This Burger Chain’s CEO Is Taking on Chipotle Mexican Grill

Wendy's has high ambitions.

Nickey Friedman
Nickey Friedman
Jul 30, 2014 at 9:00AM
Consumer Goods

Source:  Wendy's

"We're the cut-above brand, and we've been about that for 45 years. And we've been about fresh great tasting food from day one," stated Emil Brolick, CEO of Wendy's (NASDAQ:WEN), in an interview with CNBC. He dismissively referred to Chipotle Mexican Grill (NYSE:CMG) as "the new QSR," or quick-service restaurant, and a number of his arguments were compelling.

Brand transition
During the interview, Jane Wells of CNBC described the new image of Wendy's as a "Chipotle feel." She pointed out that the company is in the middle of a brand transformation and asked if Wendy's is now a Panera meets burgers and Frosties.

Brolick confidently stated that its 45 year run on serving fresh food means "we're clearly giving people a superior experience" compared to its traditional competitors. He didn't identify them by name, but he was obviously referring to chains such as McDonald's and Burger King, which have a reputation for not exactly having the freshest of ingredients.

Holy Chipotle!
For Chipotle Mexican Grill specifically, Brolick argued that Wendy's gives people a comparable experience to that of Chipotle Mexican Grill but does so for between 40% and 45% less than the average check.

Source: Chipotle Mexican Grill

The average check at Chipotle Mexican Grill is around $9. This puts Wendy's at between $4.95 and $5.40. For many budget-conscious people these days, any savings is welcomed. 

No square burritos
If Brolick and Wendy's can successfully sell people on the idea that people get the same fast-casual experience at Wendy's that they get at Chipotle only at a huge discount, sales will benefit to the upside.   For 2012, the average Wendy's restaurant in the U.S. did slightly less than $1.5 million in sales. Chipotle Mexican Grill did better, at $2.1 million.

If you do the math, this also means that the average Wendy's had around 300,000 customer visits compared to just 233,000  visits to Chipotle Mexican Grill. This suggests Wendy's, believe it or not, is still more popular on a per-store basis.

Growing hot as a Mexican pepper
One thing Chipotle Mexican Grill has over Wendy's, as I'm sure you've heard, is the  continuous  same-store sales and average unit growth. From 2010 to 2012, the average Chipotle unit sales grew  16.7%, while at Wendy's it only grew by 4.6%. That trend may start to reverse.

Source: Wendy's

Evidence suggests new Chipotle Mexican Grill locations start out with relatively soft sales compared to the rest of the chain, while for Wendy's it's the opposite. Brolick said new stores built from the ground up are seeing sales that are up to 35% higher than those of existing stores.

Part of the reason for this is the new fast-casual look and feel of the reimage  initiatives.  Wendy's has been remodeling its restaurants with a whole new look that appears more similar to the Chipotel-Panera style.  There is something to be said for atmosphere; it's working for Chipotle, but it's starting to work for Wendy's too.

Store remodels see sales jump between 10% and 20% post remodel. For stores that are scrapped and rebuilt, it's even better at between a 25% and 35% jump in sales. Both see an average leap of 40% in profit flow-through afterward.

Going for the whole enchilada
Wendy's is targeting between 410 and 460 "image-activated restaurants" including 60 rebuilds this year. Using the midpoints of 435 restaurants, a 15% jump in sales post-remodel and a 30% jump in sales for rebuilds,  for this year alone that should add 1.1% in sales to the system unit average.

Granted, 1.1% isn't a huge amount, but it's a start as Wendy's eyes Chipotle Mexican Grill's sales-per-unit level of $2.1 million. During a presentation back in January, Brolick stated:

I will tell you that in October, at our franchise convention, we went public with our franchisees and committed to achieving system average volumes of $2 million; and we showed them a clear path on how we can get there, $2 million system average volumes.

Foolish takeaway
It will be interesting to see if Wendy's can achieve its goals. Simply put, the fast food chain needs to increase  per-unit sales by 33% in order to succeed. The company may have some surprise plans to unveil from its test-marketing labs.  Watch the plans and results carefully and you might be able to catch a relatively early ride on Wendy's for years of growth ahead.