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Discounts hurt Wendy’s sales

The company’s stock price fell after same-store sales declined for the first time in years.
Photograph courtesy of The Wendy's Co.

Wendy’s customers increasingly opted for the chain’s value offers over its premium items, resulting in the burger chain’s first same-store sales decline in more than five years.

Same-store sales declined 0.2% in the quarter ended Sept. 30, ending 22 straight quarters of increases.

Wendy’s stock price declined 2% in morning trading Wednesday as a result, though it had been down as much as 5%.

“The opportunity we have is how not only to drive [customers] into the restaurants, but how to get them to mix in more core and premium items,” CEO Todd Penegor said on the company’s third quarter earnings call Wednesday. “We need to have that right balance between driving them in and trading them up.”

Wendy’s results are indicative of an increasingly competitive market, especially in a QSR burger space that is suddenly losing customers—either to other chains or to grocers.

Without providing details, Penegor said that Wendy’s lost market share on a sales basis to its fast-food burger competitors. Much of that was likely lost to McDonald’s, where same-store sales increased 2.4% in the U.S. Burger King, meanwhile, reported a 0.7% decline in same-store sales in the same period.

But Penegor said that the company gained share when it comes to traffic, suggesting that consumers are coming in, buying Wendy’s 4 for $4 value meal and skipping the premium items that cost more.

The company has shifted some of its marketing, with $1 any-size fries and a high-end S’Awesome Bacon Classic promotion, in a bid to improve menu mix and get customers to try more higher-priced items.

But, Penegor said, value remains important. And he remains concerned about the state of fast-food customers, many of whom are in households with incomes of $45,000 or less.

“The economy has a lot of great tailwinds,” Penegor said, noting a 10-year recovery, low unemployment and high consumer confidence. “But much of the income growth has been skewed to higher-income households. Workforce participation is still well below prerecession levels. Real wage growth is not accelerating to the level we hoped for. And rent and healthcare is eating into some of the headway they’re making.”

Development incentives

Wendy’s is doing more to encourage its operators to build new units. The company operates 6,669 locations worldwide, 5,791 of which are in the U.S., all but 350 of which are owned by franchisees.

Wendy’s wants those operators to build more units. So the company has increased the incentives it is giving to franchisees that sign development agreements and build new restaurants.

Those incentives will give operators breaks on royalty payments and advertising in the first two years—enabling operators to keep 6.5% of revenue that would otherwise go to the franchisor in the first year, and 6% the second year.

The company is also enabling operators to remodel locations under a simpler, cheaper remodeling option. Such “refresh light” remodels were previously available to operators with stores that generate $1.3 million in annual sales a year or less. Now that program is available to operators of all restaurants regardless of volume.

Penegor said that such remodels still generate sales lifts in the “low to mid-single digits.”

International pause

While Wendy’s is encouraging operators to build new units, it is re-evaluating its international growth, including the way it enters new markets.

Wendy’s recently named Abigail Pringle its global chief development officer and head of international as part of a shuffling of the company’s executive team.

“We really want to take another look at how we evaluate our approach to new market entry,” Penegor said. He noted that the company has “a lot of cash” after it sold its interest in Inspire Brands for $450 million. “As we explore those ways to stimulate growth, we see meaningful growth in the long run on the international business.”

Delivery and technology

Penegor said that Wendy’s has delivery in 50% of its system and continues to add more locations through DoorDash.

The two companies are marketing the service more often, offering free delivery promotions to boost sales and advertising delivery on television. Penegor said that promotions in the quarter led to a “significant increase in delivery sales” over the second quarter.

And he said that delivery sales “are sustaining at the higher levels post-promotion.”

Wendy’s also used an offer to drive more usage of its mobile app and had a successful rollout of mobile ordering.

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