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Why Wendy’s believes this breakfast attempt will work

The company says that it can quickly generate up to 10% of its sales via the morning daypart. RB’s The Bottom Line examines how.
Wendy's menu
Photograph courtesy of Wendy's

the bottom line

Wendy’s insists that its breakfast will work. And this time, they mean it.

The Dublin, Ohio-based burger chain believes that it will work really well, quickly ramping up to a $1 billion U.S. business, representing about 10% of the chain’s sales.

What’s more, executives argued that it would not take away from existing business, that it could generate these sales even in the face of an expected response from competitors such as McDonald’s, and that operators would make a lot of money in the process.

All of that is a remarkable amount of bullishness for a company that has tried and failed to add breakfast to its menu three times dating back several decades.

“We’re absolutely confident this is going to work,” CEO Todd Penegor said Friday in a presentation to investors that represented the company’s first public comments since its breakfast announcement in September.

Kurt Kane, president of Wendy’s U.S. market, did acknowledge “the elephant in the room”: its failed prior efforts to build a breakfast business.

He said that previous efforts were too costly and complicated. Equipment cost $10,000 per store. It was also more difficult to operate and involved higher food and labor costs. In addition, previous efforts were added region by region rather than nationwide.

“We didn’t have scale behind it,” Kane said. That scale will give the company the ability to advertise breakfast nationwide, rather than depend on regional marketing that it had done before.

In addition, Kane said the company brought its franchisees along for the planning phase. The company selected a group of franchisees to help ensure that the breakfast rollout would work for the entire system.

Franchisees operate 95% of Wendy’s U.S. restaurants. Their willingness to add breakfast is vital to the daypart’s success.

The company said its new breakfast is focused on drive-thru customers, rather than dine-in customers. Takeout is a major consideration in the morning as many consumers get their breakfast on the way to work.

It will also have fewer unique ingredients—18, versus as many as 45 in previous versions. And operators will be able to serve the daypart with as few as three employees., and won’t be required to buy any new equipment.

The biggest difference, however, is in the scale. The company is going nationwide right away and will advertise the daypart heavily.

Company executives believe that will help build sales quickly. “We’ll put full media power behind the breakfast daypart,” Kane said.

Wendy’s developed its own coffee blend, rather than license another brand’s coffee. That’s an important consideration in the morning. And it is using many of its existing products—the Breakfast Baconator sandwich is expected to be a key component. And the company is developing iced “Frosty-ccino” beverages that could work all day.

Most of the new menu is sandwich-focused for takeout customers.

The combination of all of those efforts will help the daypart “quickly grow to at least 10% of the total day for our business.” Wendy’s generated $9.4 billion in system sales last year. Assuming continued overall growth, that would soon make Wendy’s breakfast a $1 billion overall business.

To be sure, the addition of another major daypart frequently takes a modest amount of business from other parts of the day—essentially meaning that it cannibalizes existing business.

Kane said tests at 300 locations this year haven’t resulted in any loss in business outside of breakfast. “We haven’t been seeing cannibalization,” he said, noting that customers are “in the rotation more frequently” when it adds the morning daypart.

Executives also said they avoided serving breakfast all day, like McDonald’s, to ensure that the daypart is easy to get into from the get-go and to avoid one problem with past efforts: trying to do too much at once.

“One of the lessons in the past was, in trying to be all things to all people, we loaded breakfast in a way that kept us from getting into the daypart at all,” Kane said.

For Wendy’s, the calculation behind its decision to get into breakfast again is relatively simple: The daypart is growing overall, while lunch and dinner are not.

Still, the company will face a lot of competition. As it is, Burger King wants to grow its own breakfast business. And the market’s 500-pound gorilla, McDonald’s, hasn’t exactly been sitting on its hands. The company has focused intently on getting its morning daypart growing again after more than a year in decline.

Wendy’s thinks it’ll generate sales, anyway, and the company projected strong overall sales growth next year based on its breakfast. “We expect a significant competitive response,” Kane said, noting that it built its model based on that expected response.

“We should be able to get there relatively quickly.”

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