Is Wendy’s actually running out of beef? While a seemingly strange and implausible question just weeks ago, it’s surfaced continually in recent days.

Stifel analysts Tuesday said they analyzed a random sampling of Wendy’s menus and found 5–10 percent presented chicken-only lineups. The report, led by Chris O’Cull, said it appeared a “transient issue,” yet noted, “impacts to the system’s beef supply will be a flash point during [Wednesday’s] earnings call and further interruptions could lead to share price volatility in the near-term.”

CNN Business put the number at 1,000, or 18 percent, of Wendy’s 5,500 domestic restaurants that were not serving any hamburgers or other meat-based items. This figure came from financial firm Stephens, which said online menus shifted in recent days to emphasize chicken sandwiches. Company analyst James Rutherford suggested, in states such as Ohio, Michigan, and New York, about 30 percent of Wendy’s were out of fresh meat.

So what is the reality? CEO Todd Penegor tried to address the concern Wednesday. He said beef suppliers across North America are facing production challenges. And, because of this, some of Wendy’s menu items might be in short supply “from time to time at some restaurants in this current environment.” He added the company continues to supply fresh hamburgers at all of its restaurants, with deliveries two or three times per week, consistent with its normal schedule.

But here’s where the disconnect appears to be forming: Yes, Penegor admitted, Wendy’s diverted marketing efforts to focus on chicken products in an effort to alleviate beef pressure. Yet just because customers aren’t seeing the option pop up online doesn’t mean the restaurant is necessarily out of burgers.

When a location is tight on supply, he said, they have the option to turn beef products off in mobile and online menus. He called it “an abundance of caution” to make sure the customer isn’t disappointed.

“But we could still have had beef in the restaurant,” Penegor said.

Essentially, Wendy’s is saying that some of the restaurants analysts surveyed weren’t actually out of meat—they just weren’t advertising it.

Either way, it spotlights an undeniable near-term concern.

“We do believe it is temporary,” Penegor said. “And we’re close with our big supply partners and we have several of them on the fresh-beef front. We do believe we’ll work through this in short order, but we will make sure that in the short-term we’re delighting every customer with what we have.”

He said there’s “probably a couple of weeks” of tightness ahead. “And then we’ll come out the other side working with our partners and continue to support our business,” Penegor said.

Wendy’s noted there’s no real sales quantification to share yet. The reason being that while there might be some beef “spot outages,” as Penegor labeled them, people who show up to the restaurant are still buying other food.

The beef topic isn’t tapering off. Costco said it was limiting the amount of meat customers could purchase. Kroger is doing the same with pork and ground beef at select venues. Meat plants, including some operated by Tyson Foods, have suspended operations. The company cautioned Monday that it expected more plant closures in 2020 and that it will continue producing less meat than usual, as workers refrain from coming to work during the pandemic. It took a full-page ad in The New York Times saying, “the food supply chain is breaking.”

As pork, beef and chicken plants are being forced to close, even for short periods of time, millions of pounds of meat will disappear from the supply chain,” John Tyson, Chairman of the Board of Tyson Foods, wrote in a letter.

The company said Monday that the U.S. hog processing capacity has been nearly cut in half.

On April 27, Smithfield Foods in Sioux Falls, South Dakota, JBS pork processing in Worthington, Minnesota, and Tyson Fresh Foods in Waterloo, Iowa, went offline. Together, they accounted for about 15 percent of pork production.

In March, America saw meat, beef, and pork production hit record highs, according to the USDA. Yet as demand went up, meat processing declined due to worker concerns. USDA data from the company’s April 27 report said beef production dropped nearly 25 percent, year-over-year, while pork production was down 15 percent.

President Donald Trump issued an executive order for plants to remain open.

And the near-term hurdle isn’t necessarily tied to closures, the USDA said. Recent data showed that less than 10 percent of the country’s beef processing capacity is shut down. However, the facilities are not running at typical levels—50–75 percent to allow employees to social distance. According to labor union United Food and Commercial Workers, at least 20 meatpackers have died from COVID-19 and more than 5,000 have been hospitalized or are showing symptoms.

Glynn Tonsor, a professor at Kansas State University’s department of agricultural economics, told Time he believes the problem should improve by June as plants adjust to COVID-19 regulations. After all, there isn’t a product problem per se—it’s a processing issue.

McDonald’s said in recent days it’s started sending beef and pork to locations based on anticipated demand. Previously, it took orders on a per-unit basis. McDonald’s CEO Chris Kempczinski said last week the company was monitoring the situation “hour by hour.”

For Wendy’s, there’s simply no clear-cut way to quantify the number of restaurants affected or how long the problem might persist. Deliveries are still coming. The marketing calendar was shifted to help operators manage shortened supply over the next couple of weeks.

“We’re working diligently to minimize the temporary impact to our customers and restaurants, and continue to work with our supplier partners to monitor this closely,” Penegor said. “Our focus, even in the face of this near-term headwind is to continue to delight every customer. Period.”

Wendy’s Q1 commodity inflation was 3.9 percent, primarily driven by beef, the company said.

BTIG analyst Peter Saleh wrote Thursday in a note he expects the current beef shortage to last for a few more weeks and have a nominal impact on Wendy’s sales performance. “Given that both proteins represent about 20 percent of their commodity basket, we believe the promotional shift should be successful at least in the near term,” he said.

Derrell Peel, an extension livestock marketing specialist at Oklahoma State University, told Capital Press choice boxed beef price this past Friday was $377.45 per hundredweight, the highest it’s ever been, but normally 80 percent of beef sold is priced four to six weeks earlier. Beef production last week was only 60 percent of normal, and most was already priced.

The USDA said it expects meat prices for consumers to inch slightly higher in 2020, with beef prices forecast to rise as much as 2 percent.

Shake Shack CFO Tara Comonte said Monday during a quarterly recap the chain was seeing “significant increases in beef,” with the largest increase being realized over the last week. CEO Randy Garutti noted the company doesn’t expect a supply issue. “However, costs have really jumped,” he said.

Jersey Mike’s CEO Peter Cancro added in an interview with Bloomberg the 1,750-unit sandwich chain was working with its ham supplier, Clemens Food Group, to get ahead. “We’re backing it up already because of the coming—we feel—the coming shortages,” he said.

The power of breakfast

Before COVID-19, Wendy’s highly publicized return to breakfast was off to a blazing start, Penegor said. It pushed domestic same-store sales to plus 16 percent, year-over-year, in the first week of March.

COVID-19 then arrived in force. However, this has evolved into an interesting development for Wendy’s.

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 designed the drive-thru focused service to run with three added employees, or a hiring push of some 20,000 people the company put $20 million upfront to fund.

Penegor said the initial launch exceeded internal expectations. Guest counts were up. Social media and marketing efforts quickly brought consumer awareness levels above 50 percent.

To put that in perspective, a normal LTO at Wendy’s that would be out there for three to four weeks typically generates awareness in the 25–30 percent range, Penegor said.

Impressively, breakfast has sustained at about 8 percent of U.S. sales throughout the month of April.

The notable change, though, concerns the ROI. Wendy’s said Wednesday’s it’s abating national marketing fund contributions on breakfast sales for the remainder of 2020. Also, the company took the staffing requirement down to two employees given reduced business. The goal before was to start bringing in additional labor between 9 and 10:30 a.m. That isn’t the case now. So the current breakfast breakeven has reduced significantly, by about 35 percent on average, Penegor said.

The overarching result is a profitable, incremental sales channel. “We are not seeing cannibalization at all,” Penegor said. “It is a nice additional new layer of business that we’ve added for a different occasion during the course of a week or a month that is really driving frequency for our business.”

The fact breakfast has put up decent numbers despite the daypart getting crushed industrywide is encouraging, Penegor said. “Clearly, our breakfast business has been throttled in absolute dollars with mobility down and not having the morning routine … we’ll be encouraged to see that to start to come back as restrictions get lifted,” he said.

Wendy’s has begun to see sales improvement in April. Here’s a look at how things have progressed:

U.S. same-store sales

  • Two months ended March 1: 3.7 percent
  • Month ended March 29: –7.7 percent
  • Week ended April 5: –25.8 percent
  • Week ended April 12: –24.9 percent
  • Week ended April 19: –8.8 percent
  • Week ended April 26: –8.5 percent
  • Week ended May 3: –2.1 percent

 

International

  • Two months ended March 1: 5.4 percent
  • Month ended March 29: –17 percent
  • Week ended April 5: –35.7 percent
  • Week ended April 12: –39.1 percent
  • Week ended April 19: –24 percent
  • Week ended April 26: –23.6 percent
  • Week ended May 3: N/A

 

As of May 3, 99 percent of Wendy’s 5,865 domestic locations were operating. Seventy-five percent of its 943 international units were.

The company reported flat U.S. same-store sales growth in Q1.

How did Wendy’s improve those trends? A few levers. Penegor said Wendy’s digital business upped in recent days to 5.5 percent of sales, more than double what it was in 2019. It’s picked up 1.2 percent in just the past 30 days, driven primarily by delivery. Postmates was recently brought on as a new partner, with Uber Eats coming soon. Grubhub was added in February to join DoorDash. Mobile ordering covered the rest.

App downloads and active users are both up 25 percent since March. And the chain is preparing to launch a loyalty program in the near future. Penegor said the aim there is to capitalize on frequency opportunities, especially as normal routines resume.

The other factor involves tighter operations at the available order points. Penegor said throughput numbers in the drive-thru have improved over the past few weeks. “We have seen our average times go down and that is with the average items per transaction being up dramatically,” he added.
So that bodes well for the future when we get to normal average items per transaction around speed of service.”

Wendy’s streamlined its menu and removed certain items, such as side salads and wraps. The COVID-19 pivot also focused attentions to certain areas. There hasn’t been an LTO or any new push. Employees have centered on driving the core for Wendy’s—from products to service channels.

I really do think folks want to start to get out, but they want to do it smartly and safely, and we’re a great option to provide high quality, affordable food, very quickly in a very safe environment,” Penegor said.

The company has also invested in additional training across its system to ensure employee and customer safety in areas such as handwashing and hygiene re-certifications, social distancing and proper mask utilization. 

For franchisees, Wendy’s extended payment terms for royalties and national marketing funds beginning in April by 45 days for a three-month period. It also offered to defer base rent payments on properties owned by Wendy’s and leased to franchisees by 50 percent (beginning in May for a three-month period). Wendy’s said it reached out to landlords on subleased properties to defer rent payments for the same window and is offering to pass long any deferrals obtained to franchisees. Lastly, it extended its remodel and new development requirements by a year and reached out to primary franchise lenders. In most cases, Wendy’s said, they will allow for interest-only payments for a period of time.

Other COVID-19 initiatives include emergency paid sick leave for employees and a 10 percent increase in hourly pay for corporate store employees working shifts. That’s been extended through the end of May. Wendy’s said it will now protect part of the monthly bonus through the end of May for corporate GMs and district managers, and is offering free meals for employees, as well as discounted family options on workers’ days off.

Wendy’s cash balance as of May 3 was $365 million.

In terms of reopening restaurants, Penegor said the company wouldn’t rush the process. Expect to see a phased approach, with the first step involving the expansion of operating hours.

Some units walked back late-night business early on during COVID-19.

Next, carryout would come back on line to ease the drive-thru burden. Ultimately, dining rooms would reopen with “the appropriate social distancing set up,” Pengor said.

Burgers, Fast Food, Menu Innovations, Story, Wendy's