I want to look past the basics of Wendy’s Q4 and 2015 sales report on Tuesday, although those numbers were quite strong, as you’ve likely seen. North American company same-store sales were up 4.8% for the quarter, 3.3% for fiscal 2015. Average unit sales increased 3% to $1.54 million and company-store margins rose 190 basis points to 17.7% for the year.
The company attributed its strong Q4 in part to its remodeling program as well as its “4 for $4” initiative, which forced many of it competitors into similar bundling efforts. Future marketing will focus on the “deliciously different” message it is using now to promote the improvements recently made to the Dave’s Hot ‘n Juicy Cheeseburger line. The chain continues to test a new Grilled Chicken (marinated, all-white-meat) sandwich and non-meat Black Bean Burger, and says test-market reactions have been favorable.
But what interested me most during the Investor Day presentations was a quick tutorial on the QSR marketplace given to attending securities analysts by Emil Brolick. He already has ceded his president title to CFO Todd Penegor and will pass him the CEO title as well this spring, but Brolick remains one of the clearest observers of the QSR scene. I will miss his quarterly earnings presentations. Over several slides, he argued that the QSR marketplace is the place to be, that the burger segment is the strongest and that, of course, Wendy’s is best positioned to thrive in this market. His overall message was that brand relevance is what separates brands that succeed from those that do not.
You may not have been able to hear his presentation, so I’m giving just a few highlights here. There’s data that should be of use to both chains and independents and there are some insights for all. I apologize to Emil Brolick if I didn’t get all his words exactly right, but I think I caught the gist of his interesting talk:
“This is a massive, massive business: 1.5 trillion dollars. And this is the food business, [almost evenly] split between food eaten at home and at foodservice. The message I’m sending here is that we see ourselves as being in the food business, not just the foodservice business. But think of it: if you shift one share point in this business, it’s $15 billion dollars. So we see food-at-home as our No. 1 competitor. It’s not the other traditional quick-service restaurant down the road; it’s food at home.”
“Take that same information and convert it into eating occasions [instead of dollars]: 477 billion eating occasions on an annual basis. This includes snacks and all occasions. Foodservice, which has about 49.9% of the dollars, has about 18% of the eating occasions. That means 82% of the time, people decide on an at-home experience. This is why at-home is our No. 1 competitor. And the way to take share from at home is by driving convenience and value, which is what QSRs have always done.”
“There has always been three important segments: QSR, midscale and casual dining. QSR is 79% of all the visits. This tells you that far and way QSRs are doing the best job at delivering convenience and value. Midscale has been losing share for as long as I can remember. Casual dining recently has been losing share. And as we look out into the future I would expect mid-tier restaurants to continue to lose share. I expect casual dining to be flat-ish, maybe up a little bit. They have become very aggressive promoting and trying to get that business back.”
“If you look at the last 14 or 15 years, any time you see a market that is growing year after year that tells you something about that market. This is a market working extremely hard making sure that we’re delivering convenience and value to consumers, and we’re doing it consistently and we’re building share. QSR has gained 5.5 share points; 3.4 billion incremental visits [since 2001]. It’s a massive business.
“If you look at traffic growth in the market, we see that the last several quarters have been quite strong. And I’m going to attribute this to a couple of tings. One, The ‘new QSRs’ or fast casuals are doing a nice job; they’re continuing to grow. But one of the real driving forces is the resurgence of traditional QSR restaurants, as well.”
“Like in many businesses out there, the Big are going to continue to get bigger. The larger national chains have been taking share from independents and smaller chains. And remember that Hispanics—the largest demographic force out there—indexes at 121 against national chains. What’s interesting is they index a 53 to independent restaurants. They love national brands.
“So QSRs are the place to be, and I contend the Hamburger category is the [QSR] category to be in. It has been the largest category forever, and any time you’re on top for a long time, it tells you something special about the work being done by the brands to retain that relevance and deliver convenience and value.”
“Look at the ‘new QSRs’ [fast casual] and they’re 7% of the traffic. What’s interesting about that market is that there are three brands—Chipotle, Panera Bread and Panda Express—that account for 48% of that 7%. After that it’s really quite a fragmented market. The other category that’s interesting is retail, and retail has been growing quite attractively. The biggest force in retail is the convenience store. And the brands like Wawa and Sheetz that are really food-forward with custom-prepared food are doing a great job. C-stores are 57% of that 18% [that is retail].
“Household income is one of the most predictive factors as you look at the industry and growth rates. There was great growth between 1996 and 200: household income up 8.2%. But then between 200 and 2014 it declined 7%. So essentially household income has been flat for an 18-year period of time. When you look at our success with our “4 for $4” initiative, it’s not surprising: there are simply a lot of households out there who are very heavy users of quick-serve restaurants. They want not just an attractive price point, they want high quality fresh food and there’s no one who can deliver on that as effectively as Wendy’s can.”
“It’s also important to recognize that this is a diverse customer base, not just demographically but economically. And like virtually every consumer market out there, it’s segmented. About a third of QSR checks—and these are per eater, not per transaction—are $4 and under. About a third are in the mid-tier, that $4 to $6 group. And there’s a third of the people who can afford to pay more. You have to make your product and segmentation strategy and you marketing strategy deliver against all these groups.”