The hit television show Seinfeld introduced us to the memorable quote, "These pretzels... are making me thirsty!" However, when it comes to this year's pretzel-bun craze, many companies are just making customers and shareholders confused.
Wendy's (NASDAQ:WEN), Ruby Tuesday (NYSE:RT), and several peers have tried to implement pretzels into their menus with mixed results. However, in the end, restaurant companies like Chipotle Mexican Grill (NYSE:CMG) are showing why long-term menu consistency pays off.
Wendy's is just a limited edition company these days
With seven different company slogans this past decade alone, Wendy's currently uses the slogan "Now that's better." This is ironic in some sense given the recent success of the pretzel burger.
Wendy's third-quarter earnings showed consolidated revenue increased to $640.8 million, up from the $636.3 million in the third quarter of 2012.. Net losses fell to just $1.9 million, a huge improvement from the $26.2 million loss a year ago. The quarter was the strongest since 2005, according to Wendy's CEO Emil Brolick, with most of the credit given to the company's new Pretzel Bacon Cheeseburger and Pretzel Pub Chicken Sandwich, which debuted in July and October, respectively. However, like many other new menu items before, the pretzel bun at Wendy's is coming to an end, regardless of how financially successful it was -- or was ever expected to be.
The problem isn't that Wendy's is replacing the popular pretzel bun for a new gourmet lineup consisting of items like the new Bacon Portabella Melt Burger. The problem is that Wendy's never intended for the pretzel bun to last beyond a limited time. This isn't new to the business model because Wendy's constantly experiments to keep profitable innovations on the menu.
Among changes that didn't work in Wendy's favor include another breakfast menu run, which ended after a year of testing. This is no different from the 1985, 2007, or 2009 breakfast attempts. Also, unlike its pretzel buns, Wendy's flat-breads so far haven't sold well, dragging down an otherwise solid third quarter. However, the breakfast attempts continue, the flat-breads stay, and the pretzel buns go. Maybe Wendy's new slogan should be "If it is broke, don't fix it, but if it is fixed, break it again."
Ruby Tuesday has an identity crisis?
Pretzel buns so far haven't helped Ruby Tuesday, as first-quarter FY 2014 earnings showed same-restaurant sales declined 11.4% and 8.4% for company and franchise-owned locations, respectively. On top of that, net losses soared to $21.9 million, which is near the $23.4 million loss suffered for all of FY 2013.
The problem with Ruby Tuesday is that its pretzel-bun menu items are priced in the $8.99 to $9.49 range. There is nothing wrong with adding new items to the menu, but it comes across as a desperate attempt to capitalize on the pretzel-bun craze while charging nearly twice as much as Wendy's.
When you factor in the fact that Dunkin Donuts, a product of Dunkin' Brands, as well as Sonic and many other smaller fast-food chains have also implemented pretzel buns, it seems that Ruby Tuesday is competing down instead of up.
There isn't a drive-through at Ruby Tuesday because it is a full-service dining restaurant chain. Guests expect a dining experience with price points higher than that of a fast-food chain. Price points and customer expectations are why you won't see sirloin steaks and a full rack of ribs at a Wendy's.
Ruby Tuesday's 2013 annual report states that new product innovation and marketing strategy refinements are some of the company's goals. However, these goals may further put the company in the red as customers enter expecting Ruby Tuesday but discover something unrecognizable.
The Chipotle consistency factor
The biggest changes in nearly two decades of existence for Chipotle consist of going from 60% to 100% natural pork, beef, and chicken, removing trans fat in 2004, and transitioning to organic black beans. The company doesn't have year-round limited time menu offers. When you go into a Chipotle, you aren't met with surprises.
The problem with changing the menu for Wendy's or Ruby Tuesday is the costs involved in making all of the locations consistent, training the employees on the new items, and then marketing those items to customers.
If you want to order a Wendy's Pretzel Bacon Cheeseburger today because your friends have finally convinced you of how good it is, you may be out of luck. This is the biggest problem of all because this is the point where you start losing customers long term.
The bottom line
Consistency usually wins in most aspects of life, and it is no different with fast-food and restaurant menus. This is one of the reasons why Chipotle is highly profitable. Customers are not going to research what changes are on the menu every time they are hungry -- and they shouldn't have to.
The fact that Wendy's and Ruby Tuesday are more interested in constantly changing their menu than they are improving other areas of the business should make shareholders wary. If capital is spent year-round on changing the menu, it shouldn't be a surprise that there is not much left to invest elsewhere.