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 Dan Burrows
The 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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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
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 .
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.
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.
So long Wendy's
And ye MC Donalds has been playing with burger size and quality
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.
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.
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.
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The solid report comes a month after the retailer closed all of its Canadian operations.
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