Unlike McDonald's (NYSE:MCD), which remains trapped by its dollar-menu value meals, Wendy's (NASDAQ:WEN) has no such restrictions and is free to exploit the continued growth of the fast-casual dining niche that remains the driving force behind restaurant expansion.
According to the market researchers at NPD Group, restaurant unit growth was an "anemic" 0.5%, done in by large swaths of independent companies that closed stores for the 12-month period ended in March. While chains nationally broadened their footprint 1.3% from the year-ago period, bringing the industry total to 617,505 restaurants, independent operators' numbers fell 0.2% year over year, and coupled with full-service locations essentially remaining unchanged year over year, it was left to the quick-serve segment to pull the weight of the industry.
Straddling both sides of the fence is the trend of fast casual, which saw unit growth widen 7% over the preceding year, underscoring other industry analyst findings that say the concept is here to stay. Technomic says fast casual makes up just 14% of the total $223 billion limited-service restaurant segment, but its sales increased 13% in 2012. It anticipates fast-casual sales to grow at a 10% compounded annual rate through 2017, compared to just 4.5% for the entire limited-services segment.
Epitomized by industry leaders like Panera Bread and Chipotle Mexican Grill with sales of $3.7 billion and $2.7 billion, respectively, in 2012, the fast-casual niche offers diners a combination of good food and good value. And where McDonald's attempted to tap into that growth by adding chicken wraps and egg-white offerings to spice up its menu, it's hard to convince someone to spend $4 or $5 for an Angus beef burger when they can get a handful of burgers off the dollar menu for the same price.
It's no coincidence, then, that the burger joint did away with the Angus burger and substituted a new chicken wings selection, Mighty Wings, that has more in common with the dollar meals than the premium end of its "barbell" marketing plan. McDonald's will continue to feel pressure on its margins because of the drag that creates resistance from franchisees who rail when the menu becomes too large.
Wendy's has no such constraints. Embracing the fast-casual concept early on, it began converting its restaurants into lounge-like experiences with no plans to go on to the next stage of growth. This summer it flipped more than 400 restaurants to its franchisees, suggesting both an improvement in the economy and a newfound financial muscle (it also hiked its dividend 25%) that can be used to modernize its restaurants and refresh its decor to appeal to the more upscale dining market.
Having overtaken the No. 2 burger chain spot last year from Burger King Worldwide, which is also trying to improve its image with lounges and a Zen-like Starbucks vibe, and with industry leader McDonald's trying to figure out where it wants to be -- and lately that means exploring its roots again as a low-cost fast-food experience -- Wendy's has the chance to gain even more ground by differentiating itself from the competition.
Its pub-style Pretzel Pub Chicken sandwich, for example, which is a chicken breast served on a pretzel bun, fills the "good food at a good value" motto of the niche, but affords it the opportunity to go beyond the buck-a-meal plan and still come out on top.
Wendy's might still be thought of as a traditional burger joint, but its valuation has put it more in the neighborhood of a more upscale eatery. Shares have more than doubled over the past year, and last quarter it turned in profits that handily beat analyst expectations. With profitability having only been a hit-or-miss proposition until recently, the burger flipper may have found the recipe that investors will want to still sink their teeth into.