Wendy's is going dark.
But not in the way you might think. After leaning heavily into breakfast for the past three years in the U.S. and Canada (a $1 billion-plus daypart business), the brand is now ready to greet more customers during the opposite time of day—late night.
"If you go back over the last 12 months, when you think about late-night hours, having your dining room open until 10 [p.m.], having your restaurant open till midnight or later, we weren't all the way there," CEO Todd Pengor said during the brand's Q1 earnings call. "And we've done a lot of work to get ourselves set up to actually nationally advertise now open for late-night business, midnight or later."
Across the industry, the daypart suffered greatly during COVID because of restrictions and debilitating staffing issues, but the burger chain is in a position to promote the business this summer. During Q1, Wendy's saw an uptick in sales during late night, driven by a return to normalized hours, local advertising, and a growing delivery business, Penegor said.
"We are excited to offer our customers the high-quality late-night experience they deserve and believe there's a ton of opportunity ahead of us," the CEO said. "During this daypart, we continue to expect that executing against our strong and balanced marketing calendar, leaning into under-penetrated dayparts, and continued operational improvements will ladder up to mid-single-digit global same-restaurant sales growth in 2023."
Wendy's new initiative is part of a larger movement in the restaurant segment. For instance, Jack in the Box—known for its 24-hour drive-thru—said in 2022 that late night was showing some of the best growth among its dayparts because of better operating hours and its redesigned Late Night Munchie Meals platform. In August, Krystal announced to customers that it was back to late-night business by offering the Krystal Snack (sliders, small fry, and tater tots) for $1.99 and promoting the deal with TV personality Ray J. On the full-service side, Denny's repeatedly champions the importance of 24/7 operations. The classic diner said recently that 71 percent of the U.S. system was back to full hours, up from 63 percent in January.
Penegor said the company wants to make sure it's "getting our fair share" of the late-night daypart. Currently, traffic is back to pre-pandemic levels. The chief executive didn't specify any promotional plans, but did note that Wendy's will make the menu efficient enough to drive throughput.
"When you look at the profitability, when you start to think about where we traditionally go and shut down the dining room after 10 [p.m.] and get into a late-night staffing model, there is a lot of profit to be had," Penegor said. "So when you look at the labor model against the existing menu with the sales and transactions, it can be a nice contribution to the restaurant economic model. We'll continue to look to make sure that we make it even more efficient around the menu construct. How do you make it easier to close at night to provide a better opening in the morning so they can really then continue to support your breakfast business too to make it the virtuous circle?"
Wendy's emphasis on the bottom line led to record sales and profits for franchisees in the U.S. and Canada in 2020 and 2021. Last year was the same story. In 2022, U.S. and Canadian operators achieved three-year sales growth of more than 18 percent and 24 percent, respectively. And despite inflationary headwinds, EBITDA dollars remained 2 percent and 11 percent higher versus 2019 in the U.S. and Canada, respectively. Wendy's expects franchisees to return to EBITDA dollar growth in 2023 as inflation eases and sales continue to rise.
On the corporate side, U.S. company-operated restaurant margin was 14.7 percent in the first quarter, increasing from 12 percent last year. Wendy's attributed the expansion to higher average check, partially offset by higher commodity and labor costs and customer count declines.
Company-owned outlets saw U.S. comps rise 7.4 percent year-over-year and 9.3 percent on a two-year basis. Franchise same-store sales grew 7.2 percent year-over-year and 8.2 percent over two years.
Penegor said company stores have leaned into late-night for a long period and have experienced success.
"We know when we look at the rest of the system relative to where we are in the company restaurants, there is an opportunity," Penegor said.
One of the biggest reasons behind the late-night push is better staffing levels. CFO Gunther Plosch said 90-day turnover rate improved year-over-year and quarter-over-quarter. However, that doesn't mean Wendy's is seeing a deflationary environment. In Q1, labor inflation was 5 percent, lapping 15 percent from 2022. The brand is trying to mitigate these costs through multiple ways, including enhanced retention strategies, technology, such as the drive-thru AI with Google Cloud, and web/app expansion. In Q1, the U.S. digital business achieved its highest mix ever at more than 11 percent, thanks in large part to Wendy's March Madness promotion.
Regardless, staffing is now good enough to where Wendy's feels comfortable advertising late night.
"The size of the prize, hard to quantify," Penegor said. "But when I start to look at where we have some big growth drivers, late night is going to be one of those, and breakfast will continue to be one, and we'll continue to work hard to continue to win, like we have been at lunch and dinner. You've seen some nice growth in those dayparts."
Wendy's finished Q1 with 5,989 U.S. units (403 company-owned, 5,586 franchises) and 1,106 international stores (11 company-owned, 1,095 franchises). The chain opened a net of 39 restaurants globally in the first quarter, including 20 in the U.S. and 19 internationally. Through the first quarter, roughly 45 percent of this year's pipeline is either open or under construction. Also, 80 percent of the footprint has completed restaurant reimaging, up from 74 percent in the year-ago period. The fast-food brand remains on pace to achieve 2-3 percent net unit growth in 2023 and 2024 and 3-4 percent in 2025.