Wendy's Plans To Take On 'Fast Casual' Restaurants Five Guys, Smashburger

By CHRISTINA REXRODE   11/ 9/11 06:25 PM ET  

NEW YORK -- Wendy's new CEO on Wednesday laid out his action plan for re-energizing the fast-food chain against the backdrop of a quarterly loss driven by costs related to the recent sale of Arby's.
Emil Brolick, who joined Wendy's as CEO less than two months ago, said in a call with analysts that he was focused on beating a relatively new crop of competitors of "fast-casual" brands like Five Guys and Smashburger. He gave more details on the company's push to offer breakfast nationwide, something that virtually all of its major fast-food rivals already do. He also outlined plans to expand into international markets like Japan and Russia.

Restaurants of all price ranges are facing the double challenge of higher costs for ingredients and customers who are wary of spending on eating out in the weak U.S. economy. Most fast-food chains are playing catch-up to the much larger McDonald's Corp., which has fared well throughout the recession and its aftermath by emphasizing low prices, remodeling restaurants and adding products like smoothies and fancy coffee drinks.

For years, Wendy's had carved out a niche as quality fast-food for adults, but sales have suffered recently because customers decided its offerings had grown stale. Adding to that, after founder Dave Thomas died in 2002, Wendy's struggled to find a new face for its advertising. Brolick, a company veteran who became CEO in September, said Wednesday that the company had gone through "an identity crisis."
Brolick's strategy for Wendy's is to be on the high end of the fast-food pecking order because he thinks customers will be willing to pay more than they would at other fats-food chains if the food is better. But they'll also get the benefit of prices that are lower than those at a fast-casual chain, he reasons.

"I'm not for the moment suggesting that we want to try to pretend to become a Five Guys or a Smashburger or something like that," Brolick said on a call with analysts. "But I do believe that there is a significant opportunity in the marketplace for higher-quality products that are fresh, made-to-order products."
Wendy's has been reshaping its menu with new ingredients and preparation methods for its salads, hamburgers and the rest of its offerings in an effort to attract more customers. Brolick said the new Dave's Hot `N Juicy burgers had "exceeded our expectations" and would help Wendy's reclaim its "leadership in the premium-quality hamburger category."

Wendy's has previously talked about taking a "barbell" approach to pricing: offering high-priced and low-priced items to appeal to customers at both the top and bottom. On Wednesday, Wendy's said later this month it will introduce a new "W" cheeseburger line, which it describes as mid-tier. Prices for those burgers would be around $2.99 – between the 99-cent "value" cheeseburger and the premium Dave's Hot `N Juicy burger, which can cost nearly $6 for the biggest size. Wendy's is hoping that customers who previously bought the cheap burgers will trade up to the middle.

Additionally, Brolick said Wendy's, the only major fast-food chain that doesn't offer breakfast nationally, would take the same approach to breakfast as to the other meals: offer higher-quality items than other fast-food chains. He also said the company would stop reporting each quarter on how many restaurants were now offering breakfast, citing competitive reasons.

Wendy's hopes its efforts will help it boost results.

For the period covering roughly July through September, Wendy's Co. lost nearly $4 million, or a penny per share. In the same period a year ago, the chain lost $909,000, which was break-even per share. This quarter's loss was largely from costs related to selling Arby's in July, including expenses for cutting some jobs and retaining other employees.

Wendy's was combined with Arby's for less than three years, in a deal engineered by hedge fund magnate Nelson Peltz. Wendy's sold Arby's to a private-equity firm in July, saying it needed to concentrate on improving Wendy's rather than trying to revive Arby's. The Wendy's/Arby's Group lost money in seven of the 10 quarters in which it reported results as a combined company.

Wendy's is under pressure to prove it can do better on its own. Though revenue missed expectations by analysts polled by FactSet of $617 million, it still rose 2 percent to $611 million. Shares fell 4 percent Wednesday afternoon to $5.26, though Janney Capital Markets analyst Mark Kalinowski reiterated his "buy" rating on the company and said he expects it will overtake Burger King as the No. 2 seller of fast-food burgers in the U.S.

Meanwhile, the company has been growing overseas. Wendy's has only a small presence outside the U.S.: about 300 restaurants out of a total of about 6,600 are international, but Brolick said the company has agreements for growing to 1,000 international restaurants, including additions in Japan and Russia.