Wendy's turnaround plans draw skepticism: franchisees, analysts doubtful about breakfast rollout, value pricing and remodels

Nation's Restaurant News,  Feb 19, 2007  by Carolyn Walkup

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Dublin, Ohio -- As Wendy's International prepares to relaunch its long-ago-abandoned breakfast daypart and undertake other initiatives aimed at boosting margins and the brand's quality image, some franchisees and analysts are expressing doubts about the potential profitability of those plans.

At least one Wendy's operator has dubbed the chain's value-pricing strategy a "money-losing trap," while another has voiced concerns that breakfast could cannibalize lunch sales and inflate labor costs.

Yet another franchisee has claimed that Wendy's hasn't demonstrated that expected building remodelings would yield sufficient returns on investment. And a prominent foodservice securities analyst has said Wendy's late entry into the QSR breakfast field raises doubts the chain can gain a foothold in that market.

Nonetheless, Wendy's this month unveiled planned initiatives that go beyond bargain-burger tactics, while projecting that its same-store sales would rise this year by as much as 4 percent. Included in a three-year forecast by leaders of the No. 3 burger chain were plans to upgrade Wendy's coffee and add other new beverages and to change to varying local-market pricing at the 1,310 Wendy's-owned U.S. units. The company also said it plans to offer incentives to franchisees to remodel aging branches of their 4,638 domestic outlets.

Executives said minimum-wage hikes in eight states and on the federal level, expected to raise corporate-store labor costs by $2 million, are partly responsible for the decision to raise menu prices on selected items in some markets.

The company added that it plans to cut some 450 salaried store manager positions through attrition to save $8 million to $9 million in 2007 and $10 million in 2008.

Wendy's executives pledged to roll out breakfast--a daypart not served by the chain since a failed launch in the 1980s--to 20 percent to 30 percent of the chain's 5,948 U.S. units by year-end. At least 50 percent of the chain would offer breakfast by mid-2008.

Early in the testing phase begun last year and expanded to several hundred locations in multiple markets, Wendy's executives forecast that breakfast could boost average-restaurant sales by about $160,000 annually.

However, several franchisees who requested anonymity expressed doubts that Wendy's could achieve that kind of incremental result and cautioned that breakfast might even cannibalize the chain's lunch business.

"There is no sign that breakfast sales produce a profit," said one franchisee, who added that "the breakfast program clearly has negative implications for food and labor margins."

Neither Wendy's nor its franchisees have divulged specific budgets for equipping their restaurants to compete for a share of the quick-service breakfast market.

Some analysts also voiced skepticism about the potential for success of Wendy's breakfast rollout. John Ivankoe of JPMorgan Securities said in a research note that he doubts breakfast would succeed because Wendy's lacks an established niche in that daypart.

Breakfast titan McDonald's, on the other hand, recently credited its successful morning business for helping generate the chain's latest gains in same-store sales. Meanwhile, Burger King is augmenting its morning menu by launching a 10-item slate with prices starting at $1 each. In December Taco Bell said it was expanding Southern California tests of a breakfast menu to three more markets early this year, while projecting that breakfast could boost sales of the 5,029-unit U.S. chain by $1.2 billion annually.

Veteran franchisees who remember the failure of Wendy's earlier breakfast attempt have taken a cautious attitude toward the new initiative. "It may be more complicated than they were anticipating," said a spokesman for Cedar Enterprises, a 100-plus-nnit franchisee based in Columbus, Ohio. "People might come in for breakfast instead of lunch. Several thousand dollars worth of capital investment will be required."

Wendy's previous try at breakfast failed because such offerings as omelets took too long to prepare and were not portable, recalled corporate spokesman Bob Bertini.

"Operationally, there were challenges especially in transitioning from breakfast to lunch," he said. "This time around we are confident we have the right menu. The breakfast daypart is the fastest-growing segment in QSR. Certainly, customers today are far more used to visiting quick-service restaurants for breakfast."

Bertini also said the chain's testing of breakfast, for up to a year in some locations, had revealed no problems with diminished lunch business.

Among the current breakfast choices at test locations are a bacon, egg and cheese sandwich on a fresh-baked biscuit, called a Frescuit; a steak, egg, bacon and cheese sandwich; French toast sticks; and a large burrito containing eggs, meats, cheese and other ingredients. Value-priced breakfast items are likely to include an egg and cheese sandwich, a smaller burrito, and a sausage biscuit.