Wendy's Borrows McDonald's Problem

Wendy's has another new sandwich - and the same old problem that tanked McDonald's comps.

Feb 1, 2014 at 8:30AM

Wendy's (NASDAQ:WEN) has recently debuted its latest limited-edition sandwich with the Ciabatta Bacon Cheeseburger. The company has held tight to its belief that frequent rollouts of short-term menuitems holds the key to its long-term  success. While Wendy's did have a surprise hit with last year's Pretzel Bacon Cheeseburger, the company quickly shoved it off the menu to make room for new sandwiches.  McDonald's (NYSE:MCD) has suffered from employing a similar strategy and recent research shows that customers aren't even interested in trying limited-time products. 

NPD Group recently released a survey concerning how often diners will try a new menu item when eating out. Nearly 70% of diners wouldn't order a new item and only about 3% will try a limited time item. The chances of trying a new menu item drop considerably between a casual dining restaurant and fast food or fast casual places such as Wendy's as well. 

Wendy's Pretzel Bacon Cheeseburger performed well for any item, let alone one that's a limited-time offering. Continuing to change out the menu in hopes of striking another hit isn't going to end well, though. 

Rise and fall of the pretzel bun 

Pretzel Bacon Burger

Source: Wendy's

Wendy's third quarter featured some of the strongest comps in eight years thanks to the Pretzel Bacon Cheeseburger's debut. The wildly popular product helped deliver a 6% comps growth at restaurants open at least two years. How did Wendy's celebrate this victory? By shoving that burger off the menu because it was only meant as a limited-time offer. 

The company has since reintroduced the limited time (again) Bacon Portabella Melt (this time on a brioche bun) and two spicy chipotle sandwiches on the value menu. Now comes the Ciabatta Bacon Cheeseburger. 

This limited-time focus could make sense under two different scenarios.

If Wendy's regular, permanent menu item was holding its own financially, then the limited-time items could work as an added enticement to customers who would eat there anyway. Unfortunately, that's not the case. Wendy's regular menu has barely held the company afloat. 

It might also make sense if the company could use the limited-time items as a testing ground to add popular items to the permanent menu. The Pretzel Bacon Cheeseburger was a rare success story in the field of flatbread wraps and breakfast menu attempts. The company should keep that burger on the menu and do the same for any other sandwich in the future that might prove as popular. Don't keep shuttling through less popular products in the hopes something else will stick.

McDonald's paid the price for the same strategy   
McDonald's paid the price last year for ushering in too many products in a short period of time. The company reported a meager fourth-quarter comps gain of 0.1% globally with a 1.4% decline domestically. Full-year global comps were only up 0.2%. 

During the earnings call, COO Tim Fenton said, "One of the things we did last year...we overcomplicated the restaurants. If you remember, we introduced McWraps, we introduced Egg White Delight, we introduced Quarter Pounder Toppers and really didn't give the restaurants an opportunity to breathe." 

The lack of breathing room creates multiple problems: customer confusion on what's currently offered, disorganization in the kitchens that leads to longer wait times, and driven up inventory costs. On that last point, Wendy's has very little wiggle room since the company's near the top of food and product costs as a percentage of revenue and also lacks pricing wiggle room to help cover those costs. 

Is Wendy's on the way down? 
Wendy's still has the time to work out a better plan. The recent fourth quarter preview suggests that 2013 will go out on a high note. Wendy's revealed earnings per share of $0.10-$0.11, which bests analyst expectations of $0.06. Net income will come in between $25.2 million-$28.7 million and comparable store sales were up 3.1% at company-owned stores. Comps were up as much as 3.5% for the year. 

If the company keeps to its limited-time plans and doesn't score another pretzel-sized success, Wendy's 2014 full-year comps could resemble McDonald's.

Foolish final thoughts
Wendy's will officially report fourth quarter and full-year results on Feb. 27. Listen to the earnings call to see how management feels about the continued limited-time menu item plans and if there's any more announced for the near future. Here's hoping the company learns from McDonald's mistake and doesn't change its menu around too much. .  

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Brandy Betz has no position in any stocks mentioned. The Motley Fool recommends McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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