Wendy's breakfast daypart is close to meeting its 2022 year-end goal thanks to the menu's first piece of major menu innovation—Homestyle French Toast Sticks.
The product, launched in August and now the No. 1 selling breakfast item, drove "meaningful acceleration" in U.S. breakfast sales across the third quarter. CEO Todd Penegor said the response from customers has been "overwhelmingly positive." The morning daypart's average weekly sales per unit approached $3,000—the benchmark Wendy's hopes for in 2022—as the chain exited Q3. It earned around $2,700 in Q1 and Q2. The chain is confident that French Toast Sticks, combined with a $3 croissant promotion, will lift the brand past $3,000 before the year is over.
About 300 legacy restaurants, which offered breakfast prior to the March 2020 launch, are seeing $4,500 in average weekly sales per unit and well north of a 10 percent mix. CFO Gunther Plosch said these particular results are a sign of breakfast's growth potential. He added that it's "just a matter of time" to reach this level. Based on Wendy's current footprint of 5,997 U.S. stores, if the chain achieved average weekly breakfast sales per unit of $4,500 across the entire domestic system, that would equate to an annual run rate of close to $1.5 billion.
"It's really about ingraining the habit, bringing some news, ensuring that our customers come in a little more often along the way," Penegor told investors during Wendy's Q3 earnings call. "Innovation will play a role. Promotional price points will play a role. And executing great at the restaurant day in and day out with fast, accurate service is critical to success, and we'll continue to drive all of those things moving forward."
French Toast Sticks were under development for a year before their release late summer. They comes a la carte in four or six pieces or as a six-piece combo with Seasoned Potatoes and a drink. John Li, vice president of culinary innovation, said the company went through 18 iterations before it was satisfied.
Li told QSR in August that Wendy's doesn't have a set formula in how it approaches innovation. He said it's driven by the environment and staying in tune with what guests want and need. Penegor echoed that sentiment to investors, noting that breakfast has the highest overall satisfaction among all dayparts.
"Any time you're putting news out there, any time you got a promotion, any time you're advertising, you start to build some more awareness, but, more importantly, you build trial," Penegor said. "And we continue to see our breakfast daypart is our highest overall satisfaction daypart. So, our opportunity is to get folks to continue to get in, try us, get us into the routine, and then earn their frequency over time."
Wendy's U.S. same-store sales increased 6.4 percent in Q3, on top of 2.1 percent growth in the year-ago period. That was fueled by roughly 9 percent pricing, offset by negative 2 percent traffic, which is a sequential improvement from Q2. International same-store sales rose 10.8 percent year-over-year, lapping a 14.7 percent increase in Q3 2021.
Penegor explained that Wendy's traffic remains negative because of consumers battling inflation from all sides. He noted that groceries take up about 85 percent of a guest's basket, up from 82 percent prior to the pandemic. However, multiple quick-service executives have argued that grocery inflation soaring well above restaurant menu prices will shine a brighter light on the industry's value going forward. For perspective, the food at home index (grocery menu prices) rose 13 percent in September, compared to 8.5 percent for restaurant menu prices, including 7.1 percent at quick-service concepts, according to the Bureau of Labor Statistics.
Regardless, Wendy's is still winning the under $75,000 household, which makes up more than 50 percent of the chain's business. The brand has also seen some trade down from mid-scale casual and fast-casual restaurants. Like many others, Wendy's is leveraging a barbell strategy to grow share with low-income consumers and maintain higher-income guests.
On the value end, there's the 4 for $4, but there's room for customers to upgrade to the $5 Biggie Bag. There's also the $3 breakfast deal that features a Bacon or Sausage, Egg & Swiss Croissant and a small order of Seasoned Potatoes. The deal ends November 20. On the high end, Wendy's brought back the Pretzel Bacon Pub Cheeseburger in September and will soon launch fresh Italian mozzarella sandwiches and a peppermint Frosty. Additionally, the company is making gains in its loyalty program, which can use weekly offers to drive further traffic. Digital mix held strong at 10 percent in the third quarter.
Plosch said Wendy's still has pricing power if necessary.
"Our traffic is sequentially improving. It's still slightly down," the CFO said. "So, we don't see kind of less flow-through. We're still seeing a flow-through of about 80 percent. So, we have not yet reached a breaking point, and we think there is, therefore, more pricing power there. As we also said, we are getting even more sophisticated on where to take price with a third-party consultant that we have hired, not just for the company but also for our franchisees. And at the end of the day, the proof is in the pudding, right? We have yet again in this quarter held our dollar and traffic share in the category. So, we are competing well with the pricing levels we're at."
As for franchisees, Penegor said they are cautiously optimistic about the upcoming economic environment. Year-to-date, Wendy's has opened a net of 131 restaurants worldwide. Due to development delays for both nontraditional and traditional outlets, 2022 unit growth projections slimmed to 2 to 2.5 percent, mostly from issues with ghost kitchens. That's still above the historical rate of 1-2 percent. The long-term objective is 8,000 to 8,5000 stores systemwide by 2025. Wendy's finished Q3 with 7,080 units globally.
The company earned $3.42 billion in systemwide sales in Q3, up 8.9 percent year-over-year. Corporate store margins were 14.8 percent, not too far from pre-COVID comparisons of 15 to 15.5 percent. That was achieved despite commodity inflation of almost 15 percent and labor inflation over 6 percent.