Reverdy Johnson, [email protected], 415.364.3782 H REPORT WEN Boosts Sales with New Items But Needs Core Focus

Companies: BH, MCD, PNRA, SBX, WEN January 20, 2011

Research Question:

Will the combination of new products at Wendy's and reports of stabilization at Arby's lead to a rebound for the company in 2011?

Silo Summaries Summary of Findings 1) FRANCHISE OWNERS  Franchise owners expect store sales to increase in 2011. A repeat Two sources expect 2011 sales to increase in the Arby’s franchise owner said he is more confident now than at any low single digits because of new menu items and an other time in the last two years. Store personnel reported recently increased emphasis on core menu offerings. The higher sales because of new menu items. Arby’s franchise owner is more confident because of improved advertising and strategies from corporate.  Wendy’s breakfast trials in Columbus, OH, have been successful because of quality items that are fresh, well-priced and on par with 2) SUPPLIERS competitors’ breakfasts. The coffee also was praised. Widescale Three sources said Wendy’s is performing well, and an industrywide increase is likely because of the adoption will be determined by franchise owners, who are concerned recovering economy. One source said Arby’s is about equipment costs. stabilizing, but another said it is slipping. The  Wendys’ Natural-Cut French Fries were commended by primary industry trend is toward efficient multitasking sources, who reported higher sales and orders for fries year to year. equipment and smaller, healthier portions.

However, no source said the fries were enough to draw people into 3) WENDY’S STORE MANAGERS stores. Secondary sources panned the fries and demanded a return to Five sources said the Natural-Cut French Fries are the original. The new DT Deluxe cheeseburger appears to be on track selling better than the original. Breakfast items and in Las Vegas trials and has been praised by customers. the DT Deluxe cheeseburger also are garnering strong positive attention. Stores reported an overall  Suppliers and industry experts expect QSR industry growth in 2011, sales increase. The key to a successful national driven largely by the recovering economy. They had mixed opinions on expansion will be to convince gun-shy franchise Wendy’s and Arby’s, but agreed these brands need to focus on core owners to purchase the necessary equipment. items and marketing rather than menu expansion. 4) ARBY’S STORE MANAGERS  Chick-fil-A Inc. is an emerging niche player with a following and unique Two Arby’s managers said business improved product, similar to earlier Blueshift QSR reports discussing loyalty for recently. Customers are attracted to the value menu. In-N-Out Burger and Panera Bread Co. (PNRA) The size of the value menu items is smaller. One store is focused on improving operations and getting more profit from the value menu by choosing the Wendy’s WEN Rebound Wendy’s Fries a right items and encouraging add-ons. Breakfast Can in 2011 Success Succeed 5) WENDY’S CUSTOMERS Franchise Four sources said they prefer the Natural-Cut French Owners Fries over the original recipe. The other two sources praised the breakfast trials for the quality and value. All six sources are spending the same amount per Suppliers visit.

Wendy’s Store 6) ARBY’S CUSTOMERS Managers Three sources said they have kept their visits and Arby’s Store spending at Arby’s steady in the last year. They are N/A N/A Managers not driven by the value menu; one said the value items’ portion sizes were too small. Sources liked Wendy’s Arby’s for its core products and ability to customize Customers orders.

Arby’s N/A N/A 7) INDUSTRY EXPERTS Customers Three sources are underwhelmed by Wendy’s efforts Industry Experts to rebound. They said neither Arby’s nor Wendy’s elicits any significant response from customers. The key for both brands is to focus on core items to maintain market share, and better and more marketing to increase traffic. 1 321 Pacific Ave., San Francisco, CA 94111  www.blueshiftideas.com

WEN Boosts Sales with New Items But Needs Core Focus

Background A recent report said Arby’s, long a drag on Wendy’s Arby’s Group Inc. (WEN) with slower-than-expected execution on a turnaround plan, is stabilizing. Selected Arby’s stores benefited from higher same-store sales in the fourth quarter. Wendy’s has come out with new products, including revamped french fries, a new burger launched in Las Vegas and a trial breakfast in Columbus to keep the company moving forward. This report aims to see how those developments are taking shape and if they will indeed lead to a successful 2011.

CURRENT RESEARCH Blueshift employed its pattern mining approach to establish and interview sources in eight independent silos: 1) Wendy’s and Arby’s franchise owners (2) 2) Food and equipment suppliers (3) 3) Wendy’s store managers (5) 4) Arby’s store managers (2) 5) Wendy’s customers (6) 6) Arby’s customers (3) 7) Fast-food industry experts (3) 8) Secondary sources (5)

Blueshift interviewed 24 primary sources, including six repeat sources, and included five of the most relevant secondary sources focused on information and reviews of new products like the Natural-Cut French Fries, breakfast, and the DT Deluxe cheeseburger.

Silo 1) WENDY’S AND ARBY’S FRANCHISE OWNERS Two sources expect 2011 sales to increase in the low to mid-single digits because of several new menu items and an increased emphasis on core menu offerings. The Arby’s franchise owner is more confident than at any time in the last two years because of improved advertising and strategies from corporate. The Wendy’s owner preferred to raise the company profile in the premium burger market with an emphasis on burgers rather than value meals and a new breakfast. He is selling more french fries since the change to the new recipe.

 The owner of a Wendy’s franchise with 38 stores in the Southeast This repeat source estimates store sales rose 2% to 7% thanks to new menu items. He was confident sales would improve in 2011. Improving core items like burgers could renew Wendy’s stature in the premium burger market, but doing so would be difficult if corporate decides to push sales of breakfast items or value meals. . “Our sales are higher, and I know we are doing better because we are selling a higher number of french fries and meals. I know our sales are up, but I don’t know by how much or how much of an impact it would Our sales are higher, and … we have on a bottom line improvement. It’s premature to say, but I would are selling a higher number of guess sales are up between 2% and 7%. It’s also important to look at what happens eight weeks from now. At this point, we know the french fries and meals. … I introduction has been well received.” would guess sales are up . “The french fries are doing very well. When you make any change, between 2% and 7%. … At this there are always some people who reject it. ... That’s the risk, but in point, we know the introduction this case many more have accepted it.” . “We were part of the test market for the new burgers. Our test area has been well received. was on a par with Las Vegas, and their results are very similar to how Owner, Wendy’s Franchise we did. It has helped us. It has definitely been a plus. What happens Southeast over the next eight weeks will be important.” . “I feel very enthusiastic and excited to see what happens with new menu items over time, but it’s a little premature. Overall business is better for us. The new burger is doing exceptionally well. The fries are helping.

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WEN Boosts Sales with New Items But Needs Core Focus

Also, in our area, the oil spill checks have been coming into the Gulf Coast, and that is pumping money into the local economy.” . “The new burger has an upgraded bun, real mayonnaise, a crinkle-cut pickle, red onions and a more tender beef patty. It essentially is a repositioning of the single and double burger. This will put us back in the premium burger arena and build up our brand equity.” . “I think we have good new-menu items. I think it’s just a matter of execution and sustainability. There is no doubt the hamburger is better. If we improve our core It’s not necessarily a lot different. It is still a 1/4-inch patty, but it is thicker and it is perceived as being better.” products, we will improve . “Our biggest challenge in 2011 will be menu management and mix. We Wendy’s. … There is still a know commodity prices will not slow. Delivery charge prices and the price conflict between how corporate of oil, corn and wheat all are up. We have to be smart about what new thinks about the value items we promote and advertise.” . “I think our biggest success will be the menu enhancements that put us proposition and how franchises back in the premium burger market. Our potential success will be view the value/$1 menu. … The strengthening and upgrading the core menu items—the hamburger, the franchise owners do not bacon burger and the chicken. Over the past 40 years, the company has believe value is a 99¢ meal. done an excellent job of cheapening what we sell. That is not where we started. But upgrading the core menu is where we are today. If we improve Owner, Wendy’s Franchise our core products, we will improve Wendy’s. That’s what can make a big Southeast

difference.” . “There is still a conflict between how corporate thinks about the value proposition and how franchises view the value/$1 menu. The question is: what constitutes value? The franchise owners do not believe value is a 99¢ meal. [Doctor’s Associates Inc.’s] Subway has shown us that a $5 foot-long can represent value. [Biglari Holdings Inc.’s/BH] Steak ‘n Shake has demonstrated that the 4 for $4 can represent value. Value does not have to be a 99¢ item.” . “Breakfast is a long-term thing, and we do not offer it yet. I am not looking forward to breakfast. If it does not increase profits, why would we want it? Some people think if you open three hours earlier with breakfast, you will do better. But look at Burger King. I went by there the other day, and there was no one there at 6 a.m.” . “I don’t see machine technology as a huge margin enhancer for us. [The Coca-Cola Co.’s Freestyle machine] may or may not be helpful.” . “The customer demographics overall seem the same. The only change, and I have no numbers, may be with our new and improved line of salads. There seems to be more of a female leaning among our customers. The new salad program was introduced in August, and it has been very popular.” . “I have not seen much of a change since the merger in blending the corporate cultures. A stepsister is a stepsister. You have got the owners looking at the two as an investment on the shelf. The customer in the field looks at us as competitors. As for the Strategic Sourcing Group cooperative [SSG], that piece is positive and it will help when we order nonexclusive items. It will help with the costs for dumpster pick-up, paper goods and Co2. It appears to have some advantages, but I’m not sure how it will affect the bottom line and who ultimately benefits [franchise or corporate].” . “I’m still not excited about showing Arby how we cut costs or run our operations. So far, Wendy’s has been allowed to run on its own. I have no issue with that.”

 The CEO of an Arby’s franchise with 85 stores across seven states, mostly in the Northwest This source said franchise traffic has stabilized, and he projects a 3% sales increase in 2011 year to year. Arby’s will move toward a new line of permanent, premium menu items featuring Angus beef. New laws requiring restaurants to post nutritional information will pose less of a challenge to Arby’s than to Wendy’s, Chick-fil-A and Panera. QSRs have been scrambling to lower menu items’ trans fat and offer healthier food. . “Based on our results and systemwide sales, our business has increased. The fourth quarter will be the best quarter in years for our franchise. I think it is due to a combination of things. First, the industry has seen a rebound in the fourth quarter and, second, Arby’s has finally stabilized customer traffic counts. The value menu and other items did help.”

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WEN Boosts Sales with New Items But Needs Core Focus

. “We introduced the value menu around March, and it definitely was a major trend changer with regard to traffic. Our percentages went from a negative, high-single digit to a positive 3.5% last year. At a minimum Based on our results and that’s a 10% improvement, and it definitely was in part due to the value systemwide sales, our business menu. We did take a hit on [ticket averages]. Any time you lower the has increased. The fourth price you’ll take a hit on check, but we realized that going into it.” quarter will be the best quarter . “October was a good month, but we do not represent the overall trend. When you consider the economy, we did well. November was a little in years for our franchise. … better, December a little better and January so far is even better. This First, the industry has seen a company is in the positive double digits this month.” rebound in the fourth quarter . “I am projecting sales growth for the franchise this year. We were down and, second, Arby’s has finally 3.7% last year, and we are looking to reverse that and be up 3% this stabilized customer traffic year.” . “We are about to introduce a whole-muscle Angus beef sandwich. We counts. The value menu and will start to advertise March 1, and we have a new advertising agency, other items did help. BBD&O. The whole-muscle Angus versus the regular roast beef is CEO, Arby’s Franchise leaner. It’s like taking a steak and slicing off the beef rather than Northwest hamburger. Arby’s regular roast beef has some whole muscle in it, but the rest is formed roast beef. It is a premium offering, and it will be on the menu for the long term with a whole line of Angus beef offerings.” . “Arby’s is really not price-point heavy. The real carnivores, the 18- to 25-year-old group, go to Burger King [Corp.]. It is not our normal customer. Our customer is looking for taste and quality, and they are a bit more health- conscious, people who want premium taste.” . “Our demographics have not changed, but we are narrowing our focus, even through our advertising, to those who are interested in taste and health.” . “The value menu was introduced as part of the economic frustration, and we are still in an economy that has to be balanced with a value menu. It does not mean we will keep that focus too far out, but it has to be part of the focus. Even McDonald’s [Corp./MCD] is going back and forth between Angus and value meals. It is what it is. It did not happen overnight, and it is still part of the current economy.” . “Customers seem to be loosening up a little and spending more money. Now we just have to be ready to capture that audience.” . “Each QSR will have to decide whether to pass the cost on to the consumer. The increasing costs [for us] mean losing one base point in 2011 versus 2010, just due to the higher prices. So if you ran at 70% grow in 2010, you will run at 69% in 2011. The price of beef is high, the price of corn is high, and energy prices are going up. It will cost more to deep-fry.” . “The biggest challenge will be to sustain sales growth, but employment has not improved much. They say gas will be $4 a gallon by July. When that happens, coupled with the increasing cost of commodity prices, that’s when we will get hit. When households see gas go up, they will respond. Arby’s is really a Midwest brand. About 70% of the stores are in the Midwest, so they often get hit harder.” . “But I am actually more optimistic now than I have been in two years. I see the advertising improving. I see corporate doing the right thing. So many [Arby’s] things were broken before.” I am actually more optimistic . “Wendy’s has improved their margins and operations, and a lot of now than I have been in two those innovations come from Arby’s. Wendy’s was one of our top two years. to three competitors, no matter what market you are in. You will not see the culture clash go away because of the merger.” CEO, Arby’s Franchise Northwest . “As for new products, I was in the Atlanta headquarters in January and we were trying 20 different sandwiches. We are also working on some other new items. The new items I cannot discuss because I’m on the board and signed a confidentiality agreement. But I can say we are trying to be innovative and we are improving quality on products across the menu. You will see more sauces and spices.” . “Arby’s is not pushing breakfast. We are focused on core menu items for lunch and dinner before we invest in a new part of the business. We are focusing on where we know we can have wins.” . “We are always looking at new equipment and technology to lower costs. There is a move to lower trans fats, but you have to remember the laws have changed and we will be required to post information on the menu boards

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WEN Boosts Sales with New Items But Needs Core Focus

about trans fat and calories and carbohydrates. That will make it harder for chains like McDonald’s, and that’s probably why they developed the new fryer.” . “All of the QSRs are scrambling to adjust the nutritional content. You will see people like Panera take a hit. People think their food is healthy, but we all know much of the trans fat, calories and carbs are in the breads and sauces. Arby’s is in a better position because our meals are much lower in sodium and fats. Wendy’s will probably struggle a little more with it. Overall, you will see more focus on chicken and with less breading.” . “You will see Chick-fil-A get clipped by this. They have a decent product that tastes good. They have great hospitality, and they are doing very well. But they will get hit because of all the additives in the chicken and all the processing. Their chicken is loaded with MSG. There will be a lot of changes coming in the next six months around the new laws. It will not help the cost of products, and commodity prices are going up.”

2) FOOD AND EQUIPMENT SUPPLIERS Three sources said Wendy’s is performing well, the fries are in demand, and an overall industrywide increase in QSR business is likely in 2011 because of the recovering economy. Arby’s received mixed reviews. One source said the brand is coming back with growth plans and new equipment orders, but another said it is slipping. The industry trend is toward efficient multitasking equipment and smaller, healthier portions and away from the value menu, which drags on store margins. Rising commodity prices likely will lead to price increases for the customer. Chick-fil-A is a growing brand with a loyal following, carving out a niche in the industry. Sources were divided on the impact and potential success of breakfast for Wendy’s.

 Marketing officer, supplier of kitchen equipment used by QSRs to cook and store food The repeat source expects Wendy and Arby’s to improve sales in 2011 because of new menu offerings, growing market stability and an improving economy. Orders from long-time partner Wendy’s have been steady, and the merger with Arby’s could open doors for this company as Arby’s is renovating and planning to buy new equipment. Consumers continue to trend toward eating healthier food while QSR chains invest in equipment that can multitask and conserve. As we look forward, Wendy’s . “I think for 2011 we definitely would be expecting some improvement and Arby’s are in a much better toward a rebound. We have seen a little bit of that already as we closed out 2010 and moved into 2011. As we look forward, Wendy’s position now than a year ago. and Arby’s are in a much better position now than a year ago.” Marketing Officer . “We have partnered with Wendy’s for 30 years. We helped them with Kitchen Equipment Supplier some new things around their test breakfast offering. We assisted with the new fries although not necessarily by supplying a new fryer. We are not necessarily a key supplier for Arby’s, but there certainly are opportunities with them because of our partnership with Wendy’s. We are talking with Arby’s about supplies, but we have not supplied new products. Nothing has happened yet.” . “We were helping Wendy’s update the breakfast menu but only in terms of programs; it was more of a software upgrade primarily to add new information on the menu. I am not sure how the tests are going overall, but I know some of them have taken off. I know there have been some successes in certain areas where they are testing breakfast. I am not aware of any failures, but I also can’t say it is a resounding success in every All of the feedback we’ve heard market.” about the french fries has been . “The french fry did not have a huge effect on the equipment situation. The changes are more about providing additional access to very positive. … with regard to ingredients, such as sea salt. All of the feedback we’ve heard about taste, texture, seasoning and the french fries has been very positive. They have not been out that so forth. I don’t know if it would long. Our feedback comes from the customer side, and it has been have a huge impact on sales in positive with regard to taste, texture, seasoning and so forth. I don’t know if it would have a huge impact on sales in part because french part because french fries are fries are already a part of their regular menu.” already a part of their regular . “On the Wendy’s side, our orders have stayed fairly consistent over the menu. years. We supply the fryers and a variety of holding tank equipment. Wendy’s undergoes routine store upgrades every 10 to 15 years or so Marketing Officer Kitchen Equipment Supplier where they switch everything out for newer, efficient models.

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WEN Boosts Sales with New Items But Needs Core Focus

Replacements are scattered over time and over regions, so that every year or so there is some sort of turnover.” . “Arby’s is renovating their stores, but I only know this by word of mouth. I have no specific information or detail. At this point, we are going through the approval process on a few pieces of equipment, but we are not sure which way they will go. As with most QSR chains, they are going to reach a point in the renovation where they are ready to upgrade.” . “The use of sea salt is an emerging trend, but I have not seen any other obvious emerging trends. There continues to be a focus around chicken and additional ways to utilize the chicken and different way of creating different styles of chicken. All of this is driven by consumers being health-conscious and wanting to reduce their consumption of red meat.” . “There is certainly the continuing trend of trying to do more with less. There is a strong focus on spending wisely, not just spending equally in every venue or market. People are looking at the amount of equipment they have, and they are trying to leverage the use of that piece of equipment for many uses and items.” . “For our equipment, we have not seen any problems with material availability and there are no signs or changes in terms of shortages.” . “We see the merger as a positive because we have the opportunity to continue our strong relationship with one side [Wendy’s] and through that relationship gain access to new business on the other side. Certainly, the new combined procurement group will help. Any time you deal with a single or smaller group rather than two large procurement groups, it allows for easier understanding of need, easier communication and easier negotiations.” . “Chick-fil-A has grown. They have a new spicy chicken meat introduced last year that has gained some popularity. They have a very loyal following, and they have been very successful. Their business philosophy is a little bit different.”

 An executive with a global corporation that supplies frozen fries to retail outlets, restaurants and QSRs, including Wendy’s The source said anecdotal commentary suggests Wendy’s fries are selling well and the company is moving forward. He said the QSR industry hit bottom and improvements began to occur in November. He is optimistic about a slow and moderate sales uptick for QSRs in 2011, but employment is key to a rebound. Menu innovations are underway industrywide, trending toward smaller portions and healthier food. Commodity prices are poised to increase. . “I am not able to predict whether Wendy’s or Arby’s will rebound in 2011. I am cautiously optimistic overall that things will move up. It is all tied to the mobility of society. When unemployment goes down, Wendy’s seems to be doing mobility goes up and that means people are out and about and relying well. They seem to be on QSR.” . “I don’t handle the Arby’s or Wendy’s accounts. What I can say is that advertising and promoting new Wendy’s seems to be doing well. They seem to be advertising and products and making promoting new products and making significant efforts in the last few significant efforts in the last months.” few months. . “There are segment winners. McDonald’s is doing well and I think Wendy’s is on the right track. Wendy’s seems to be doing well with its Executive natural campaign with a focus on fresh and real foods.” Global Frozen Fries Supplier . “Most of the feedback I’ve heard about the new french fries is anecdotal, but everything I have heard has been positive.” . “We are not out of the woods yet and much of what happens now will depend on employment. But I am cautiously optimistic about 2011, and I think we have bottomed out as an industry. It all depends on unemployment.” . “Over the past couple of years, traffic has declined in all [out-of-home dining] sectors. QSR has held up better than most. Overall, there had been nothing good to report. Now, we see a traffic uptick. We are seeing it throughout the industry, and the decline has stopped. Sales have picked up, certainly from a supplier’s standpoint.” . “One challenge is that we are dealing with a fragmented consumer base. People are living longer, and new generations are eating out. At any given time, there are three to four different generations dining in the restaurant at one time. The question is, how do we cater to all of them while maintaining low inventories and full menu offerings?” . “We are seeing a change in trends because the younger generation is asking differing questions; they want different things. They want healthier food, different flavors, and different sauces. There is a great appetite for adventure in food.”

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WEN Boosts Sales with New Items But Needs Core Focus

. “Regarding innovations, a ton of things are going on in the menu arena. Everyone is trying to reengineer the menus. It’s not all about Most of the feedback I’ve heard price. Inflation and increasing commodity prices have put pressure on margins, and I think you will start to see menu offerings become more about the new french fries is flexible. Menu prices will rise. It is already happening.” anecdotal, but everything I . “Prices are going up whether it is due to speculation or energy prices or have heard has been positive. transportation prices. There are issues on whether commodities are traded short or long, issues about freight. There also is a global Executive shortage of potatoes because of the Russian crop failures.” Global Frozen Fries Supplier

. “I think we will see portion sizes undergo a reshaping. Portions have been huge. The challenge in 2011 will be to reshape portions. That has to happen when you see 80% of your plates come back and you scrape 20% off the plates for a meal that you had to offer at a value price just to get it on the table in the first place. Logically, QSRs will have to reduce portions.” . “Companies like the Panera brand have found a niche and are expanding rapidly. Subway has emerged as a leader and defined how we eat lunch.”

 A leading producer and supplier of chicken and chicken products to retail and food service This source said Wendy’s rates high on taste tests and appears to be performing well while Arby’s continues to struggle. He expects all QSRs to rebound in 2011, estimating a 3% sales increase. The high price of commodities like corn will hurt beef sellers more than chicken sellers. . “My perception is that Wendy’s seems to be doing well and Arby’s is slipping.” . “We think all the QSRs will rebound in 2011. The question is at what level. There are various opinions and predictions, but they all fall within a 1% to 3% increase. We believe it will be closer to 3%, especially on the chicken side.” . “We are watching what happens with commodity prices. Corn is up to about $6.35 [a unit] right now, and that cost is important because it will hurt the beef side. The chicken side will be more stable.” . “QSRs have hit bottom, and we do believe the trend overall for QSRs is up.” . “I am not sure people in the industry are still excited about the value meal because they can’t turn the register enough times.” . “Everyone is still trying to see what they can do to draw traffic while being beholden to investors. It’s all about advertising right now.” . “Chick-fil-A is probably the best at knowing exactly who they are and how to sell who they are. Their chicken sandwich is average at best but they sell. They do not even come in at the top in the blind taste test. Red Robin [Gourmet Burgers Inc./RRGB] did well in the taste test. Wendy’s does well, too.” . “Chick-fil-A is the only QSR that is not affected by the tough environment. I don’t think they have been hurt one bit. They are above the fray. They don’t just sell chicken sandwiches. They sell a culture. They sell service and cleanliness. They sell taking care of their customers and their employees; they are accountable to their folks. They have the secret to success.”

3) WENDY’S STORE CHECKS Five sources said the Natural-Cut French Fries are selling better than the original version during the same period last year. Breakfast items and the DT Deluxe cheeseburger also are garnering strong positive attention from customers. Stores reported an overall sales increase, thanks to these quality new products as well as the ending recession. The breakfast is exceeding expectations, but the key to a successful national expansion will be to convince gun-shy franchise owners to purchase the necessary equipment. One source said Wendy’s has successfully addressed this issue with its coffee maker by finding a less expensive alternative.

 A district manager in North Carolina This source said the new french fries have been a national success, outselling the old fries year to year. New products have helped expand Wendy’s customer base throughout the region. Transactions are higher on average this year but at a lower dollar amount. Costs are tightly controlled through automated tools as well as through individual store manual checks and are regulated by sales numbers. . “Our new fries are selling better than our old fries were at the same time last year.”

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WEN Boosts Sales with New Items But Needs Core Focus

. “The fresh-cut fries are selling great. Customers are saying they like the taste better than the old fries. They are also say they like the skin-on feature and the use of sea salt as they are perceived as healthy.” . “Last fall we upgraded the salad line leading to an improvement in customers’ perceptions of our salads. We will be releasing new version of the Chicken Club with Asiago cheese, and we hope that will peak the interest of new and old customers. We will also bring back the fish sandwich for the Lenten season and that is always popular.” . “New products are giving old customers a reason to come back, and they are also driving new customers in.” . “Our transaction counts are up, but the dollars spent is down.” . “We have a labor guide that is tied to sales, and we watch this very closely.” . “Inventory of food is controlled through an automated system to ensure there is never any excess inventory. Major food items—beef, bacon, buns and potatoes—are counted twice a day to ensure accuracy when accounting for usage and when reordering.”

Reporter Observations: Traffic slowly flowed into the door during the lunch hour on a Wednesday and the drive-thru line had two to three cars in line at all times. Signage for 99¢ items was on front windows, and ads for the new fries were on the side windows. The dining area was clean, and the staff was friendly.

 A manager in New Jersey The source said sales are up this year because of new products, such as the fries, salads and a revamped Chicken Club, better customer service, and a newly remodeled restaurant. Burger King is this store’s biggest competition in a block that also has an Arby’s and AFC Enterprises Inc.’s (AFCE) Popeyes Louisiana Kitchen. . “This year we’re up in sales because of better customer service, friendly, speedier staff.” . “The new fries are bringing in new customers. They see the commercial, they come in.” . “The fries are good. At the beginning no one liked them because of the The fries are good. … I order sea salt because it’s a lot. But now I order more fries because of the increased demand.” more fries because of the . “Next month we have a new chicken sandwich. We call it the Chicken increased demand. Club, which we already have, but they’re changing the formula: Manager, Wendy’s changing the mayonnaise and the sweet cheese. It will now have New Jersey Asiago cheese.” . “We remodeled recently. ... that helped bring in more customers.” . “It’s slow now because no one comes in in January and February. [Our busiest time is] the summer when everybody is out. [Our busiest time during the day is] lunch, 12 p.m. to 2 p.m.” . “There’s an Arby’s, a Burger King and a Popeyes all right here. Burger King is our biggest competition.” . “On Wednesdays we have a program called ‘Proceed Night.’ Twenty percent of sales go to the high school until the end of February.”

Reporter Observations: The store had ample signage for the value menu and new fries, including six lawn signs and lightpost ads at the drive-thru. The new fries were touted on a lit sign half the size of the drive-thru menu and located just before the drive-thru menu. Wendy’s main marquis sign read “Seven of your favorites now 99¢.” Drive-thru traffic was steady while two families were the only customers seated inside. We have the DT Deluxe. We  A manager in Las Vegas advertise it when people pull This source said business is better than a year ago because of increased consumer confidence, quality options and new products in both the french fries up to the drive-thru. There is a and DT Deluxe cheeseburger. recording that offers it to the . “Compared to a year ago, business has improved. We saw a customers before our staff difference starting around Thanksgiving. I think it’s partly that people takes their order. The reaction feel better about spending when they’re out and around. And it’s also to that meal has been positive. that we offer a better product than the McDonald’s that is near us.” . “Our dollar menu is doing well, and people like that you can choose Manager, Wendy’s your side for the value meals.” Las Vegas . “The reaction to the fries has been good. The customers like them. I think it was a good improvement.”

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WEN Boosts Sales with New Items But Needs Core Focus

. “We have the DT Deluxe. We advertise it when people pull up to the drive-thru. There is a recording that offers it to the customers before our staff takes their order. The reaction to that meal has been positive. People still order the regular burgers too.” . “Our customers are mostly families. People still order their whole meals off the dollar menu, so I think they are still watching their money. But there are others who are making the kind of last-minute stops when they’re out shopping. We see that kind of stuff more often now.”

Reporter Observations: The seating area was about one-third full on a weekday evening, which is normal for this Wendy’s. Customers ranged from elementary-school children to elderly couples. The drive-thru was consistently busy but not backed up during the 30 minutes of observation. An older couple and one family mostly ordered off the dollar menu while other customers ordered meals.

 A manager in Columbus This source said the breakfast menu has been a success and customers are responding well to the various new items. . “Breakfast is doing pretty well, probably better than expected. Weekdays are better than weekends.” . “We have a revamped coffee that we brew in smaller pots, making it Breakfast is doing pretty well, continuously instead of using a commercial coffee maker.” probably better than expected. . “We offer four new breakfast items: the artisan sandwich, the panini, the sausage and egg biscuit, and the breakfast butrrito.” Manager, Wendy’s . “Breakfast is served from 7 to 10:30 a.m.” Columbus

Reporter Observations: The store had plenty of breakfast signage on its walls, in the drive-thru and on the menu board.

 A manager in Columbus This source said the breakfast items are being well-received and are expected to catch on nationally when they are rolled out. Pancakes will be on the menu in a month. The manager said promotions and advertising are sparse, which is hurting public awareness. The key to timing for a national launch is finding lower costs and higher efficiencies for the necessary equipment so franchise owners are more willing to adopt the new menu. . “Customers say the new breakfast products are great, but we don’t advertise enough because not all the stores in the area have it. We need to be able to let everyone know. I took some [breakfast bars] to the high school right up the street, and most of the girls didn’t even know we had breakfast.” . “The artisan sandwich is a bigger seller; a lot of people order that one. The burrito is another big seller, as are the 99¢ sausage and egg biscuits. The panini is probably our No. 2 seller behind the artisan sandwich. It’s done on the panini grill.” Breakfast can work nationally. . “Breakfast can work nationally. The problem right now is finding cost The problem right now is efficiencies for franchisees. Some have resisted breakfast because finding cost efficiencies for we’ve had it before and it didn’t work, so they are hesitant to try it franchisees. Some have again.” resisted breakfast because . “The main obstacle now is the cost of the machines. We originally had an expensive coffee maker that we redesigned to be cost-efficient so we’ve had it before and it didn’t now franchise owners don’t have to spend $3,000 for their coffee work, so they are hesitant to try machine. Those are the kinds of tweaks we are making in this it again. breakfast pilot before rolling it out to everyone.” . “It is a plus to serve breakfast in the morning and well worth it. It get us Manager, Wendy’s all into the flow of things and even helps us prepare for lunch, which is Columbus still our biggest draw. Breakfast could become our biggest draw at some point.”

Reporter Observations: The drive-thru window had very clear advertising of the breakfast menu before the main menu board. Inside were pictures of the four new breakfast items on stand-up posters by the door and on the menu boards above the registers. The emphasis was on the products, the freshness and the quality as opposed to price or value. Few customers were in the restaurant or the drive-thru at 10 a.m. on a Sunday. Employees were preparing for lunch service.

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WEN Boosts Sales with New Items But Needs Core Focus

4) ARBY’S STORE CHECKS Two Arby’s managers said business improved recently. Customers, new and repeat, are attracted to the value menu. The size of the value menu items is smaller. One store is focused on improving operations and getting more profit from the value menu by choosing the right items and encouraging add-ons from the regular menu when appropriate.

 A district manager in North Carolina This source said sales are up and that the store is focusing on better operation systems. New and repeat customers are buying from the value menu and like Arby’s recent variety. Although the store has not lost profit on the value menu, We haven’t seen a huge the low dollar transactions may not yield much in return unless customers stray increase in sales from the to regular menu items. value menu. It is not putting us . “So far, so good. Sales are up compared to last year.” at a loss as we have put items . “We are focusing on improving our operation systems and getting them right.” on the value menu that we can . “Customers are responding well to new items, and we are getting new make a profit from. customers from them.” . District Manager, Arby’s “We haven’t seen a huge increase in sales from the value menu. It is North Carolina not putting us at a loss as we have put items on the value menu that we can make a profit from.”

Reporter Observations: The store was rather slow on a Wednesday at 6 p.m. Only four cars went the drive-thru, and approximately eight guests were dining in. The large Arby’s sign on the road at the entrance was displaying a $1 value menu ad with pictures. Each register had a digital screen touting menu items.

 A manager in New Jersey The source said business is good and the number of customers has increased since December. The specials and the value meal have helped sales, bringing in new and repeat customers of varying ages and income levels, but the demographics have not changed. The store receives two weeks’ notice on any new products; no announcement has been made in a while. . “I’ve seen an improvement [in foot traffic].” . “People like the specials. We have a buy-one-get-one on the combo meals on Tuesdays, a roast-beef special, and five items for about $6.” . “We sell a lot of the value menu. People want to catch a snack before going home, not a full meal.” . “We have had [the value meal] about six months. New and old customers like it.” . “I love working here. I’ve been here for over two years now.”

Reporter Observations: There were four customers in the store during the 15 minutes of observation. The drive-thru was slow, with about four cars coming through. Three staff members and the manager were in the store.

5) WENDY’S CUSTOMERS Four of the six sources who discussed the Natural-Cut French Fries said they prefer them over the original recipe, though none said the new fries were luring them into Wendy’s more often. The other two sources spoke about the breakfast trials in Columbus and praised the quality, freshness and value, including great-tasting coffee. Wendy’s ranks among the top 2 fast-food restaurants for two sources; one said she is eating there more than a year ago. All six sources are spending the same amount per visit. One Las Vegas source praised the new DT Deluxe burger, comparing it favorably to a similar item from In-N-Out. Two of the four sources outside of Columbus are interested in Wendy’s breakfast, while the two in Columbus said they would return for the breakfast and recommend it to others.

 A 38-year-old female in North Carolina This source eats at Wendy’s twice a month, an increase since last year. She likes the new fries better than the old, but is more likely to return for the salads and combo meals. Her spending has remained around $7 per visit since last year. She would try Wendy’s breakfast if offered. . “I have been a loyal Wendy’s customer for over 10 years.”

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WEN Boosts Sales with New Items But Needs Core Focus

. “I do like the new fresh-cut fries better but that is not why I come here. My favorites are the salads and the combo meals. They really give you a lot of food, and it is quality tasting for the price.” . “New products influence me a little, but overall I know what I want to order before I come in.” . “Sometimes the commercial will tell me what is new, and I will order it the next time I am eating at Wendy’s.” . “A Wendy’s breakfast would be great, and I would certainly try it.”

 A 34-year-old male in Dallas This source said Wendy’s is one of his two favorite fast-food restaurants and that he likes the new fries. He typically only stops at Wendy’s for lunch and would not be interested in breakfast items. His spending has remained the same year to year. . “I either choose Wendy’s or McDonald’s depending on where I am working that day.” . “I’ve come here at least two times per week, and I’ve gotten the new fries each time for the past three months.” . “I always spend about $4 to $5 on a meal, and that hasn’t changed. I mostly spend that on lunch.” . “I like McDonald’s double cheeseburger better, but Wendy’s has better fries and nuggets.” . “I don’t eat breakfast, so unless Wendy’s serves burgers for breakfast, I wouldn’t be interested.”

 A 20-year-old male college student in Las Vegas This source prefers the new fries but said the menu item has not increased his visits. His spending per visit is the same year to year. He ranks Wendy’s ahead of all other burger chains except In-N-Out. . “I come about one time per week. That is the same as I’ve been coming since last year.” . “I don’t think the fries will make me come in more than before, but I do like the fries better. They taste fresher, and I like the salt.” . “I ordered the DT Deluxe combo. Sometimes I get the classic combo or I don’t think the fries will make the spicy chicken sandwich combo, both in large sizes. I guess it’s between $6 to $8. That hasn’t changed since last year.” me come in more than before, . “I don’t really like Arby’s sandwiches. I do like Burger King but would but I do like the fries better. put Wendy’s and In-N-Out burger before any other fast-food chain. In-N- They taste fresher, and I like Out is my favorite.” the salt. . “I would probably get breakfast [from Wendy’s] if they had it. ... It would probably be better than Burger King’s, but McDonald’s has a good Wendy’s Customer breakfast.” Las Vegas . “The DT Deluxe reminds me a little of the In-N-Out burger sauce. That’s probably why I like it. In-N-Out fries are still king. The one thing that I buy from Wendy’s I can’t get from anywhere else is a Frosty.”

 An early 40s male in New Jersey This source said he has been a regular fast-food customer for the last 10 years. He goes to Wendy’s about once a week at three locations in the area and on occasion eats at other fast-food restaurants. The source orders various items off the menu, spends about $6 per visit and thinks the new fries are better than the old recipe. However, he chooses Wendy’s over other places for its salads or baked potatoes. . “I come to Wendy’s about once a week.” . “Today I had the cod filet combo. I think it was about $6.” . “The new fries are better than the old ones.” . “One of the reasons I come to Wendy’s though is because I can get a salad or potato instead of fries. It’s one of the only places that has good salads.” . “I’ve always said Wendy’s should do breakfast.”

 A 50-year-old woman in Columbus This source tried breakfast at Wendy’s for the first time and came away very impressed with the variety and quality of food offerings, including the coffee. She sampled a few of the new items and said the menu would bring her back into the store again despite a general preference to avoid fast food. . “There are a lot of new choices on the breakfast menu, and they are advertising them heavily. It’s been all over with TV ads and lots of signs in the stores.” . “I’ve never eaten breakfast at Wendy’s before, so I tried a couple of the different items just to see what I liked.” . “I had the breakfast panini sandwich with sausage, and it was delicious. I would definitely get it again.”

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WEN Boosts Sales with New Items But Needs Core Focus

. “The sausage and egg biscuit was very good, too. The biscuits were fluffy, the sausage was very good and not too salty. The cheese and egg were good too. The biscuits were not as good as McDonald’s, but the filling definitely is better than McDonald’s.” . “The coffee was also realy good. It was flavorful and not burned like most fast-food coffee.” . “Prices were reasonable, most under $3, and you can get an add-on for $1. You have a choice of fruit cup, seasoned hash browns, coffee or iced coffee. The fruit cup was really good, with fresh pineapple, red and green apple slices and red grapes. I was pleasantly surprised at the freshness and quality. It certainly felt healthy.” . “It seems they are serving a breakfast plate of eggs, bacon, hash browns and toast. They don’t have pancakes right now, but one of the servers told me they were going to add pancakes in the future.”

 A Columbus man in his 50s This source enjoyed his first experience with Wendy’s breakfast, returning the next day to sample more of the menu. He listed the panini as his favorite, calling it better than anything at McDonald’s, and highlighted the quality and freshness of the coffee. . “I went twice this weekend because I wanted to try the various breakfast sandwiches. On Saturday I had the burrito, which was good. It was reasonably priced and quite tasty. It had sausage, peppers and scrambled egg in it. And the burrito was not flat. It came out hot, Overall the breakfast was looked fresh and was really fluffy.” hands-down better than . “It was definitely worth $2.29. I could see it as a great pick-up before work, but on the weekend I would order two in order to fill up.” McDonald’s. I would definitely . “The coffee was very good.” go back and order the panini . “On Sunday, I went to a different location and tried the panini. I actually again, and especially for the got two: one with sausage and one with applewood bacon. They were coffee. It’s all fairly priced. You excellent; the best they had. It had grill marks, was well presented, was get the impression it came a big portion, had full slices of bread. I liked the sausage better than the bacon.” from scratch rather than sitting . “The coffee was excellent again, and I even got a free refill.” in a toaster like McDonald’s . “Overall the breakfast was hands-down better than McDonald’s. I pancakes and french toast. I would definitely go back and order the panini again, and especially for would recommend it to others, the coffee. It’s all fairly priced. You get the impression it came from for sure. scratch rather than sitting in a toaster like McDonald’s pancakes and french toast. I would recommend it to others, for sure.” Wendy’s Customer . “Our server told us that if we called the number on our receipt and Columbus answered their questionnaire, we would get $2 off our next breakfast.”

6) ARBY’S CUSTOMERS Three sources said they have kept their visits to and spending at Arby’s steady in the last year. They are not driven by the value menu; one said the value items’ portion sizes were too small. Sources liked Arby’s for its core products and ability to customize orders.

 A 44-year-old man in North Carolina This source eats at Arby’s once a week and has for over five years. He has tried items from the value menu but normally orders a meal deal with a side and drink included. He believes the value menu is a good idea for Arby’s and expects it to attract more customers through its price points. . “I think the value menu is a great idea and will bring in more customers for Arby’s.” I have noticed the amount of . “I have been eating here long before the value menu, and I think the value you get at Arby’s has always been great.” meat on the sandwich become . “I have noticed the amount of meat on the sandwich become less, but less, but not enough to stop me not enough to stop me from coming here to eat.” from coming here to eat.

 A 42-year-old man in Dallas Arby’s Customer This source chooses Arby’s for the price, speed and flexibility in his orders. He North Carolina

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WEN Boosts Sales with New Items But Needs Core Focus

said he sometimes orders two of the same value menu item because of the smaller size. . “I always get the value meal, and the nice thing is they let me customize it even if it’s not on the menu.” . “The value meal is not the reason I come here. It’s because it’s fast, it’s cheap and I can order what I want. I think that has more to do with customer service than their value meal.” . “Sometimes I order two sandwiches on the value meal because I know it doesn’t fill me up.”

 A mom with her 8-year-old daughter in New Jersey This source said they come to Arby’s only once a month because they live in a different town several miles away. They spend about $11 each visit and order the same thing each time. The value menu and new products were not of interest to them. They go to Wendy’s on occasion because it is closer to their house, or restaurants like OSI Restaurant Partners LLC’s Outback Steakhouse. . “My daughter gets the kid meal, and I have the Beef ‘n Cheddar meal deal. It’s good but fattening, certainly not on my diet.” . “You can go to McDonald’s, Burger King, Wendy’s for a burger, [but Arby’s] is the only place for a roast-beef sandwich.” . “We go to other [fast-food] places. Wendy’s is closer to our house and places like Outback [Steakhouse], I guess that’s classed as fast food.” . “Today we spent $11. We always order the same thing, so I guess that is what we spend each time.” . “We always get the same thing so new products don’t matter so much.” . “We wouldn’t come here for breakfast, but again, we live in a different town.”

7) FAST-FOOD INDUSTRY EXPERTS Three sources are underwhelmed by Wendy’s efforts to engineer a rebound. They said neither Arby’s nor Wendy’s elicits any significant response from customers as both brands remain average in the QSR industry. Sources did not think new products could have a significant enough effect to be a game changer. The key for both brands is to focus on core items to maintain market share, and better and more marketing to increase traffic. Two sources said integrating the cultures of the merged brands has posed a challenge and has yet to take shape. One source believes Arby’s is further along in its comeback and expects it to have a good year because of rising consumer confidence. Another said neither brand will rebound in 2011.

 A business school professor with extensive experience covering Wendy’s and the fast-food industry The repeat source said neither Wendy’s nor Arby’s would rebound in 2011. Wendy’s new menu items were not enough to refresh the brand. Despite a new report on Arby’s stabilization, the source said gaining stability in the highly competitive QSR market would not move the company forward, especially with the comeback of McDonald’s and the success of Chick-fil-A. Failure to integrate the two corporate cultures remains a stumbling block. . “I follow the ads, read the articles, visit both Wendy’s and Arby’s periodically and chat with a good friend who was on the board and talks to the current board. I am not any more optimistic now than I was in the beginning [of the merger]. I don’t see anything to be optimistic about. I don’t see any excitement on either side.” . “I was skeptical about the merger initially, and I am still skeptical that they can merge the two company cultures. There is no sign that that has occurred. I wonder whether in a few more years Wendy’s will even be around.” . “I read a report that Arby’s has stabilized, but that’s not a game changer when you continue to operate in an incredibly competitive market.” . “I don’t know how anyone can make any money on the value/dollar meals. As for breakfast, I remember Wendy’s breakfast fiasco from the late 80s. They just never got their act together on it.” . “I have seen the advertising, and the ʼfrench fries look appealing. I I am not any more optimistic thought they were OK french fries. I don’t view the item as a make-or- now than I was in the beginning break. Not having a great french fry is not their most critical problem.” . “It’s getting to be that point in time: if something is going to happen it [of the merger]. I don’t see should be happening now. I just have not seen it. I’m not sure if new anything to be optimistic about. food items has been a success or what success even means in this I don’t see any excitement on competitive market. In terms of re-energizing the company, I don’t see either side. it happening because of new french fries or burgers or breakfast. There’s no sizzle. It may briefly enhance profits but I don’t know.” Business School Professor

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WEN Boosts Sales with New Items But Needs Core Focus

. “I have been in the business long enough and followed Wendy’s long enough to get a sense of where they are. I don’t see Wendy’s as a real significant player. Like Arby’s, they are just out there. At one point, Wendy’s was the stronger of the two. Now, you have Arby’s in an OK niche and Wendy’s in an OK niche. That’s not a step up for them.” . “I have not heard or read anything about the integration of the two companies, and going forward that is still a concern and one of the biggest challenges. It’s been long enough that signs of success with the integration should be appearing and they have not. I have not seen any evidence, and I have not seen any enhancement of the brand because of the merger.” . “Wendy’s biggest challenge at this point is their position. At one point, they were a significant player. People thought about them as unique. If you ask customers now to list the top three or five QSRs, I’m not sure that Wendy’s would even be on the list, and that’s a killer for them. They need to reenergize the brand, and french fries and breakfast are not energizers.” . “There are new [technological] innovations and a lot of organizations have taken a look up and down the supply chain. There is a focus on sustainability. Oil is sold to reuse. There is more careful attention to healthier products. McDonald’s got a lot of its sizzle back that way. McDonald’s is back. They have done things with their facilities and with kitchen innovations. They are a big, tough competitor and have worked hard.” . “Regarding price, I thought the whole value menu thing would go away. Instead, they are now competing over what they can offer on a value menu. That’s going to be tough on the industry.” . “If there is a QSR that has found a niche and attracted a loyal clientele, it is Chick-fil-A. They have created a value set for their people. They have created a culture and a value proposition. Chick-fil-A has differentiated itself in the market with a unique product, a different experience. They have a loyal base of customers and employees and you see the difference when you eat there. Wendy’s used to be that way but no longer.” . “Chick-fil-A has not played the value menu game, and they have done well, which is pretty incredible. They have grown carefully and consciously, which is the secret to success. They have kept it as a family business. It is just one example that you can find a niche. It’s not as if they invented the chicken sandwich, but their chicken sandwich is clearly better.”

 Howard Cannon, CEO of Restaurant Consultants of America This repeat source expects all QSRs to show improved sales in 2011, including Wendy’s and Arby’s. New leadership and refined operations will benefit both chains in 2011, but this source was more positive on Arby’s than Wendy’s. Arby’s could shine in 2012, but Wendy’s must work harder because it plays in a more competitive QSR genre. Both brands need to focus on core menu items, targeted initiatives and well-financed creative marketing. . “They made some significant management changes last year, and they have been good for Arby’s and Wendy’s. They do seem to be getting their arrows aligned. They got rid of people who had been in the system a long time. Some of the leadership had been there too long. The Wendy’s consumer tells us They have gotten an infusion of fresh thinking. It has not necessarily that Wendy’s is ho-hum. They shown up, but it will. It happens internally first with employees and have to go through the same franchisees, and we’re seeing that.” process as Arby’s. They need . “I would bet that over the next three years, you will see Arby’s with a powerful comeback. Their new prototype buildings are beautiful. They excitement, new buildings, new had the blueprints, but they had not rolled them out because of capital designs, and new initiatives. I constraints.” have not seen that. I don’t have . “The Wendy’s french fry marketing was not very strong. If you survey as much positive feeling for consumers about Wendy’s new fries, you are not going to hear much. Wendy’s. You hear and see the negative bloggers because they are making a louder noise. ... I actually think the new fries are a pretty good product, Howard Cannon but marketing has to support it.” Restaurant Consultants of America . “The Wendy’s consumer tells us that Wendy’s is ho-hum. They have to go through the same process as Arby’s. They need excitement, new buildings, new designs, and new initiatives. I have not seen that. I don’t have as much positive feeling for Wendy’s.” . “The challenge for both brands is perception in the marketplace. Neither brand has a very powerful image. They need to come up with new marketing driven by humor or some new and exciting product. They need a new buzz to buzz about. I don’t know if that buzz will come from french fries or breakfast. So far, the feedback indicates they have had minimal impact. But if you look at the marketing, there was minimal marketing.”

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WEN Boosts Sales with New Items But Needs Core Focus

. “I don’t think Wendy’s has found its way because I have not seen evidence of it yet. Even they are not tooting their positive horn.” . “It is difficult when you have two different brands. The people at the top have to decide where they want to put their energy. They are trying to focus on both, but Arby’s truly has less competition. Wendy’s has a ton of competition. Arby’s has less competition and less of a hurdle. If they do something and they do it well they will be rewarded.” . “Wendy’s makes its money on burgers and fries. They can come up with all the cool stuff they want, but they should be putting their money on The people at the top have to pounding out more burgers and more fries as fast as they can and the decide where they want to put customer will reward them. That’s what the customer wants from Wendy’s: burgers and fries, and fast. Everything else is just noise. For their energy. They are trying to Arby’s, it’s all about the roast beef sandwich and the chicken sandwich. focus on both, but Arby’s truly They should focus on that and get it out fast.” has less competition. Wendy’s . “They are getting the operations right; they are getting the strategy has a ton of competition. figured out. I would not be surprised if in the summer they come out with some new, big idea. Both companies could succeed at breakfast. Howard Cannon Any company with that many stores can be successful with breakfast. “ Restaurant Consultants of America . “It all comes back to leadership. If you have six or seven initiatives underway, you are not going to be very successful. But with one or two targeted initiatives and with money behind it, you can make them successful.” . “You have to make sure your operations are running smoothly and then you create interest through marketing that makes the consumer believe you have something new and different. I don’t think either one of them has a quality product problem. I see it as a marketing problem.” . “It’s all about the number of initiatives rolled out and the intensity with which you roll them out. Previously, they had so many initiatives going at once that there was no momentum for any of them. If you ask the consumer what they think of Wendy’s and Arby’s, they will say they are old and outdated. Hopefully, their new leadership can identify some new targets and initiatives. The initial initiative was to cut costs. Why not make that an automatic, all the time. There is no reason to waste money. That’s what you see with the bigger companies. They rarely have cost-cutting initiatives because that’s already part of their operation so any new initiative can just focus on the customers’ needs.” . “I predict that by the end of 2011, all of the fast food chains will be up in sales. I think the economy is back with serious momentum. Second, they have all been pinched, so they tightened their belts. All of them put money into new systems to improve margins and all of that will pay off huge so that by 2012, they will be singing.” . “McDonald’s does so many things right, it’s crazy. But that’s why Arby’s seems strong. They have seriously underperformed for years, so to do anything right seems like a plus. ... There is so much competition for them that they have to be far better than what they have been. I’ll say this: Wendy’s doesn’t look so bad when there is Burger King out there.”

 A university professor of food service management, textbook author and food service researcher This repeat source said Wendy’s must focus on holding share and increasing traffic before it can expect a rebound. Arby’s must return to its core menu identity and broaden its audience. For Wendy’s, the new fries could boost company sales if well executed. New products have a shelf life and should not be viewed as game changers. Wendy’s should not roll out breakfast everywhere because success depends on locations that leverage the benefit of auto traffic flow. . “I saw the new fries touted on TV as natural-cut with sea salt. I expected thick-cut fries with the skin on, crispy and well-seasoned. I thought it would be unique and different. I was gravely underwhelmed by the product. I did not think it was as good as the old ones. It was just one sample in Florida off the highway. As with any products’ ability to excel, it’s all about the preparation. It’s one thing to make them in a controlled test kitchen and quite another out in the field.” . “The fries can be a significant food item for Wendy’s that could put them ahead with a signature french fry. No one else has a noteworthy fry that has created a firestorm. The ad peaked my interest. Someone was trying to create a better french fry, so the expectation was for something different. But I went in and I thought ‘this is it?’” . “Their biggest challenge will be to hold market share and keep traffic at an equal level. QSRs have held their prices for so long by running all these value meals. Everyone has to raise prices, but the way to do it is to create or invent a new product. The only way to increase sales with a price increase is to come up with a totally new menu item. Then you can charge anything you want without seeming as if you are raising prices.”

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WEN Boosts Sales with New Items But Needs Core Focus

. “No one can sustain a product advantage over the long run. If it’s so hot and so good, everyone will do it. What you think is a monopoly The fries can be a significant becomes a commodity. It’s all in the hands of the advertising agencies food item for Wendy’s that to come up with a catchy, clever presentation. Once you get them in, could put them ahead with a don’t disappoint them because you may only have one chance to bring them in.” signature french fry. No one . “It will be difficult for Wendy’s to base their rebound on one new else has a noteworthy fry that product innovation because if it takes off, every other place will roll it has created a firestorm. The ad out.” peaked my interest. Someone . “Arby’s used to push the high end of the ticket, but they have backed was trying to create a better off with more of a value-priced meal. I used to enjoy their market fresh sandwiches, and in general the staff was always friendly. It was clean french fry, so the expectation but rarely busy. It’s different now. You see baby boomers and people in was for something different. their mid- to late 60s eating there. You don’t see younger people in But I went in and I thought ‘this there. They’ve got to get away from that. My worry for Arby’s is that they is it?’ are getting away from their core product. I think roast beef when I think Arby’s.” Professor of Food Service Management . “I see Wendy’s making an attempt at breakfast. There’s a lot of [breakfast] competition, including throwing something into the toaster or microwave at home and brewing a single cup of coffee with a Keurig machine and eating in your car. But if you can boost your sales at even one store by 10%, it’s like having an additional store.” . “Everyone is going into breakfast like [Dunkin’ Brands Inc.’s] Dunkin’ Donuts, Starbucks [Corp./SBX] and McDonald’s. Burger King is trying to pull into that market. Breakfast has great potential for increasing your business. Roughly 16% of all QSR transactions are breakfast. And 61% of all purchases are at a drive-thru or a carryout, including for places like [The Briad Group’s] T.G.I. Friday’s and [DineEquity Inc.’s/DIN] Applebee’s. That’s how time-impoverished we are.” . “For QSRs, the key to breakfast is location. The Wendy’s near us is on the wrong side of traffic for breakfast. No one is going to take the time to cross traffic. If Wendy’s is going to be successful with breakfast, they can’t just convert all of their stores. They have to figure out which ones are on the breakfast side of traffic because people don’t go in and sit down for breakfast on the way to work.” . “Then there are the new laws. When that nutritional information goes up on the board it will have a huge impact on all restaurants. People will look at the calorie count, and it will have an impact on your decision. How they price those items will be most important. If they see a light item moving, they can push those prices up.” . “Commodity prices are about to go up. The chains have beaten down the food processors and distributors for years to the point where they margins are minimal. They were fighting delivery charges, surcharges for gas. The distributors absorbed all of that. That’s about to change, and there will be menu price increases.” . “They need to sell more beverages to make money. Unsweetened ice tea has the highest margins. It’s the least expensive item they can serve. They can charge $1.79 for a small ice tea and the cost of the tea is maybe 5¢ and the cup and stirrer maybe 15¢. That’s why you see these deals for buy one dinner get the other at 50% off with the purchase of a beverage.” . “Starbucks is trying to do something with lunch. They are following the European model with panini machines and heated sandwiches. It may start to cut into QSR business. After a while you get tired of hamburgers.”

Additional Sources Five secondary sources focused on new product launches at Wendy’s, including the Natural-Cut French Fries, and trials of the revamped breakfast menu and deluxe cheeseburger. A blogger’s review of the new fries garnered many negative remarks from readers. Lastly, a recent report showed the lack of attention and significance consumers pay to the calorie count on fast-food menus, potentially dampening the effect of federally regulated postings of calorie counts in March.

 A Jan. 10 About.com article The article discussed customers’ disappointment with Wendy’s new french fries, which they equated to New Coke. http://franchises.about.com/b/2011/01/10/wendys-new-fries-worse-than-new-coke.htm

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WEN Boosts Sales with New Items But Needs Core Focus

. “If customer response is any indication, Wendy’s new fries are this generation’s ‘New Coke.’ People tend to be loyal to their burger chain, with people who favor McDonald’s almost never going to Burger King and vice versa, and people who favor Wendy’s hardly ever going to the others. But the response to the new fries, with the skins left on and a large amount of sea salt added, suggests that customer loyalty has been stretched to the breaking point.” . “In my previous blog entry (Wendy’s New Fries—Love ‘Em or Hate ‘Em) each of the first 60 comments was critical of the new fries, some of them intensely so. Words like ‘disappointed,’ ‘awful,’ ‘disgusting,’ ‘horrible’ and ‘disaster’ were used. Once-loyal customers said things like, ‘It makes me sad to think I can never enjoy another meal at Wendy’s.’ One said, ‘They are practically salt licks now.’ Another, ‘They actually look dirty with the skin still on them. They may be ‘trendy,’ but they are certainly not tasty. Give me taste over a fad any day.’” . “It gets worse. One said, ‘The new fries are the worst fries I have ever tasted.’ Another, ‘These new Wendy’s fries are worse than Burger King’s, and that is saying something!’ Yet another, ‘Well, I guess stopping at a Wendy’s is now out of the question. I could stomach the cold burgers because of the fries now there is no reason to go there.’ Two commenters suggested that Wendy’s founder Dave Thomas must be rolling over in his grave. One went all the way to suggesting true doom for the company: ‘Is Wendy’s trying to go out of business? Seriously.’” . “And that’s just the responses to my previous blog post on the subject. Facebook now has pages with titles like ‘Wendy’s new fries SUCK!’ (the largest, it has 187 members), ‘Protest the new Wendy’s fries,’ ‘Screw the new Wendy’s fries! Bring back the old ones’ and ‘Change Wendy’s fries back!!! The new ones suck.’ There’s even one titled ‘Wendy’s Classic Fries.’” . “Wendy’s broke one of the cardinal rules of business: ‘If it ain’t broke, don’t fix it.’ Too many of their customers haven’t liked the way their fries have been ‘fixed.’ If Wendy’s doesn’t go back to their old fries, they may end up ‘broke,’ in more than one sense of the word.”

 A Dec. 1, 2010, Houston Chronicle article The article provided more detail behind Wendy’s switch to Natural-Cut French Fries and the reporter’s preference for the new fries. http://www.chron.com/disp/story.mpl/life/hoffman/7319016.html . “Here’s the blueprint: a large order of fries cut from russet potatoes with the skin on, fried in vegetable oil with no trans fats, sprinkled with sea salt. There, that wasn’t so hard, now was it?” . “Total calories: 520. Fat grams: 25. Dietary fiber: 7. Carbs: 67. Manufacturer’s suggested retail price: $1.99.” . “Natural-Cut Fries with Sea Salt fit right into Wendy’s ‘you know when it’s real’ campaign. These fries are skinnier than Wendy’s old fries, so they fry up noticeably crispier, distinctly darker and absolutely tastier. You can see the skins still on, especially if you get a couple of end cuts in your order.” . “While your favorite Food Network chef is cutting, soaking, blanching and double-frying his fries, Wendy’s goes the simple, one-step route of frying first-quality russets in a proprietary blend of vegetable oils.” . “Wendy’s is holding the price of Natural-Cut Fries with Sea Salt, in every size, from the 99-cent Everyday Value order to the $1.99 big boy. The only difference that really counts— bottom line—these new fries taste better.”

 A Sept. 3, 2010, Columbus Dispatch article The article detailed Wendy’s test run of its new breakfast items at select Columbus locations. http://www.dispatch.com/live/content/business/stories/2010/09/03/wendys-will-test-breakfast-items-here.html . “Wendy’s efforts to give breakfast another try are showing up at 10 central Ohio restaurants.” . “The new menu being tested includes traditional items such as a sausage biscuit and coffee and more distinctive items such as a bacon fire-roasted burrito, egg and cheese panini, and artisan egg sandwich.” . “The move into the local restaurants comes as the chain’s parent company, Wendy’s/Arby’s Group, continues to test the new menu in three markets: Pittsburgh, Kansas City, Mo., and Phoenix.” . “Wendy’s has made several forays into breakfast, but it has never had the success other chains, such as McDonald’s, have achieved.” . “The latest round of rethinking its morning menu was announced in January 2009, when Wendy’s said that it would stop serving breakfast in about 300 of its restaurants as part of an effort to cut costs and refocus its breakfast program, the company told The Dispatch at the time.” . “The new menu is being rolled out locally on a test basis because the central Ohio market is ‘our hometown,’ said Wendy’s spokesman Denny Lynch.” . “The 10 local restaurants serving the new menu are among the Wendy’s that continued to serve breakfast even after the January 2009 move.”

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WEN Boosts Sales with New Items But Needs Core Focus

. “Morningstar analyst Joscelyn MacKay said it’s not surprising the company is offering such promotions, considering the efforts it has focused on the new breakfast initiative.” . “‘Getting a new and improved breakfast menu is going to be very important to them,’ she said. ‘The company wants to be very cautious about it, because they want to do it right rather than quickly.’” . “‘We’re pleased with the new breakfast menu and believe that waiting to get the products right is the best decision. We are anticipating the 2011 [nationwide] launch and believe it will be key to driving [customer] traffic.’” . “Breakfast has become increasingly important and competitive among fast-food operators as chains fight for precious consumer dollars and loyalty. In fact, breakfast accounted for nearly 60 percent of the restaurant industry’s traffic growth over the past five years, according to the NPD Group.” . “The segment is even credited with blunting the effect of the economic downturn during the past two years, NPD said.” . “As a result, more fast-food chains have increased the focus on the breakfast segment in a variety of ways: by introducing new items, adding items to the breakfast ‘value’ menu and in the case of Subway, introducing breakfast offerings for the first time.” . “Breakfast has been and is projected to continue to be a bright spot for the restaurant industry, said Bonnie Riggs, NPD’s restaurant analyst. One reason is that consumers who visit a chain for more than one mealtime tend to be more loyal, recommend the chain, eat there more often and contribute more volume, she said. . “There is a major long-term opportunity for restaurants to steal (market) share from those who eat at home and those who skip breakfast, Riggs said.” . “In July, 37 percent of adults had eaten breakfast at a fast-food restaurant nationwide, according to Scarborough Research.” . “The consumer research firm said McDonald’s held the top spot among fast-food breakfast diners, with 46 percent of adults eating breakfast there in July. That was followed by Dunkin Donuts and Starbucks, each with 19 percent, and Burger King with 12 percent.”

 A Nov. 9, 2010, article in Nation’s Restaurant News The article introduced Wendy’s new cheeseburger being tested in Las Vegas. http://www.nrn.com/article/wendys-tests-new-line-burgers-las-vegas?ad=news . “Wendy’s is testing a new line of premium burgers in the Las Vegas market named for the chain’s founder, Dave Thomas, and promoting them with commercials starring his daughter.” . “Dave’s Hot ‘N Juicy Cheeseburgers feature a thicker, quarter-pound patty and new ingredients like crinkle-cut pickles on a buttered, toasted bun. The upgraded burgers are being advertised in Las Vegas as single-, double- and triple-patty varieties and are being tested at different prices, said Denny Lynch, the chain’s senior vice president of communications.” . “The advertising campaign being tested in Las Vegas marks a return to form for Dublin, Ohio-based Wendy’s. The first of three commercials for Dave’s Hot ‘N Juicy Cheeseburger debuted Nov. 8 starring another familiar face from the Thomas family, Dave’s daughter Wendy.” . “While she no longer sports the pigtails from the Wendy’s logo, the brand’s namesake pitches the new burgers by talking about her father, who opened the first Wendy’s in 1969 and appeared in all the brand’s commercials from 1989 until his death in 2002.” . “Since that time, Wendy’s has searched for continuity in its marketing efforts, going through several advertising agencies and campaigns before rolling out its current quality-focused positioning, “You Know When It’s Real,” developed by its lead creative agency, Kaplan Thaler Group.” . “Wendy’s new-product pipeline has been active since the brand merged with former Arby’s parent Triarc Cos. to form Wendy’s/Arby’s Group in 2008. New products include last year’s introduction of boneless wings and the rollout this year of four new premium salads. Dave’s Hot ‘N Juicy Cheeseburgers would give the nation’s No. 3 hamburger brand an answer to McDonald’s Angus Third Pounders and Burger King’s Steakhouse XT.” . “A report in the Las Vegas Sun said Las Vegas is the only test market for the new burgers and a national rollout is expected in June 2011. However, Lynch told Nation’s Restaurant News that an analyst is speculating about that date and added that Wendy’s is ‘a long way from deciding’ whether the burgers would go systemwide.” . “Industry marketing executive Gary Stibel, chief executive of the New England Consulting Group, said developing new products and positioning them as innovative— which he cited as a major reason for quick-service leader McDonald’s success over the past few years while Burger King and Wendy’s have struggled— is a good strategy to turn sales around.” . “But the execution of the campaign has struck him as lackluster, he said.”

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WEN Boosts Sales with New Items But Needs Core Focus

. “‘Naming your best product after the founder has credibility, but they haven’t made the sandwich look that much better than the competition,’ Stibel said. ‘No. 2, the way they’ve involved Dave does not recognize the man the way it could have.’” . “Referencing Dave Thomas in new commercials is a good idea, Stibel said, but he thought the execution came off ‘benign’ because the script has Wendy Thomas speaking of her father the way any spokesperson could. He added that while Wendy Thomas is the daughter of the brand’s founder and a Wendy’s franchisee, she is not an ‘aspirational’ spokesperson with the status of an actress or celebrity or the authority of a gourmet chef.” . “‘It’s a throwaway,’ Stibel said. ‘There are no tears in her eyes and no emotion. This [product] could have been lofted up as a tribute to one of the last, great hamburger restaurateurs, but it comes off as just another burger, this time from Wendy’s.’”

 A Jan. 18 CNN Health blog post The blogger wrote that customers pay little attention to calories listed on restaurant menus, casting doubt on the effect of national rules coming in March that require fast-food chains to list nutritional information on menus. http://pagingdrgupta.blogs.cnn.com/2011/01/18/customers-pay-little-heed-to-calories-on-menus/ . “Posting calories on menus has little effect on what customers buy, according to a recent study.” . “Customers at TacoTime (a western Washington chain) who read how many calories are in their chimichangas, burritos and tacos on the restaurant’s menu were just as likely to order them as people who don’t have that information.” . “For 13 months, researchers recorded food purchases at seven suburban TacoTimes and seven inside Seattle, Washington. Seattle passed a law requiring that all fast food chains post their calories, fat and sodium content to the menus in 2009.” . “Once the law went into effect, public health researchers in Seattle and researchers from Duke-National University of Singapore Graduate Medical School compared what people were buying at TacoTimes inside and outside the city.” . “Contrary to their hypothesis, ‘We found no difference,’ said lead author Eric Finkelstein. ‘We looked at the variables—the transactions, total calories per transaction, food, dessert, entrees. We weren’t able to find any effect whatsoever.’” . “The findings suggest that having calorie information did not change public health behavior.” . “This may not be totally surprising. After all, obesity rates have continued to soar after pre-packaged foods were required to carry nutritional content, said Finkelstein, an associate professor of health services at Duke-National University of Singapore.” . “Similar studies about calorie counts in menus have found either small, marginal effects or no difference at all.” . “‘This is just one chain, so it’s possible to find more compelling results in different chains,’ Finkelstein said, about the TacoTime’s study.” . “Regardless, nationwide changes are coming. The health care reform bill, passed last year, requires fast food chains to post their nutritional information on menus. The FDA’s rules on for this are due in March.” . “While calorie info on menus may not unleash widespread weight loss, it could have some benefits, Finkelstein said.” . “‘My sense is that if these laws are to have an effect, it’s going to be on the supply side,’ he said, referring to fast food companies. ‘If they’re embarrassed about 2,000-calories lunches, they might try to skimp on calories, sodium and fat.’”

Next Steps Blueshift’s next report will focus on the rollout of Wendy’s breakfast and deluxe burger products, including the new pancakes in Columbus and any additional locations for the DT Deluxe and Hot ‘N Juicy hamburgers. We will revisit franchise and supplier sources to learn if their expectations for 2011 growth are on track. We will pursue the emerging trend of Chick-fil-A’s growth to learn if it is taking share of the chicken market from Wendy’s and McDonald’s. Lastly, we will follow up on the new Angus beef sandwiches as a permanent part of the premium line and focus on core menu items at Arby’s.

Additional research by Carolyn Marshall, Susan Jennings Kantari, Lindsay Gadsby, Rebecca Gallegos, and Erica Franklin

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WEN Boosts Sales with New Items But Needs Core Focus

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