Wendy's International Inc. (NYSE: WEN) is one of the world's largest restaurant operating and franchising companies, with over 6300 Wendy's franchises in North America and over 300 franchises abroad. Currently Wendy's owns a 14% market share of the fast food, or Quick Service Restaurant (QSR) market.
By increasing the diversity of its menu with these alternatives to traditional fast food items Wendy's hopes to reach a wider range of customers. In line with recent industry trends, Wendy's is moving toward a menu with increased variety and more healthy menu choices. Wendy's is hoping to gain market share by introducing a breakfast menu this year, something that its two major competitors, McDonald's and Burger King, already have firmly set in their own restaurants.
Wendy's has other challenges to face in the QSR industry. To stay competitive and increase profits Wendy's must reduce its operating costs, specifically its beef costs which are relatively high. Also, Wendy's must continue to increase its same store sales growth in order to compete with market leaders McDonald's and Burger King.
Wendy's Old Fashioned Hamburgers was founded in 1969 in Columbus, Ohio by Dave Thomas. Since 1969 Wendy's International Inc. has become one of the largest restaurant operating and franchising companies in the world. There are over 6700 Wendy's Old Fashioned Hamburgers restaurants in operation today across the world. In addition to Wendy's Old Fashioned Hamburgers, Wendy's is invested in the Cafe Express and Pasta Pomodoro restaurant chains, owning 70% and 29% of those chains, respectively. Until 2006 Wendy's International Inc. also owned the Tim Hortons and Baja Fresh franchises.
Over the past several years fast-food restaurants have been criticized for being a major factor in America's increasing obesity. In order to counter these critics, many fast-food chains have adopted healthier menu items and made changes to their pre-existing items. Wendy's is moving in line with the QSR industry and is working to offer healthy food choices. Wendy's has added sandwiches and salads to its menu, and offers side dish substitutes for french fries. If Wendy's is able to increase the perceived nutritional value of their food, Wendy's could increase sales to health-conscious customers.
As the full name of the Wendy's chain, Wendy's Old Fashioned Hamburgers, suggests, a very large part of Wendy's business is hamburgers. Consequently, the beef that those hamburgers are made is one of Wendy's biggest costs. It is estimated by major investment banks that Wendy's purchases approximately 17-20 million pounds each financial quarter.
If beef prices were to unexpectedly fall, Wendy's and other burger chains could significantly reduce their costs. Factors such as droughts can cause such changes: if a large drought occurs in June it can dry up farm pastures. Without enough usable pastures, cattle-raisers might slaughter cows ahead of schedule, increasing the amount of available beef and consequently decreasing its price.
Wendy's uses fresh beef for its hamburgers rather than frozen beef, and thus must buy its beef no more than seven days in advance. Wendy's is unable to take full advantage of drops in the price of beef through stockpiling and is consequently more sensitive to changes in the price of beef. However, Wendy's can lock in beef prices on a quarterly basis, which somewhat ameliorates its sensitivity to price changes.
As a member of the food service industry, Wendy's is vulnerable to being adversely affected by health scares such as outbreaks of E. coli or mad cow disease. Mad cow disease (scientifically termed bovine spongiform encephalopathy, or BSE) is a fatal neurodegenerative disease found in cattle. Reports of BSE transmission to humans via consumption of beef began to appear in 2003, prompting a health scare that caused many consumers to avoid beef.
Other health scares could negatively affect Wendy's as well, such as outbreaks of illness from the bacteria E. coli. In the fall of 2006 an outbreak of E. coli was traced to Taco Bell chains in New Jersey. Taco Bell's parent company has estimated that it lost $20 million in operating profit in the fourth quarter of 2006 due to the E. coli outbreak (out of a total operating profit of $1.26 billion in all of 2006). In addition to the loss of profit, Taco Bell's same store sales decreased 5% in the fourth quarter, a trend that Taco Bell is still trying to reverse.
Breakfast is a large component of sales for the fast-food industry, with long-time offerings from McDonald's and Burger King. McDonald's breakfast sales comprise 30% of its total restaurant sales. Wendy's has recently re-entered the breakfast market after a 20-year hiatus. The breakfast menu will rolled out across its franchises over the next few years, starting with selected markets in the US. If Wendy's can successfully take over a significant share of the fast-food breakfast market, it will augment revenue substantially as well as increase the strength and awareness of the Wendy's brand.
Costs associated with labor is a major factor in the success of any business. Wendy's labor costs include upper management, but the bulk of Wendy's employees are the workers at individual restaurants. In order to cut back on labor costs, Wendy's has decided to reduce the average number of managers per restaurant from 3.6 to 3.3 by June of 2007. Wendy's expects that this will not only decrease labor costs but also enhance efficiency at individual restaurants as they have found that a high number of managers can result in division of responsibility and confusion. In 2006 Wendy's total operating costs were approximately $2 billion while total revenue was about $2.4 billion, leaving a profit of approximately $430 million. If Wendy's labor cost reduction initiative can successfully decrease labor costs without negatively impacting revenues, Wendy's could see a substantial increase in total profits.
Same Store Sales are defined as the increase or decrease in sales for stores that have been in operation for one year or more. Same store sales is a measure of performance used in many industries, and are a measure of how well a brand is performing over an extended period of time. Wendy's has struggled with same store sales over the past few years but recently has been exhibiting 3-4% growth same store sales.
Below is a graph depicting the same store sales for Wendy's since 2001. When looking at the graph, remember that the numbers refer to the change in same store sales, not actual store sales. For example in 2005 Wendy's had same store sales of -3.7%, this means that stores that have been in operation for at least one year had a decrease in sales of 3.7% from the year before.
Wendy's faces stiff competition in the QSR industry, as McDonald's holds a dominanting 45% share of the market with Wendy's and Burger King holding shares of approximately 14% each. In recent years Wendy's has been lagging behind McDonald's and Burger King in same store sales growth, an indicator of how established franchises are faring.
Note: Parenthesis denote negative values.
1. Wendy's new labor reduction initiative will cut down on operating costs and substantially increase profits.
2. Wendy's will successfully incorporate breakfast into its menus across the country and take over a considerable share of the QSR breakfast market.
3. A push to increase same store sales will help Wendy's generate more revenue from existing stores and increase profits.
1. Wendy's will fail upon entering the QSR breakfast market because stores such as McDonald's and Dunkin Donuts already have a tight hold on the market.
2. Wendy's reliance on fresh beef leaves it more vulnerable to fluctuations in beef prices.
3. Wendy's main product is hamburgers and if another mad cow disease scare was to take place, Wendy's sales could be considerably damaged.
11/28/2006 - 12/4/06: Wendy's announces completion of sale of Baja Fresh restaurants.
04/17/2006 - 04/19/06: Wendy's elects Kerri B. Anderson as interim CEO and President of Wendy's. On the same day James V. Pickett was elected as Chairman of the Board of Directors after sitting on the board for many years.