Wendy's is going through its biggest reinvention in 50 years

Brian Sozzi

A honey butter chicken biscuit sandwich served during breakfast hours. The return of Wendy’s to Europe within 18-months. 50-piece orders of spicy chicken nuggets being ordered by those that saw a bullish Chance the Rapper tweet about them. The Baconator ordered on the Wendy’s app and delivered soon thereafter by Grubhub.

Clearly, this is not the steady as she goes Wendy’s (WEN) that Wall Street has come to know and appreciate over the past 10 years. No, this is a Wendy’s hungry for more frequent customers during the week. A Wendy’s that believes it deserves a place in breakfast besides heavyweights McDonald’s and Dunkin’ Donuts. A Wendy’s that appreciates its model of consistency honed through the years, but is locked and loaded on finally taking some well-calculated risks.

In short, the mild-mannered and all around nice guy Todd Penegor — aka Wendy’s CEO — is ready to write his own chapter in a fast-food chain founded in 1969 by Dave Thomas and known mostly for its fresh beef promise, spicy fried chicken and mostly U.S.-centric store base.

“This is a different Wendy’s. You think about having the courage to play to win, we are really trying to create a compelling accelerated growth story and then carry that into our brand and our stock,” Penegor tells Yahoo Finance.

Wall Street hit Wendy’s stock hard in September (-9.2%) amid the emergence of Penegor’s more aggressive growth strategies, notably the re-launch of breakfast. The stock has stabilized a bit, rising about 4% in October. The main concern among analysts — generally taken by surprise by the shift in Wendy’s growing plate of initiatives — is that the company is sacrificing near-term profits in another breakfast launch that may not work well due to serious entrenched competition.

Penegor says it’s time for Wendy’s to take some well thought out risks now that a good number of restaurants have been remodeled and customers are visiting more often.

Yahoo Finance caught up with Penegor fresh off his presentation — and those from his executive team — to analysts and investors at the company’s investor day Friday. The company released bullish third quarter preliminary North American same-restaurant sales growth of 4.4% and a 20% dividend increase.

The sales momentum in the business suggests Penegor is right that the time is now for Wendy’s to get after it, so to speak.

What follows is an edited and condensed version of the interview.

Brian Sozzi: Why is now the right time to pull the trigger again on breakfast?

Todd Penegor: We have been thinking about it for quite some time. We looked at it and thought what would it take to get back into breakfast and when would we be ready. We started looking at all the elements of our business. We have more than 50% of our restaurants re-imaged. We have over 50% of our franchisees new, and with a long-term view on the business. We have a very strong social voice and we really thought all of those tools lined up well to really take a good run at breakfast this time around.

So that gave us the courage and impetus to start working on it. And then we partnered with the franchisee community from day one to make sure they help us learn from the past and they could help us make sure we have something that was operationally simple. We want to get people in and out of the restaurant quickly. That’s why we have ended up with this breakfast menu that is very much simplified with 18 unique SKUs (stock keeping units) leveraging all our existing equipment, so there is basically no extra cost of entry to the franchisee community.

Wendy's fast food chain chicken nuggets are viewed in Bowie, Maryland on May 9, 2017. - An American teenager has broken the world record for the most retweets, in a crusade to win a year's supply of his favorite food: chicken nuggets.Beating out TV stars Ellen Degeneres and Kim Kardashian, and leaving former US president Barack Obama in the slow lane, 16-year-old Carter Wilkerson started his Twitter challenge on April 5 when he asked the Wendy's fast food chain how many retweets he would need to receive a year's supply of nuggets for free.And the web responded. On May 9, 2017, his message had been retweeted more than 3.4 million times, beating the record that Degeneres racked up at the 2014 Oscars, when she posted a selfie with a gaggle of film stars that included Bradley Cooper, Jennifer Lawrence, Meryl Streep and Brad Pitt. (Photo by JIM WATSON / AFP)        (Photo credit should read JIM WATSON/AFP/Getty Images)
Wendy's nuggets are high in demand. (Photo by JIM WATSON / AFP) (Photo credit should read JIM WATSON/AFP/Getty Images)

Sozzi: How hard will it be to plant a flag in breakfast when you haven’t been a significant player in breakfast before?

Penegor: It’s going to take some work. We are launching in the first quarter of next year. In year one, breakfast could get to 6% to 8% of our system-wide sales. So it will take a little while to ingrain the habit [among consumers], but we do believe breakfast can build to 10% plus of our systemwide sales over time.

But our marketing team has done a fabulous job with mainstream media and social media in getting folks to show up in a big way. And I think there will be a lot of dialogue around breakfast and we will be able to turn that spotlight toward us. I think we are going to get a lot of folks to show up early and we will have to be ready. We are going to have to start creating a great food menu so they love our food, but we will have to get them in and out of our restaurant quickly because they really want that convenience element in the morning.

Our biggest opportunity is frequency. We only have an average customer coming to Wendy’s five and half times a year. We have a huge opportunity by adding another day-part to really drive frequency of visits maybe not on the same day, but more times during the week.

Sozzi: Fair or unfair that most experts are comparing this breakfast rollout to other ones in the past that didn’t catch on?

Penegor: It’s not fair at all. Our other breakfast rollouts were regional tests. We gave the competition an opportunity to come in and put in national advertising against our regional market. Breakfast was also unbelievably complicated with 45 SKUs and unique equipment like panini machines and rolling toasters.

Right now we have made it very simple. We are leveraging all the existing equipment. All of the SKUs are sandwich based. And we can do all this with three people — basically two people to open the restaurant in the morning and then prep, and then one to work the drive-thru register. We have easy sandwich builds, but we have some unbelievably great-tasting food.

Wendy's CEO
Wendy's CEO Todd Penegor [Credit: Wendy's]

Sozzi: The Wall Street analyst community has also said breakfast will be a distraction for Wendy’s. Are they right?

Penegor: It’s not a distraction at this stage because of the simplicity we have created. We are able to build breakfast from scratch so we were able to build the menu architecture. We are able to build the staffing model. When you think about a menu that has easy builds, easy training for employees and a day-part in which people want to work. So as we go ahead and hire those 20,000 people we think it’s very achievable, it has folks very comfortable it will not be a distraction at all.

In the old days it was so complicated you had to take the general manager to staff the morning day-part. The franchisee community is very excited. Importantly, it has got us excited it won’t be a distraction from lunch or dinner. We are also funding this model with incremental new money for us into breakfast. We will use our royalty collections to invest that back into breakfast over the course of the first three years to help ingrain the habit [among consumers] and that will create a halo effect across our whole day of our business. There will be a lot more impressions for Wendy’s out there. And everyone who will be fighting us will have to shift money from lunch and dinner to defend.

Sozzi: Do you envision having trouble hiring 20,000 people for breakfast in such a tight labor market?

Penegor: It is a lot of people. But when you really boil it down market by market, it comes down to three people. So you need three more folks on staff. You can always shift some existing folks into the morning day-part. The morning day-part comes in at 5:30 a.m., gets ready for a 6:30 a.m. open and can be out of the restaurant by 10 or 11 a.m. It’s just a great quality of life for many people that fits their lifestyle.

We have been encouraged as we have been out there hiring for our existing restaurants that we can fill that day-part.

Sozzi: How long will you stick it out on breakfast?

Penegor: We are all in here. We have full commitment from our board of directors. We have full alignment around it with my leadership team. And we have full commitment to it from the franchisee community. So within the guidance we have provided, it’s clear that we will invest incremental dollars to ingrain the habit [among consumers] over the next three years. We will have to put some incremental dollars into it from the company perspective because we won’t be collecting enough ad funds and royalties to keep the weights we need in years one, two or three.

But we are in it for the long-run. This is a long-term play that we think has significant upside as we get out into 2022, 2023 and 2024.

Here comes the Wendy's breakfast menu in 2020.
Here comes the Wendy's breakfast menu in 2020.

Sozzi: Did you share a total cost for the breakfast rollout at investor day?

Penegor: We stayed away from a lot of the specifics, only because of the competitive perspective. We did say that in 2019 because we are funding some training and hiring we called out a $20 million investment. If you look at our presentation, it shows less of a loss in 2020 — so less than $20 million — but still not making money yet at a company level. We are making money at a four-wall restaurant level right away. And then in 2021, breakfast starts to become accretive to the company’s earnings stream.

Sozzi: How do you imagine your competitors will respond to your breakfast entry?

Penegor: We expect it to be highly competitive. We built the menu to ensure we had healthy margins. But we also built in a heavy dose of discounting from one, a competitive response and two knowing we will have to have a heavy promotional calendar to get folks to visit for breakfast. We want them to try our food.

So, we are planning for that strong competitive response. And I am sure it will come. We feel good. There could be several winners in breakfast. There will be a lot of discussion around it. But if you start looking at some of the small mom and pop or regional chains that will have to be shifting money from lunch and dinner into breakfast, it will become more challenging for them.

Sozzi: Lost in all the focus on breakfast, is that you came out with much stronger than expected third quarter sales guidance at investor day. Can you explain how they happened?

Penegor: We did a lot of work early in the year to make sure we had speed in the restaurants. We are really working hard to improve our consistency, and we are starting to see a little bit of the benefit of that. Quite honestly it was those elements but sales really accelerated because of spicy chicken nuggets coming back. We had a strong social voice coming out because of Chance the Rapper’s tweet. We had a lot of pent up demand for spicy nuggets. So people showed up behind that message even before we turned on national media.

The great news is that they have continued to come. It’s not just for spicy nuggets either. We have seen strong demand for items across our menu. We are driving more frequent customers.

Sozzi: So, this was the quarter of spicy nuggets?

Penegor: It truly was. It created a big conversation around the Wendy’s brand. But spicy worked well more broadly. We had a spicy jalepeno chicken sandwich that was out there. We really focused on our core spicy chicken sandwich. And people weren’t just buying four-piece spicy chicken nuggets, they were buying 10-piece and 50-piece orders.

Sozzi: Wendys announced it’s re-entering Europe. Take me through the details.

Penegor: In the next 12-18 months we will be making an entry into Europe. We know we had to create a beachhead in a particular market, so we said we are going to the United Kingdom first. We will front-run some of that investment by opening up to 20 company-owned restaurants in the first couple of years. We want to show we can control the brand and control the proposition and then actively recruit franchisees to help build out the U.K. market in a hurry. As we are scaling up in the U.K. and creating a team there, it will give us an opportunity to really get into Europe in some of the big anchor markets.

The brand can travel. It has a lot of brand equity across all of Europe. There are a lot of social followers across all of Europe on Twitter. We are already looking to partner with some big partners to help bring the brand to life beyond the U.K. into Europe.

Sozzi: How far away is Wendy’s from debuting in China?

Penegor: That’s a little further out. That is clearly a big market and has a lot of potential. But, we have got a lot of focus on scaling up in the core markets that are doing quite well in our existing portfolio today. Then getting into the U.K. and then Europe. Our international business, which now includes Canada, is more than 900 restaurants and $1 billion in sales. By 2024, it will be 1,500 restaurants and $2 billion in sales.

Hickory, NC, USA-15 August 18: A new Wendy's nears completion, with an updated look.
Wendy's is gearing up for a rollout in Europe.

Sozzi: There sure seems like a lot going on at Wendy’s. It appears to be a completely different company.

Penegor: This is a different Wendy’s. You think about having the courage to play to win, we are really trying to create a compelling accelerated growth story and then carry that into our brand and our stock. That’s the game we are playing. We talk about the Wendy’s way, we can continue to ramp up the quality of our food. We can continue to ramp up our service experience and restaurants. Those are all core elements. But we have introduced three new growth accelerators: breakfast, driving digital and delivery and then ultimately really going after the international business.

We have the balance sheet and the cash flow to do all of this and return a lot of cash to shareholders.

Sozzi: What are your digital plans?

Penegor: We have announced we are moving into Google voice ordering. But we are working a lot on the basics. How do we make the usability of our app even easier, we have talked about going from less than two stars to over four and a half stars on usability. We just built out where we have mobile ordering available in all system. We have delivery coverage in over 80% of our restaurants. So now we are driving awareness so people use it.

About 2% of our sales today come from digital. We think that will be 10% by 2024, so we do see a lot of adoption taking place over the next several years. We are now open for business on technology. Today we are exclusive with DoorDash, it has been working our great for us because we are 30 minutes from order to time it’s delivered. But once you integrate into our system, you can shave off 3-5 minutes. Once it’s fully integrated, we can bring in other partners. We have talked about bringing in Uber Eats before the end of the year, and GrubHub.

Sozzi: Is this a career-defining moment for you at Wendy’s considering all of the initiatives you have unveiled?

Penegor: It has been a big couple of months. But I think it started earlier than the summer. Making the move to have a president of the U.S. business and a president of international was a big move for our system. We have had 50 years of history — are we a marketing company, or are we an operations company? I made it clear we are a restaurant company. We had to work better together to really have a sense of urgency in all we do. Speed is the mantra I really talk about a lot. We are testing to learn, we are testing to fail fast.

I am blessed with a great team. We have been together for the most part three-plus years, have a couple new additions. We have a team that works really well together and truly takes a long-term view to this business.

Sometimes you get to be at the right place at the right time on a journey in a brand, and I do feel as though we are living that right now.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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