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The Wendy’s Co (WEN): What Happened?

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Wendy's Co (NYSE:WEN)The Wendy’s Co (NASDAQ:WEN) is going through a makeover. It is not only modernizing is restaurants and changing its logo, but it is also coming out with premium menu options, like flat-bread sandwiches, that compete with those of fast-casual chains.

However, in its quest for becoming more upscale, is The Wendy’s Co (NASDAQ:WEN) turning away the regular value-oriented customers who constitute the main traffic in any fast-food chain?

First-quarter revenue missed expectations

Same-store sales increased 1% at the company-owned stores and 0.6% at franchised stores. The overall revenue was $603.7 million against the $615 million predicted by analysts polled by FactSet. Adjusted earnings of $0.03 matched expectations.

While the company attributed the soft revenue to bad weather and holiday timings, there are some underlying trends that are disturbing.

The number of transactions was actually lower than in the year-ago quarter. The same-store sales growth came from mix and pricing alone. Next, the company admits losing market share in the value-menu segment.

The importance of value menu

Overall trends suggest that people are less enthusiastic about value meals in general. In 2012 restaurant traffic based on deals fell 3% while non-deal based visits grew by 2% according to NPD. But there are few compelling facts that underline the importance of the value-menu concept for Quick Service Restaurants or QSRs.

Firstly, value items typically priced around $1 have become an integral part of the menu at QSRs. This has stopped being a special deal and has become something that people expect. So people are often disappointed if a chain does not have enough of these.

Secondly, chains like Chipotle Mexican Grill, Inc. (NYSE:CMG) and Panera Bread Co (NASDAQ:PNRA) have emerged to provide much better quality food, albeit at a premium. People who are willing to foot a higher restaurant bill are preferring these eateries more and more over regular QSRs.

Finally, there is the “barbell” strategy. This implies that while the chains would lure customers into their restaurants with value items, they would hope that people would occasionally order higher-priced items, which carry bigger margins.

Wendy’s not providing enough value?

Unlike other chains that have a straight dollar menu, The Wendy’s Co (NASDAQ:WEN) has a tiered “Right Price, Right Size” structure where items priced between $0.99 up to $1.99 are bunched together. The company had launched this around the beginning of the year.

The message that it wanted to send is that it is not just about inexpensive items. It sought to give its customers better than QSR-quality food at QSR-like prices.

The step was indeed in the right direction but where the company lagged was that it did not adequately emphasize its $0.99 items, which are the real crowd-pullers. Also, a lot of the $0.99 items were not consistently available.

No wonder The Wendy’s Co (NASDAQ:WEN) saw its market share slipping in this all-important segment.

It is not going to be easy

The good thing is that management has realized that the chain needs to strengthen its value-menu proposition. It has said that throughout the year it will emphasize its dollar menu in all its promotions. It will also consistently have six solid items at the $0.99 slot. This way it will try to get back some of its lost customers from rivals.

But the task is going to be anything but easy with both rivals McDonald’s Corporation (NYSE:MCD) and Burger King Worldwide Inc (NYSE:BKW) getting aggressive on the value side.

Dollar Menu is Big Mac’s mission of the year

When McDonald’s Corporation (NYSE:MCD) gets aggressive it becomes a raging war. Already in April, the company surged past analyst expectations by posting a positive 0.7% growth in same-store sales in the U.S. against the negative 0.5% that analysts had predicted.

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