Wendy's hikes prices: Here come falling sales

The fast-food chain can't live with dollar menu items, but perhaps it can't live without them either.

By InvestorPlace Jan 7, 2013 1:59PM

Image: Fastfood working copyright Creatas, PictureQuestBy Dan Burrows

iplogoThe fast-food industry has a dollar-menu addiction, one that's very bad for margins but almost impossible to give up because of how it juices sales.

So, don't be surprised if Wendy's (WEN) change to its value menu leads to a drop-off in revenue in the very near future. Worries about profit margins forced the chain to raise prices. But, as we've seen recently, messing with the dollar menu can be very bad for a fast-food chain's top-line results.

Wendy's said last week it was changing its value-menu offerings because selling stuff for only 99 cents was a money-loser amid rising costs for things like chicken, beef and cheese.

The fast-food chain known for square burgers and Frosty shakes is dumping its 99 cents value menu and launching a campaign called "Right Price Right Size," where items will range from 99 cents all the way up to $1.99.

That's all well and good for margins, but if McDonald's (MCD) recent experience is any guide, the price hike will punish sales none too soon.

Recall that back in October, McDonald's, the Dow component and world's biggest fast-food chain, posted its first monthly sales decline in nine years, largely because it futzed around with its own dollar menu.

The company blamed the shocking drop on pushing its so-called "Extra Value Menu" -- that is, trying to sell items priced higher than a dollar. McDonald's immediately reversed course, doubled-down on actual dollar-menu offerings and -- voila -- sales bounced back strongly the very next month.

Unfortunately for all concerned, the big players really have no choice but to have value-menu offerings. True, those foods may have little or no margin attached, but they pull traffic into restaurants, and then customers often buy other, more profitable items along with the 99-cent stuff.

Consumers, meanwhile, are as cost-conscious as they've ever been, meaning that if one chain has a dollar menu, all the others have to follow suit.

Competition among the fast-food companies has probably never been more intense. After all, they have never in their histories faced an economy this weak for this long or unemployment this high for this long. At the same time, the old-line outfits also face an onslaught from higher-quality upstarts like Chipotle Mexican Grill (CMG).

That puts Wendy's, in particular, in a very difficult position. It simply has to offer margin-killing value-menu items to keep customers coming in the doors, but at the same time it has almost no margin or profitability to speak off.

After all, Wendy's is coming off of two consecutive quarters of net losses, meaning it has a negative net profit margin. And there's little wonder how that came to pass, given how its profitability teeters on a very thin edge at the operational level. Indeed, the company's operating margin stands at just 6.6%.

McDonald's, by comparison, has an operating margin of 30% and a net profit margin of nearly 20%. Even struggling Burger King (BKW) has operating margins in excess of 20% and a net of more than 4%. Yum Brands (YUM), which owns Pizza Hut, KFC and Taco Bell, falls in the middle, with operating and net margins of 16% and 12%, respectively.

So, as an unprofitable chain with razor-thin margins, it seems Wendy's had no choice but to raise prices on its value menu. And the market certainly appeared to like the move, sending shares up more than 1% on the news.

But that reaction may be short-sighted and short-lived.

Wendy's revenue was forecast to grow just 3% to 4% in upcoming quarters. The company has almost no room for error in its margins -- but then it doesn't have much breathing space when it comes to top-line results, either.

As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.

More from InvestorPlace

Jan 8, 2013 3:26PM
Why are chicken sandwiches (remember the line about chicken being the cheapest meat) the most expensive thing on a menu now. really, 6=$6-$8 dollars for a breast fillet. Do they not realize people shop at supermarkets and see how cheap chicken breasts are?. ..89 cents for a decent sized fillet and so i must be paying close to  $7 bucks for a chain to fry it up for me. I guess i am paying for their electricity. Please help me figure how a chicken breast gets marked up 1000% when it hits a restaurant's cooler. And we all know that the chicken thy serve is sub-par grade B at best. Man, if i'm paying that much i want the Foghorn leghorn on my plate.
Jan 8, 2013 3:18PM
for years they've reaped profits from over priced products ad vengeance is ours. 100% mark up on sodas millions saved (kept) by not giving napkins/salt/pepper/ketchup.......
Jan 8, 2013 3:08PM
Wendy's lost my busness when they claimed $1 menue Frostie, WHICH WAS ALWAYS A DOLLAR,, only it shrunk 2 oz. and BOASTED AS A VALUE.
Jan 8, 2013 2:36PM
burger king & mcdonalds are the worst hamburgers. at least at wendy's i am getting some meat for my money. only thing good about mcdonalds is the breakfast sausage.
Jan 8, 2013 2:31PM
If ANYTHING hurts Wendy's bottom line in the coming weeks and months, it will NOT be so much their missing $1 Menu, as it will be backlash by progressives and Obama supporters, and those smart enough to realize that Obamacare will benefit average Americans, against the announcement by a Wendy's franchisee owner in Oklahoma, that he will be trimming back his employees hours to part-time to avoid having to comply with Obamacare directives on the 2014 horizon. Most of the restaurants announcing similar actions, so far, have found they have been targeted for blowback, in the form of organized boycotts by online activists. When are these CEO's and franchise owners going to learn to shut up and keep their politics to themselves? Being "out there" and "in your face" about Obamacare, abortion, same-sex partnerships and LGBT issues, employees rights of access to birth control coverage under their employer-provided healthcare plans, etc. OFFENDS roughly 1/2 or more of your customers, and your business WILL suffer the consequences of YOUR activism. Not very bright, and NOT a good business model! I plan on boycotting Wendy's!
Jan 8, 2013 2:01PM
Years ago, Wendys had the best fast food burgers. Now? Ground cardboard with old grease flavor added. Bio fuel bus exhaust smells better.
Jan 8, 2013 1:54PM
LOL more corporate greed.  I don't feel bad for all the franchisees out there as they choose to by in to a pyramid instead of starting their own brand.  Pay a fee to the top and all they have to do at the top is regulate the crapy food, advertise, they tell you what your food costs are, and provide a logo.  Advertising is dirt cheap when you have thousands of stores paying you.
Jan 8, 2013 1:51PM

their chicken sandwiches arent cheap but its a real chicken breast!

Way better than the competition

great side salads too ...........especially the caesar..................



Jan 8, 2013 1:35PM
$ 5.89 for a baconator sandwich, 7.99 for a combo meal, I can get a loaded sub sandwich for $5-6 from any number of places and be fuller on healthier food. If I'm spending $6 just for a burger, It better be awesome (and I haven't had a good/complete/correct/warm/fresh meal from Wendy's in a vary long time) Buh....     Buh.....    Buh-Bye!!!!!!!!!!!!
Jan 8, 2013 1:10PM
One of the problems is the quality of help they employ.  I loathe dealing with the person at the register as they always act as though I am bothering them. And god forbid I ask for no mayo on a burger, or anything else that constitutes a "special order." Using Chick-fil-a as a comparison, I am always willing to pay a little more for quality food with friendly, helpful people. "it's a great day at Chick-fil-a...thank and I look forward to serving you, my pleasure" paired with an actual smile from a friendly and well-groomed employee. That goes a long way. Generally I get a "hold on" from the Wendy's drive thru speaker box and maybe an "aight" after I complete my order, then I am "greeted" with someone who looks like they haven't showered. Your business is who you employ.
Jan 8, 2013 12:45PM
Wendy's has done it before. Dave Thomas would be pissed if he were still alive. I remember the "Biggie" was 99 cents. now its a small drink, a childs frosty. Jr. Bacon Cheeseburgers are like 1.50. The price never changed they just shrank the product. I remember getting 6 items off the 99 cent menu for 6 bucks and change. now its almost 9 bucks.
Jan 8, 2013 12:37PM
Wendy's is a bit better than McD. really, when it comes to eating, I would rather spend an extra dollar or two, and have something good. A fast "food" combo meal is about $7, for $9, I can eat in a real restaurant, with better service and quality. A couple places locally, I can be out of there for the same price.
Jan 8, 2013 12:01PM
I'll go to Wendy's if I'm forced to by circumstance, never go on purpose. Will NOT go to a McDonald's or Burger King - absolutely inedible.

If you look around you can find perfectly good alternatives. I work in a major eastern city where the price of things is usually a lot higher than elsewhere. But, there are places you can get decent food at a reasonable price.

For instance we have an asian market nearby, one of the places there sells a large Banh Mi (vietnamese) pork sandwich for $ 3.00.

 And we have a Japanese place that sells a Bento Box lunch - Salmon or Steak or Chicken, salad, fruit, rice, california roll, shu mi, and miso soup for $ 9.00. That's a real meal of excellent food for a little more than a full meal at the chain places.

Look around for a local diner or little hole in the wall place, you'll try some new food and it's got to be better for you than the stuff the big chains sell.

Jan 8, 2013 11:55AM
Jan 8, 2013 11:33AM
For the price of a "value" meal at any of the chains one can easily buy a loaf of bread, lunch meat, and a bag(s) of chips that will make you lunch for the whole week.  And you will be eating healthier at the same time.  If you want to treat yourself to a lunch or dinner then who cares about the dollar crap unless you want to eat 10 burgers.
Jan 8, 2013 11:30AM

Five Guys!

They don't have dollar menus but that's the only place I go to get a burger because they are the best!

Jan 8, 2013 11:23AM
The reason these restaurants don't make money.....they have so many people running them that don't have a clue about, #1- Hiring, Training, and Managing people to be efficient and productive.  #2- Have no idea haw to manage costs in the restaurant ----paper, food, maintenance, etc.  #3-The very people that are running these restaurants at store level are extremely underpaid, and the hourly employees don't even make near poverty level wages.  They are allowed to run these restaurants because of that reason, to keep employee labor percentages down and all the  while keeping morale down also. They need to train their existing  entry level management, on everything from making a sandwich to cleaning, to cost.  Give some real attainable goals to meet, reward them for reaching them.  Try to RETAIN their people.  Productive, knowledgeable people are the key to making a profit in these types of places.
Jan 8, 2013 11:20AM
I love the Wendy's menu and still prefer their food over any other fast food chain.  I would pay more.
Jan 8, 2013 11:14AM
i went to mcdonalds last week and got a big mac a fish fillet and a $1 iced tea and it came to $9.25 which i thought was a pretty bad deal. i could have had 2 mcdoubles and the iced tea for $3.18 and been just about as full for 1/3 the price.
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