Can value menu turn around Arby's?

Dollar choices are part of a strategy to win back cost-conscious consumers. But advertising and planned remodels will be expensive.

By InvestorPlace Apr 12, 2010 10:12AM

arby's value menu small dollarThough a bit behind rivals McDonald’s (MCD) and Burger King (BKC), Arby’s is at last rolling out a value menu of its own.


The restaurant is adding more lower-priced items to its menu including a small roast beef sandwich, curly fries and a Jamocha shake -- and operator Wendy’s/Arby’s Group (WEN) is backing them with an expensive new advertising campaign.

 

It’s part of a big push by the higher priced fast-food joint to woo back cost-conscious customers who fled the pricier restaurant for cheaper rivals during the recession. Since Arby’s ownership group Triarc bought the Wendy’s name in 2008, it has seen its Arby’s stores stuck in a downward spiral -- sped up by the recession.

But will this latest gambit help, or is Arby’s a dying chain?

 

Arby’s is certainly not pulling its own weight despite making up half of this stock’s name. In the first week of March, WEN reported that despite a narrower loss and a modest 0.5% bump up in revenue, same-store sales plummeted 11% at Arby’s locations.

After the Q4 numbers were released, executives vowed to expand Arby's value menu and remodel locations to woo back customers. The recent announcement of cheaper eats is half of the equation. But with 3,718 restaurants in the U.S.( by the company’s latest estimates) the remodel is going to be a very costly complement to this strategy. Post continues after video:

And lets not forget the marketing expenses to get the word out. Arby's is launching new ads  on Saturday Night Live, showing fans "sharing their stories about why they love Arby's food," as the company said in a press release. Those broadcast spots don’t come cheap. And besides, doesn’t McDonald’s already have the market saturated with claims of fast-food junkies who are “lovin’ it?”

 

Besides, the expense of domestic operations are preventing WEN from the really profitable markets overseas. Taco Bell has huge potential in India with its potato and paneer burritos. And Domino’s Pizza recently announced that global sales are now nearly half of its pie! WEN just can’t afford to miss out on opportunities like this if it wants to grow and thrive.

 

There’s no doubt that WEN needs to do something to stop the slow bleed at Arby’s. But this may be too little too late -- or rather, it may be too much too late as expenses mount. With one-time charges baked in, Wendy's/Arby's lost $13.6 million, or 3 cents a share, in the fourth quarter.

 

Granted, the company likely isn’t going to go bankrupt anytime soon. But shareholders should think twice if they think offering curly fries for a buck will solve all of Arby’s problems.

 

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