News broke last week that Wendy's (NASDAQ: WEN ) will phase out the popular pretzel buns that played a role in one of the most talked about sandwiches in the last decade for the fast-food restaurant. The change isn't due to slumping sales. Wendy's simply says the buns were always meant to have a short life to make way for other "limited time only" menu items.
Wendy's suffered during the recession due to higher prices than competitors such as Yum! Brands (NYSE: YUM ) -- owner of brands including Taco Bell and KFC -- and Burger King Worldwide (UNKNOWN: BKW.DL ) . But Wendy's has showed new signs of life in recent years as the menu has changed into a higher-end version of fast food.
Wendy's shares have risen nearly 90% in the past year due to investor optimism --much of which was inspired by the potential sales for the heavily promoted Pretzel Bacon Cheeseburger.
Could the revolving menu strategy come back to bite the long struggling company?
Future sandwich popularity not guaranteed
Wendy's recently reported third quarter included nearly 6% growth in comparable sales for stores open at least two years -- the largest growth the company had managed since 2005. Comps were a respectable 3.2%. Burger King had global comps of around 1% in that period, and Yum! Brands had flat US comps.
Wendy's president and CEO Emil Brolick acknowledged that comps growth was driven by the success of the Pretzel Bacon Cheeseburger. And now that sandwich is going off the menu along with its pretzel bun, which also appeared in a popular chicken sandwich, to make way for new sandwiches that have no guarantee of success.
Why did Wendy's risk losing one of its most successful products in a decade?
Bloomberg quoted emailed comments from Wendy's spokesman Denny Lynch which explain that the pretzel bun was always meant as a "limited time only" offer. Lynch continued that keeping the bun in restaurants with the other offered buns would increase the inventory kept on hand.
And that's a general point that Wendy's could make. The restaurant already has a wider-than-average variety of salads, side dishes, and sandwiches. Having to keep additional ingredients such as the pretzel buns or the Pretzel Bacon Cheeseburger's specialty cheddar on hand would further complicate inventory and the food-preparation process.
But taking away the pretzel bun isn't going to solve that problem.
The change won't help streamline kitchens
Wendy's isn't going back to only using traditional hamburger buns. The company has rolled out new brioche buns paired with a second release of the Bacon Portabella Melt, which was on a regular bun the first time around. Brioche buns will become Wendy's new push, kicking the pretzel buns to the curb.
Switching one bun for another doesn't streamline the kitchen -- it's an even swap. And Wendy's clearly plans to keep launching limited time menu items in the hopes of wooing customers. That's well and good if the company doesn't drive away the new customers it gained with the Pretzel Bacon Cheeseburger. But that strategy certainly doesn't make the food prep or inventory any easier for employees to handle.
And the revolving menu could also exacerbate the food-costs problem that keep Wendy's menu items more expensive than McDonald's and Burger King.
This won't fix the food costs problem
Wendy's fresh ingredients and broader menu equal higher food costs. The company's second-quarter food and paper costs were nearly 33% of total sales. Compare that to Burger King's 6%, and 27% for the multiple restaurants behind Yum! Brands.
Revolving menu items don't seem the best way to cut food costs unless Wendy's manages to utilize existing inventory to create the new products. And even if that were to work, sense would dictate keeping the popular sandwich around until it either experiences a sales plunge or is eclipsed by the sales of an outperforming new product.
Pretzel buns likely cost more than brioche buns. But that's a hit Wendy's should gladly take to keep a good product on hand. The company is not in a strong enough position to make this bold of a bet. Wendy's missed third-quarter estimates -- reporting $641 million in revenue compared to analyst-estimated $643 million -- and shares dropped 9% the day of the report.
Foolish final thoughts
The Pretzel Bacon Cheeseburger does come with more potential problems than the average burger in its inventory needs. But Wendy's would do better to integrate those ingredients into further items to justify their inclusion than to ship off a comps-driving product. And the company had better hope people really love a brioche bun.
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