Wendy's struggles to serve up success

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The company that lives by Dave's Way has lost its way.

Two years after the death of Wendy's founder Dave Thomas, the third-ranked fast-food chain is struggling as robust competition dragged full-year same-store sales down 2.9% in the second quarter at company-owned restaurants and 1.8% at franchised restaurants.

Rivals have caught up to its menu innovations. A resurgent McDonald's has crested a youth wave with "I'm lovin' it" and music promotions such as its tie-in with Sony Connect.

No. 3

And while Wendy's last year came within a half share point of overtaking No. 2 Burger King, its Miami rival now looks to have widened that gap, thanks to edgy marketing that's given it a cult following among the fast-food faithful.

When asked by an analyst last week how it plans to capture the younger burger consumer, Chairman-CEO John T. Schuessler admitted the company is still looking for the answer. "It was amazing how Dave Thomas transcended any age and he could relate to someone 16 or 64," Mr. Schuessler said. "It was just amazing. When we switched to our Mr. Wendy's campaign, it didn't work very well, so [we put a] bullet in his head and he's out of here. We are looking at a new campaign."

Mr. Schuessler outlined a strategy of targeting specific messages to specific media. He did not give specifics of the advertising, from the Interpublic Group of Cos.' McCann Erickson, New York, but indicated it would be diverse. "For instance, if we advertise on MTV, it will be a different feel of commercial than it would be on NBC or CBS."

Wendy's indicates some changes are coming. Calling 2004 a year of "competitive convergence," executives laid out to analysts plans to revive sales with a full product pipeline, new store designs, better equipment and hipper marketing. Mr. Schuessler noted that Wendy's had entree salads, premium sandwiches, chicken strips, healthier kids options and extended hours before the competition did.


It's leading the way with some innovations such as fruit bowls and combo-meal flexibility. Mr. Schuessler talked-up products it's testing, including a deli-style sandwich line using fresh-baked bread called Frescata, and yogurt and granola and mix-ins for its Frosty. Wendy's is also pinning hopes on a new double-sided grill to boost burger quality and speed of service and said it may be ready to test breakfast in the "next year or so."

"There's no question the [innovation] gap has been closed" with rivals, said Mr. Schuessler. "We expect things like that to happen when McDonald's, which is three times as big as us, rolls out a product. So what we say to ourselves is, `OK, we still have the advantage, we just have to heighten our execution on it."'

But in a category where leader McDonald's has come back with a vengeance, Dublin, Ohio-based Wendy's has retained its folksy and familiar ways.

So-called competitive convergence poses risks for Wendy's if sales don't improve this year, "making it more challenging than in the past for Wendy's to exert its operational and product innovation leadership" as competitors move in lockstep, warned Andrew Barish, restaurant analyst for Banc of America Securities.

But Bob Goldin, exec VP at restaurant consultant Technomic, cautions not to count Wendy's out. "They've had a great run and it's hard to sustain, especially when competitors are getting more capable," he said. But "I don't think these guys [at Wendy's] are sitting on their hands anymore."

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