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Forbes  Sep 27  Comment 
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Forbes  Sep 13  Comment 
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Both chains are trying to find the next big novelty hit.


Wendy's was acquired by Triarc Companies (TRY) in April 2008.

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) industry, far behind McDonald's 45% market share.

Wendy's hopes to reach a wider range of customers by increasing the diversity of its menu with alternatives to traditional fast food items like hamburgers and fries. 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 McDonald's and Burger King already have established in their own restaurants.

Wendy's has other challenges to face in the QSR industry. The company is suffering from a surge in raw foods costs which have consistently eaten into to profit margins over the past few quarters. In April 2008, amid a deterioration in its operations on the back of intense competition and rising costs, Wendy's announced a definitive agreement to merger with Nelson Peltz' Triarc Companies (TRY) in a deal valued at $2.4B. The combined company will have approximately 10,000 restaurant units and pro forma annual system sales of approximately $12.5 billion. This would make the company the nation's third largest quick service restaurant company.

Business Overview

Wendy's Old Fashioned Tony is an ass 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. Wendy's franchises the majority of its restaurants. A franchisee, usually a local entrepreneur, requests permission from the Corporation in order to open a Wendy’s restaurant. The Corporation’s franchising agreement requires the franchisee to provide the initial capital for equipment, signs, seating and decorations. Meanwhile, the Corporation owns or obtains long-term leases for the building of the restaurant and the land. These franchises generate revenue for the Corporation through payment of rent, royalties based on sales, and initial fees. The Corporation then avoids having to invest a significant amount of capital in its restaurants.

Wendy's ended 2007 with just under 6000 Wendy's Old Fashioned Hamburgers restaurants in operation. Of these, 1,274 (21%) were company owned and operated while the remaining 4,662 restaurants were franchised. 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.

Same Store Sales

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 many store sales over the past few years in the face of an increasing aversion to "unhealthy" fast food and stiff competition from rivals such as McDonald's and Burger King.

Below is a graph depicting the amount that its 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.

Trends and Forces

Targeting the Healthy Consumer

To read a more detailed discussion of consumer health trends and how they affect the fast-food industry, see also Healthier Food Consumption.

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.

Raw Material Costs

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 of 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 battle with volatile beef costs is further complicated by the fact that the company uses fresh beef in its food offerings. In other words, Wendy's buys its beef no more than seven days in advance. Therefore, 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.

In addition to rising beef costs, Wendy's is heavily dependent on a wide array of agricultural commodities such as corn, wheat and dairy. Over the past few years, the prices of these commodities have increased drastically on the back on growing global demand. Because the QSR industry is so competitive, Wendy's is reluctant to pass these costs along to its customers for fear of losing market share. As a result, increasing costs have taken a bite out of Wendy's operating margins. A sustained increase in agricultural commodity prices will continue to do so.

Health scares

For a more detailed discussion of health scares and how they impacts the food industry, see also Health scares

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.

Introducing Breakfast

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 be 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 its brand.

Reducing Labor Costs

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 2007 Wendy's total operating costs were approximately $2.29 billion while total revenue was about $2.45 billion, leaving a slim operating income of approximately $156 million. If Wendy's labor cost reduction initiative can successfully decrease labor costs without negatively impacting revenues, Wendy's could see a substantial increase margins and operating profits.


Wendy's faces stiff competition in the overall fast food industry, as McDonald's holds a dominating 17% share of the market with Wendy's and Burger King holding shares of approximately 2% each. In recent years Wendy's has been lagging behind McDonald's Burger King in same store sales growth, an indicator of how established franchises are faring. In addition to traditional hamburger-based fast food restaurants, Wendy's must compete with chains such as Subway, Yum! Brands (YUM) and Jack In The Box (JBX).


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