Analyst: Wendy's May Top Burger King

NRN.com|Nov. 30, 2011 5:30 pm EST

Wendy's soon could leapfrog Burger King as the second-largest burger chain in terms of U.S. market share, according to a new research note from securities analyst Mark Kalinowski of Janney Capital Markets.

"We expect Wendy's to overtake privately held Burger King for the No. 2 market share position within the limited-service hamburger sector, perhaps as soon as this year," Kalinowski wrote.

The chain has been positioning itself to grow in the upcoming years with upgrades of core menu items like the Dave's Hot 'N Juicy Cheeseburger and W Cheeseburger, and new restaurant designs.

Kalinowski's bullish projections for Wendy's factored in same-store sales momentum and followed a visit to a new Wendy's prototype in Phoenix, he wrote. That location not only featured the chain's new "urban" design, but also was testing the Redhead Roasters premium coffee line and baked goods sold during the breakfast daypart, both of which the analyst expects to boost same-store sales over the next several years.

Aiming for The King

For years, Wendy's has been the third-largest U.S. burger chain in terms of size and market share, behind No. 2 Burger King and No. 1 McDonald's, which has more than 14,000 domestic restaurants. But Kalinowski wrote that Wendy's soon could command more of the limited-service hamburger market, despite having fewer locations than Burger King, with 7,523 U.S. restaurants.

The vast majority of Wendy's more than 6,578 restaurants are located in North America. The brand is testing four different prototypes in several markets this year and said it would embark on a wider remodeling plan over the next few years, which Kalinowski wrote could increase same-store sales 4 percent to 6 percent per year.

"At present, we believe that Wendy's has less than 20 revamped restaurants total in the United States," he wrote, "which gives the company the opportunity to convert hundreds of them — indeed, thousands — in coming years. All else equal, this should provide a boost to same-store sales trends over 2012 through 2016."

While Wendy's and Burger King both have been upgrading their menus over the past year, Wendy's has had more sales success during that time. Same-store sales swung from negative to flat for the first quarter, and then increased 2.3 percent for the second quarter and 0.9 percent for the third quarter. By contrast, Burger King's same-store sales losses, while narrowing sequentially, were 6 percent for the first quarter, 5.3 percent for the second quarter and 0.3 percent for the third quarter.

Upgrading Wendy's unit exteriors and dining rooms should improve perceptions with guests, Kalinowski wrote, noting that the Phoenix prototype ditched the mansard roof that became iconic of quick-service restaurants in the 1970s. He also cited a fireplace and flat-screen TVs as upscale design touches.

"Ultimately, for the better fast-food chains, such features seem likely to become commonplace over time," he wrote. "Essentially, these quick-service concepts are upgrading the in-store experience, making them look like some of the better fast-casual concepts over time."

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Rise and shine

Wendy's prototype also features new equipment and the ability to execute a new breakfast product line, Redhead Roasters, Kalinowski wrote.

"Wendy's indicates to us that the Redhead Roasters line of menu items is only available in a very small group of test stores at present," he wrote. "We would not be surprised to see some form of Redhead Roasters make its way nationwide in time."

Janney Capital Markets photos indicate that premium coffees in the line range from 99 cents for a small cup to $1.49 for a large cup, and Iced Roasters are available in mocha, caramel and vanilla flavors for up to $2.49 for a medium cup. Differentiated drinks, such as the Mocha Frosty Roaster and Caramel Frosty Roaster, also are on the menu and could compete with successful blended beverages at McDonald's, like McCafé Frappes and Real Fruit Smoothies.

Baked goods on the morning menu included Cinna-Middles, a Fresh Baked Oatmeal Bar, a Cinnamon Crumb Muffin, and cookies and brownies.

Kalinowski also noted that the Phoenix location's two Coca-Cola Freestyle machines, which can pour more than 100 different soft drink flavors and feature a touch screen interface, could be a big segment differentiator if Wendy's becomes an early adopter of the technology.

"Over time, we expect these types of beverage dispensers to become standard for many quick-service concepts," Kalinowski wrote. "Put another way: If Wendy's adopts this technology on a wide scale basis, does anybody really think that concepts such as McDonald's will simply let Wendy's keep such an advantage over time?"

Dublin, Ohio-based Wendy's has indicated in earlier earnings calls that it sees the potential to grow to as many as 8,000 domestic locations and expand internationally to as many as 8,000 franchised locations in such markets as Brazil, China and Japan.

Contact Mark Brandau at mark.brandau@penton.com.
Follow him on Twitter: @Mark_from_NRN