Wendy's is well situated as the 4th largest QSR sandwich player (by domestic system-wide sales), leveraging its “Quality is our Recipe” brand positioning which stresses a commitment to fresh, never frozen, North American beef. Wendy’s marketing claim is that its fresh beef, cooked-to-order burgers are juicier (better burgers) and aggressive marketing tactics have attempted to secure credit for its use of costly fresh beef (Wendy's is recognized by consumers as best-in-class vs. the top 5 hamburger chains for high-quality food, fresh food and food that tastes better). The brand's sensible menu strategy is to: reinforce its hamburger quality leadership; raise consumer expectations for how good chicken can be (with launch of new Chicken Tenders); drive unique visits through salads & beverages; innovate with on-trend flavors (like Bacon Queso); and continue helping customers with a multi-faceted approach to price/value. While the 4 for $4 promotional emphasis has helped support the brand's sales and traffic, Wendy's current challenge is to boost store-level profits by increasing its sales mix of higher margin menu items (in return for its premium positioning) while continuing to improve labor efficiencies. In any case, while it is notable that the brand's relatively low average check is inconsistent with its quality positioning (which could be partially compromised by its 4 for $4 promotional emphasis) and lack of low priced breakfast options (which also keeps it from addressing a key QSR daypart), the chain's system-high store level AUV exceeds the segment average. Further, the system's going forward AUV should benefit from remodels, store relocations, closures of underperforming stores and relatively high new build AUV levels. Also, traction with apps, kiosks and delivery should contribute to top-line growth. In conclusion, while Wendy's has progressed in its efforts to compete around value, the brand's ongoing challenge is to maintain traffic while layering in margin expansion by fully cashing-in on its fresh beef, high quality QSR+ halo (while it lasts).  


Menu & Promotions

  • RR’s Menu & Promotions analysis provides data for 56 chains (33 QSR and 23 FSR) including: (1) a 5-year history of total menu items (2013 – 2017); (2) new product intros; (3) average check; (4) daypart sales mix; (5) menu composition; and (6) monthly new product calendar.
Report Highlights
  • Average menu size contracted for the 3rd consecutive year, with QSR paring the most (-6.5% versus -2.3% for FSR). Operations continue to grow more complex with increased menu customization options, new digital ordering platforms and delivery. With speed, convenience and improved food quality at the forefront, the brands increasingly recognize that they can't raise the bar while also trying to be everything to everyone.
  • New product introductions and LTOs declined -4.5% for FSR due to a focus on value and efforts to reduce operational complexities but increased +8.8% for QSR (reflecting renewed innovation in the sandwich & coffee/bakery segments).
  • Average check growth moderated (+2.3% QSR and +1.8% FSR) due to less aggressive menu price increases and more discounting. Based on an RR survey, franchisees took +2.1% in price during 2017 and expect to take an additional +1.6% in 2018 which should help the industry’s relative positioning vs. grocery stores which are finally beginning to moderate their price declines.


McDonald's is engaged in an extremely ambitious modernization program with many moving parts. Brand strategy is built around its Velocity Growth Plan which is designed to: retain existing customers by bolstering core strength in family occasions & food-led breakfast; regain lost customers by improving food taste, quality, convenience & value; convert casual to committed customers by elevating & leveraging the McCafé platform and enhancing its snack & treat offerings. While this system upgrade is still in its early innings, strong 2017 comps with positive traffic for the first time in a long time suggest that these strategic initiatives are working. In any case, we think McDonald's could not lose by simply returning to its value roots which it has done very well (check is -19% below segment average which reflects that price value is a key accessibility strategy foundational to the brand’s identity). The menu emphasizes value with many options at different price points starting as low as $1 and increasing in single dollar increments until the 2 for $4 breakfast LTO price point. Building on this foundation, McDonald's is stretching with its: fresh beef initiative which helps the brand finally address the better burger segment; new Buttermilk Crispy Tenders which helps build the brand's chicken credentials; and the re-introduction of its espresso products which keeps McCafe in the game. On top of this, McDonald's is bolstering its access and convenience with its Experience of the Future, mobile order & pay and delivery initiatives. Fortunately, all-time high unit level sales and cash flow can help fund all these investments (including the remodels). However, it is important to note that the system's operational complexity is already challenged by capacity constraints given a very high AUV and can only be aggravated by all these new initiatives. Notably, speed comes a close second to value in terms of brand equity for this iconic chain and its drive-thru times are already challenged which is a concern given that this old fashioned channel still drives the vast majority of its business. In conclusion, while McDonald's means to take no prisoners, it must remain aware that at the end of the day, the game is its own to win so long as it can execute as advertised and only time will tell if its eyes are bigger than its stomach.



IHOP is building upon its breakfast heritage leadership (particularly around "world famous" pancakes) with strategic improvements that include: plans to move towards everyday value; improved marketing; remodeling progress; efforts to expand off-premise sales channels; and ongoing efforts to enhance the guest experience. We particularly appreciate its plans to explore an everyday value platform with the potential to increase frequency while moving the brand away from its historical special occasion positioning. New marketing should help break through the clutter with consistent messaging (pancake focus) and offbeat humor while strength in social media and new IHOP N’ GO online ordering platform plays well to the brand's younger demo (compared to peers). Off-premise prospects especially benefit from the concept's 24 hour accessibility. A reinvented in-restaurant experience and operational improvements have driven higher guest satisfaction scores (up +500 bps during 2017), thus adding further to the brand's all important total value proposition. Having said all this, we still must wait to see how well these strategic improvements move the needle given the system's sales deterioration over the last 2 years. In conclusion, while we like IHOP's directional improvements and solid execution (helping to reinforce the brand's iconic foundation that extends deep below the consumer landscape), we are particularly interested in how the chain is able to address everyday value in a margin friendly way given the apparent necessity of this strategy in the current operating environment.  


4Q Same Store Sales

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