Wendy's Considers Drive-Thru-Only Restaurants

    Meanwhile, breakfast is the story of the present.

    Fast Food | November 2020 | Danny Klein
    Wendy's employee serves a customer through the drive-thru lane.

    Wendy's

    Wendy’s exited Q3 with a cash balance of more than $350 million.

    Wendy’s smashed through the COVID-19 floor in Q3 with its highest global same-store sales performance in more than 15 years. The company’s worldwide comps increased 6.1 percent on top of last year’s 4.4 percent result. In the U.S., figures bumped 7 percent versus 4.5 percent growth in Q3 2019. Revenue lifted 3.3 percent to  $452.2 million

    On a two-year basis, Wendy’s same-store sales improved each month to a 14.4 percent stack in September.

    CEO Todd Penegor said customer counts climbed as mobility increased, or guests broke free of lockdown behavior. But namely, Wendy’s leaned into its breakfast business.

    The category generated more than 7 percent of Wendy’s sales in Q3, down slightly from last quarter. Yet average weekly take grew throughout the period and was above Q2 metrics. Wendy’s “rest-of-day” sales were also up 5 percent on a two-year basis.

    Before diving further into Wendy’s breakfast boom, which is occurring despite COVID trampling routines and awareness levels of 50 percent, Wendy’s CFO Gunther Plosch said the brand expects capital expenditures this year to be about $70 million, an increase of $15 from prior estimates. The reason ties back to the sales surge. “As our business has improved over the last few months, we made the decision to ramp up capital spending in development and technology to set us up to drive growth in the future,” Plosch said.

    In talking about the future and potential investments, Penegor hinted the company now has a “new appetite to look at drive-thru-only restaurants.” Wendy’s has some prototypes going out, he added, as the company will continue to test and learn.

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    “And I think it is important to have [a] portfolio of restaurants of different sizes to really make sure that we've got solutions for any trade area that's out there,” he said.

    Taco Bell shared a similar idea in August when it dropped renderings of a “Taco Bell Go Mobile” store designed to serve drive thru (with a double lane) and curbside pickup customers, with a focus on order-ahead transactions through its app.

    Wendy’s presently boasts a variety of footprints, including a traditional freestanding venue with 65-plus seats, all the way down to a Smart 2.0 with just 30. “If you think about the access to real estate, you think about the access for conversions, and we got a conversion task force in place, [we’re] really comfortable converting any type restaurant into a Wendy's restaurant,” Penegor said. “I think all of those play into an opportunity to accelerate development into the future.”

    Wendy’s exited Q3 with a cash balance of more than $350 million, higher than $275 million at the end of July. This was due to the strong top-line progress, as well as two additional royalty payments from franchisees who deferred in Q2 as part of a COVID relief package. Penegor said 85 percent of Wendy’s franchise community is actually in better financial standing than they were last year. “So that's a good testament to how we're performing. And we'll continue to build on that momentum and leverage that into the future,” he said.

    Breakfast, which arrived March 2, exploded early. It pushed domestic same-store sales to plus 16 percent, year-over-year, in the opening week of March. Of course, COVID arrived soon after and shifted everything.

    What Wendy’s is seeing lately, though, is high repeat orders and customer satisfaction scores. In fact, the company’s highest rated daypart from guests is also its newest. It’s proven easy to staff, operationally simply (an issue in past rollouts) and profit-accretive to Wendy’s economic model. The company’s profit margins at corporate stores improved by 70 basis points in Q3.

    Yet Wendy’s still has a “fairly large percentage” of its own existing customers who haven’t tried it yet.

    If you couple that with 50 percent awareness and the hope morning routines return closer to previous norms, the whitespace is clear. Wendy’s always touted the launch as a longer-term play, one where it was willing to invest over and above for a three-year period. “We're doing this, this year. We are definitely doing it next year as well, and that money and that focus is going to drive trial and repeat in the drive-in business for us,” Plosch said.

    At first, the company planned to drop between $70 million and $80 million on advertising alone to raise breakfast awareness in 2020. Corporate expected to front $40 million to $50 million of that cost (franchisees would pay the rest).

    Additionally, Wendy’s spent $20 million upfront to hire about 20,000 people. COVID, of course, disrupted this outline, especially on the franchisee contribution side.

    Penegor said Wednesday the company plans “to continue to support breakfast with our incremental company advertising spending.” Wendy’s forked up $6.2 million in Q3. So far in 2020, corporate pushed $15 million into the breakfast marketing pot, “and we plan to continue our incremental spending in 2021,” he said.

    And the goal aligns with Plosch’s directive—of driving trial and frequency. Where Wendy’s sees the most runway is with ingraining breakfast into consumers’ morning routines. Whatever that might be post COVID.

    “We said that we are going to bring America the breakfast it deserved and we are delivering on that promise,” Penegor said. “The key unlock for this business moving forward will be mobility, as this improves, coupled with our incremental investment in marketing, we believe that this business has a ton of upside.”

    Plosch said breakfast contributed roughly 6.5 percent to its U.S. same-store sales in Q3.

    Wendy’s witnessed higher average checks as breakfast guests use the option differently than originally imagined, which is understandable since Wendy’s didn’t plan for a global crisis. Customers are coming later in the morning and bringing breakfast back home. Plosch said competition was softer early in the year than expected, too. But it’s stepped up lately.

    He shared an interesting anecdote. Breakfast first piloted in about 350 restaurants (the old version of it). Wendy’s updated and has observed a promising result—these stores appear to have ingrained the habit. With advertising and all of Wendy’s promotional efforts tossed in, daypart sales at those so-called legacy stores are up 40 percent, year-over-year, so far in 2020.

    “And as we keep getting added and building the habit, keep making investments this year and next year, all on the buffer we collect from our franchisees, we think we have created a very solid breakfast business,” he said.

    The breakfast tailwinds, Plosch said: Trial, trial, trial. Critical there is Wendy’s digital business, which grew each month in Q3 to reach 5.5 percent of U.S. sales—more than double 2019 levels. In September, the figure was more than 6 percent.

    Wendy’s launched a loyalty program nationwide in July. All of Wendy’s app users joined immediately, giving the company a strong base to start. And since introduction of rewards, app downloads are up more than 15 percent. Higher average checks and higher frequency followed.

    “We are excited about this program, and we'll continue to drive awareness through compelling offers, and within our marketing messaging to grow this program in the coming months,” Penegor said.

    The larger that group gets, the easier it will become for Wendy’s to drive trial into breakfast, as well as other product launches.

    Something to consider, too, is the company’s October hiring of Kevin Vasconi as chief information officer. He retired earlier in the month from Domino’s, widely considered the tech front-runner in quick service. In Vasconi's eight years at Domino's, he served on the executive leadership team and was responsible for developing and leading domestic and international technology capabilities. Domino's welcomed more than half of all global retail sales last year from digital channels, primarily online ordering and mobile applications. In the U.S., it was 65 percent.

    “How do we lead technology around mobile ordering? Get really complemented with mobile grab-and-go and curbside delivery into our restaurants to create an even more seamless experience? And ultimately, how do we capture and leverage all of this data to really a more personalized communication, one-to-one communication?” Penegor said of Vasconi's role.

    Wendy’s had some other successful promotions in Q3. It added a Spicy Crispy Chicken Sandwich into its 4 for $4 platform and introduced a Pretzel Pub Cheeseburger and Chicken Sandwich, which it brought to the Made to Crave lineup. Both helped Wendy’s lap last year’s Spicy Nuggets relaunch.

    In October, Wendy’s unveiled a new Classic Chicken Sandwich for $4.99. Penegor plans to really launch it, marketing wise, in a big way starting next week. It’s going to be included in a 2 for $5 promotion in hopes of getting customers to try it.

    The sandwich plays into Wendy’s pre-COVID menu architecture of getting value guests through the door, and then trading up to premium items later on. What it calls “one more visit, one more dollar.” Value at the 4 for 4, while innovating into higher-priced tiers (Made to Crave). In both cases, marketing around recognizable, high-awareness constructs instead of trying to launch a new LTO, with fresh marketing, each time.

    “Our focus is really on quality as a differentiator and quality for the long-term, making sure that folks understand our 4 for $4 platform is something that only Wendy's provides, making sure that our Made to Crave platform is something that only Wendy's provides,” he said. “We'll sprinkle that in with some price-pointed promotions as appropriate.”