How Wendy's learned from its past mistakes to craft a better breakfast menu

Key Points
  • Wendy's will launch breakfast nationwide on Monday.
  • The chain crafted its menu to keep operations simple but still appeal to customers.
  • Wendy's on Wednesday said its operating profit fell by nearly 20% in the fourth quarter primarily due to investments to support U.S. restaurants ahead of the breakfast launch.
Wendy's Breakfast Baconator being prepared
Source: CNBC

DUBLIN, OHIO -- As Wendy's readies itself to launch breakfast nationwide on Monday, the chain is preparing to go head-to-head against rivals like McDonald's with a menu touting its quality.

Three prior attempts to serve breakfast nationally over the last three decades failed to move past regional tests. This time around, Wendy's worked with franchisees to construct a simpler menu full of items with broad appeal and a few fun twists.

"Our whole program was really built to challenge the conventions of fast food and the quick-service industry and so our opportunity is to go into the space very directly and do it better than everyone else," Wendy's U.S. President and Chief Commercial Officer Kurt Kane said in an interview.

Kurt Kane, Wendy's U.S. President and Chief Commercial Officer, in the Wendy's Innovation Center.
Source: CNBC

But that strategy comes at a cost. Wendy's on Wednesday said its operating profit fell by nearly 20% in the fiscal fourth quarter primarily due to $17 million in investments to support U.S. restaurants ahead of the breakfast launch. The company's stock, which has a market value of $5.2 billion, was down nearly 2% in midday trading. The shares are up more than 30% over the last 12 months.

Wendy's quarterly earnings were in line with expectations, while its revenue topped estimates. However, its fiscal 2020 forecast for profits, which is about flat from the previous year, is a bit shy of what analysts had expected. The company expects to earn between 60 cents and 62 cents per share, on an adjusted basis, in fiscal 2020 on sales in a range of $12 billion to $12.5 billion.

Breakfast is expected to operate at a loss this year. But management is confident that breakfast will help it over the long term and it was careful to heed the lessons of its past attempts to win early morning customers.

Unlike past breakfast iterations, franchisees didn't have to pay for any new equipment. The company purposefully crafted the menu to avoid these costs. The most significant additions to kitchens are egg rings, which are used to shape freshly cracked eggs into slightly imperfect circles on the grill for breakfast sandwiches.

Freshly cracked eggs on the Wendy's grill
Source: CNBC

Wendy's also crafted its menu so all products should sell consistently. A lack of niche items means that Wendy's employees are making every item regularly, keeping the quality high.

The Honey Butter Chicken Biscuit, the second-best seller on the menu in test markets, follows recent trends like chicken for breakfast and Southern-style biscuits. Internally, the breaded chicken sandwich, slathered with whipped maple honey butter, has been given the nickname "the honey buddy."

"I can tell you that McDonald's is not doing the same thing we're doing to our chicken and neither does Chick-fil-A or anyone else," Kane said.

Other items, like the Frosty-ccino and the Breakfast Baconator, incorporate Wendy's classics into the new menu. Despite being its most expensive breakfast sandwich, the Breakfast Baconator was the top seller in test markets.

John Li, Wendy's vice president of culinary innovation, said the most difficult menu item to perfect was the coffee, both its new hot blend and cold brew. Wendy's coffee masters and its vendor landed on an Indonesian blend with expensive Sumatran beans, which initially led to some pushback from the company's finance team. Wendy's also had to ensure that it was Rainforest Alliance certified.

"Without good coffee, you're sunk, no matter what market," Li said.

Wendy's signature coffee drink, the Frosty-ccino, combines a Wendy's Frosty with cold brew and has about half of the calories of a Starbucks' Frappuccino, according to executives.

Wendy's biscuits and rectangular croissants will be made off-site at bakeries to avoid bogging down restaurant operations. But the chain — keeping with the same logic for why it serves rectangular burger patties — didn't cut corners. The croissants are made with 128 layers of butter and dough, and it took about 50 iterations to nail the biscuit recipe.

"The partner probably wanted to kill us at some point," Li said. "You've got to get the texture just right on a Southern-style biscuit."

There is a high bar for breakfast. It is crowded with competitors from McDonald's to Taco Bell to Dunkin', and Wendy's will need to convince consumers to give up their ingrained breakfast rituals.

While Starbucks cafes in Canada and Dunkin' are looking to attract new breakfast customers by offering breakfast sandwiches with Beyond Meat's meatless sausage, Wendy's is staying out of the trend for now, although it isn't ruling it out eventually.

"We're really trying to keep this very simple as we start out," Kane said.

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