on its earnings call, “I think what's most important is we want to drive traffic, it's most important to us right now and we will continue to drive positive traffic at whatever cost that represents.”  So despite the focus on average check, getting people in the restaurant continues to be the company’s primary focus.

Franchise same-store sales growth was weak in the quarter while SG&A was a little lower than I was modeling.  Contributing to the decline in SG&A were reduced advertising costs as marketing dollars were shifted from television to promotion and lower supervisory labor as RT increased the span of control for both regional and area supervisors.  RT increased its span of control about 6-9 months ago so the associated decline in SG&A was nothing new, but this type of cost savings initiative is concerning in the long-term as it often impacts the customer experience.





This habit is hard to kick!