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.


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134Comments
Jun 10, 2013 1:33PM
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I can go to Jasons Deli for the same price as fast food chains.
Jan 8, 2013 8:39PM
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The fast food market here in the U.S. is facing a bit of a glut if you ask me.  There are simply far too many food joints chasing a shrinking market that is scattered across many different brands.  The larger ones like McDonalds, and some of the Yum Brand outlets are able to spread their loses across a much larger market that is strategically placed in many countries around the globe. 

 

I Don't believe that Wendy's has been that aggressive in developing their foreign markets.  Consequently they have to rely on a very weak and diffused customer base here in the U.S.  The dollar menu items have become a kind of staple as a lost leader for fast food establishments.  Now they are having to sacrifice most of that just to try and stay viable.  That is not a good sign.

 

I like Wendy's.  Their food quality is generally quite good when compared to most other typical burger joints.  However their prices have driven me away.  When I am in the market for a burger  I head for Checkers/Rally's.  A Big Bufford and some spicy fries and that pretty much does it for me.  When I am really in a hurry and need cheap eats I hit places like Circle K and have two brats and a small juice.  Fast, cheap, and filling. 

 

Actually I have to laugh when I do happen to patronize McDonalds because it is usually anything but fast.  I have to stand in a line of 20 to 30 squirming antsie teenagers just to get a burger, fries, and a coke.  Typically it takes me 30 minutes or more just to get my chow.  The brats at Circle K are bought and consumed in that same timer frame.  So fast food it is not.  LOL 

 

 

Jan 8, 2013 8:18PM
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it seems that Wendy's need a fresh innovative approach to finding out what the public wants; and what the company needs, while bringing these two together may be challenging , the rewards will keep the company floating. creating a new menu, that's exciting and new, takes some hard work ; but hard work never lacked payoff   

 

 

 

 

 jasper young exec-director operation help .

Jan 8, 2013 8:06PM
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why do people eat this garbage anyhow show some respect for yourself
Jan 8, 2013 7:47PM
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I hear Clara Peller bellowing from the hereafter, "WHERE'S THE BEEF?"
Jan 8, 2013 6:32PM
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In three years their double stack burger has gone up nearly 90%.   That's 30% a year for inflation.

Sorry, not buying your math anymore.   Going back to BK. 

Jan 8, 2013 6:31PM
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Experienced the NON value NON 99 cent Jr. Bacon Cheeseburger yesterday, To my surprise it is now $1.79!

 

One Asiago Chicken Ranch combo and a Jr Bacon was $9.98.

 

Ridiculous!

 

So long Wendy's

 

And ye MC Donalds has been playing with burger size and quality

Jan 8, 2013 6:25PM
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Wendy's pickles are nasty.  'nuf said
Jan 8, 2013 6:17PM
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Well here comes the loss in sales because so many fast food chains have lost their way in making good reasonable priced food items. Why do you all have cheese on everything on the there menus. Most of them will not remove the price of deleting the cheese but will increase it by 20-80 cents to add extra cheese. Then if you down size your drink they up charge you for down sizing it. Even if you change to the cheaper ice tea they charge you extra for it too. Here in Maryland the big three all have their heads up their butts and are not willing to change nothing because they will lose money and market share. I myself have change to other places that do not charge me for changing my food choices. I like Roy Rodgers and Chic-Fil over McDonalds and Wendy's then Burger King even if it is an extra 20-30 miles from the closes big three. I have been voting with my money on who gets it. As for Wendy's I left them more than a year ago and only do them if there is no where else to go. just like I left Sears over 12 years ago. They lost all my money and how many other places will lose my money?
Jan 8, 2013 5:18PM
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I feel I am missing something on all these stories about fast foods hurting.  True that dollar  menus could be hurting them but the prices of the meals are absurd!  With not much more and sometimes with le$$ you can get better food and service at mid-tier restaurant chains like chilis and ruby tuesday.   While not as conveneint as a drive-thru - many of these places allow you to order in advance and they will bring it to your car.  

Jan 8, 2013 5:08PM
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These places make there money on the soda. I laugh everytime I decide to eat in a fast food restaurant and the person in front of me orders a LARGE soda when they dine in. The machine is there and they could fill up and pay for a small as many times as they want but they pay for the large. LOL
Jan 8, 2013 4:51PM
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I would love nothing more than to see Wendy's go out of business after they ruined their menu by changing their burgers and fries. Bring back the old menu and bring back your old reliable customers. I didn't mind paying a little more for the old stuff but refuse to pay anything for the garbage they are peddling now.
Jan 8, 2013 4:46PM
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The point with fast food for me was, it was quick to get and cheap to buy.  Now at Wendy’s 2 number 4’s cost more than buying 3 pounds of hamburger, buns, lettuce, tomato, cheese, and a 1 liter bottle. This provides for 8 burgers, fresh and hot. 

 

See no point to going to any fast food joint anymore.  Not when I can make it myself for cheaper and know that the quality if much higher.

Jan 8, 2013 4:41PM
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Why did they have to change their pickles? 

 

I really don't like the new ones, it changes the whole flavor of the wendy burger. and getting one  without pickles just isn't the same.  Lately when I get the chili its salty and watery.  so I pretty much don't go to the ones near me any more.  I can do better at home and for less money. 

Jan 8, 2013 4:21PM
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Don't eat fast food, haven't in over 18 months, even when someone else is buying. But when I did, only dollar items and NEVER soft drinks.  The best were Wendy's chicken sandwich, McD's double cheeseburger before they cheaped out and made it just a McDouble, but the best deal was Burger King doubles for a buck.
Jan 8, 2013 4:08PM
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I not only used to work at wendy's (for 1.5 years) when I was in high school, but I used to really love Wendy's food and atmosphere. It became very clear to me that as soon as Dave Thomas passed away and his daughter took over she was clearly more a fan of Mcdonalds food as she tried EVERYTHING the she could to turn it into Mcdonalds. Wendy's buns for example used to be moist and fluffy because they used to put them in a humidifier that was much like a microwave right before using them, they were then immediately placed in a warmer. now they're cheaper buns and taken directly out of the package causing them to be dry and poor in quality as well as taste. They used to use light mayonaise which accounted for a large percentage of their signature taste, now they use what tastes like hellmans real mayo.. they wrap and package their burgers like mcdonalds does with their specialty items and this list of changes goes on and on. They use nasty sweet pickled onions now instead of the regular raw red onions that they'd used in the past. My point is every Wendy's sign says "Wendy's old fashioned hamburgers."  Nothing is old fashioned if it was completely revamped by the origionators idiot daughter in the year 2011. If you pride yourself on not changing a recipe, don't change the recipe and THATS what started the sales slump they now find themselves in. People eat at Wendy's because it's NOT Mcdonalds, now I just go to Mcondalds because they're more old fashioned than Wendy's is. I guess what im trying to say is their profit margins current state has nothing to do with their dollar menu, it's because their food is crap now and they didn't stay true to Daves original convinctions. I'm sure the man is rolling in his grave and wishes he called it Daves.
Jan 8, 2013 3:37PM
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As a daily fast food consumer, price is very important, but what will easily overcome a price difference is drive through attendants that can understand your order and take it correctly. Too many times I have driven off due to operator asking "what", or repeating a single english phrase read off of a cheat card spoken in a thick latino accent. I do not blame the employees but I do blame management for having someone who clearly cannot communicate adequately in a position that REQUIRES excellent communication skills. I willingly pay a little extra for the accuracy that comes with good communication skills.
Jan 8, 2013 3:35PM
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Its THE SMALL MAC now.. Where's The BEEF!!!!!!!!!!!!!!!!!!!!

Jan 8, 2013 3:28PM
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They screwed up the worst when they changed to those gross pickles !!!!!!
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