Wendy's doesn't intend to sacrifice quality, profit in the burger price wars

Chain remains strong by appealing to older, more-affluent customers

August 18, 2002|By Marc Ballon | Marc Ballon,SPECIAL TO THE SUN

While McDonald's Corp. and other burger chains have slugged it out with 99-cent Big Macs and 49-cent hamburgers, Wendy's International Inc., the company best known for its square hamburgers, has stayed out of the fray, keeping intact its profits and the reputation it claims for quality.

The company, which has generated strong sales by offering generally pricier fare than competitors, has rejected the margin-killing strategy of heavy discounting rampant in the fast-food industry.

Slashing prices can cheapen the value of products over time in consumers' minds and even tarnish a company's image, said Wendy's Chief Executive Officer John T. Schuessler.

Price-cutting also can trigger never-ending price wars, said John S. Glass, an analyst at CIBC World Markets in Boston.

"Once you start discounting, you can't get out of that vicious cycle," he said.

Cheaper menu

Rather than slash the price of its flagship burgers as McDonald's does, Wendy's offers a menu featuring chili, shakes and other items that can be profitably sold for 99 cents each, experts said.

Because Wendy's main menu has changed little in 13 years, customers are not confused by constantly falling or rising prices as they are at other restaurants, said Harry Milling, a stock analyst at Morningstar.

Wendy's appears interested in reaching a slightly more affluent and older customer.

Such a strategy has boosted Wendy's market share for five consecutive years. The company's five-year annual earnings growth rate of nearly 10 percent dwarfs McDonald's 3.7 percent.

Despite its gains, Wendy's market share, at 13.2 percent last year, up from 12.7 percent in 2000, continues to trail Burger King's and McDonald's 43.1 percent, said Dennis Lombardi of Technomic Inc., a restaurant research and consulting company in Chicago.

Like its big burger rivals, the chain faces several challenges, including "burger burnout" and the increased competition from new fast-casual chains, which combine the speed of fast food with the quality of a casual-dining chain.

Unlike its rivals, Wendy's doesn't use frozen ground beef. That commitment to quality has helped it to consistently rate higher than McDonald's and Burger King in a national taste survey, said Robert L.Sandelman of Sandelman & Associates, of Villa Park, Calif., the restaurant consulting company that conducted the study.

"It's all about the food," Wendy's CEO Schuessler said.

The typical Wendy's customer spends about $4.75 per visit, CIBC analyst Glass said. That compares with $4.25 at McDonald's, $4.20 at Jack in the Box and $3.50 at Burger King, according to Technomic.

Wendy's same-store sales increased a strong 7.3 percent in June and 6.6 percent in the second quarter. Profit increased 14 percent to nearly $64 million, or 54 cents a share, on sales of $684 million in the quarter.

"People go there and keep going back," Standard & Poor's analyst Dennis Milton said.

Reflecting Wall Street's faith in Wendy's, the company's stock has risen 24 percent in the last year.

Effort to deversify

In an effort to move the chain beyond its fast-food roots and diversify into faster-growing concepts, Wendy's has been on a spending spree of late.

In February, the chain made its first foray into the fast-casual arena by investing $10 million for a 45 percent stake in Cafe Express, a Houston chain of 13 restaurants. The company hopes to grow the concept to 50 restaurants within three to five years.

Last month, Wendy's agreed to buy the parent company of Baja Fresh Mexican Grill for $275 million in cash.

The company, based in Thousand Oaks, Calif., hopes to expand Baja Fresh to as many as 700 restaurants in five years, from 173 today. Baja Fresh, known for its homemade salsas and burritos, is considered by many to be the star in the fresh Mexican sector.

Wendy's has hinted that acquisitions will play an increasingly important role to help meet its annual profit goal of 12 percent to 15 percent growth over the next decade.

Analysts have applauded Wendy's moves, including the 1995 takeover of Tim Hortons, its 2,200-unit chain that controls 70 percent of the coffee and baked goods restaurant market in Canada.

But the strategy of increasing profit and sales by gobbling up competitors is fraught with risk, said Janet Lowder, president of Restaurant Management Services in Rancho Palos Verdes, Calif.

Acquisitions often are difficult to digest, and they can divert management's attention from running core businesses if any problems surface.

If Wendy's moves too quickly, the company could saddle itself with a mountain of debt and high interest payments, just as CKE Restaurants Inc. did when it acquired Hardee's four years ago for about $760 million.

Cautious expansion

Schuessler said Wendy's, which is based in Dublin, Ohio, would expand cautiously.

As it positions itself for the future, Wendy's is looking backward. The company, which profited for so long from late founder Dave Thomas' folksy charm, has brought him back with new television commercials that say the food is prepared "Dave's way."

"Dave is ingrained in this company's values and culture," Schuessler said. "There was such an outpouring of emotion when he died that we decided to subtly link [him] to the brand and food."

Marc Ballon is a reporter for the Los Angeles Times, a Tribune Publishing Co. newspaper.

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