Wendy's (WEN) has built its business on value as much, if not more, as it has attracted customers based on its promise of fresh, never-frozen beef. Much as McDonald's (MCD) has used variations of its dollar menu to drive sales, Wendy's has used its 4 for $4 deal and other special offers to drive sales.
Value plays a key role in fast food. Sure, people enjoy eating at Wendy's and McDonald's, but they also like getting a full meal for a $5 bill and getting change back.
It's a different equation for Chipotle (CMG). The fast-casual chain has managed to convince people that it's a good value regardless of price. That has enabled it to raise prices by roughly 10% over the past year without hurting sales.
Basically, Chipotle has been able to pass on higher labor and ingredient costs to customers. That's something McDonald's has done, too, (by about 6% year-over-year). But while Chipotle can raise prices unilaterally, McDonald's has been careful to preserve its value menu.
It's a tightrope for McDonald's that dates back to its dollar-menu days. The chain wants to offer value -- or ideally push checks higher by offering deals on meal additions -- but it wants to get more money from customers.
That's the line Wendy's has to walk as it plans to raise prices for the second year in a row.
Image source: Wendy's.
Wendy's Plans to Raise Prices
Like Chipotle and McDonald's, Wendy's raised its prices last year and plans to do so again in 2022, according to Chief Financial Officer GP Plosch during the chain's fourth-quarter earnings call.
"And yes, we are pricing over 5% in 2022. That gets us to double-digit pricing on a two-year basis, and it's clearly providing a tailwind for us on the [same-restaurant sales] number."
That doesn't mean Wendy's will drop the 4 for $4 or even stop offering deals through its app designed to drive digital adoption. Instead, it's more subtle than that. The chain will keep its most popular deals while inching up prices on other items.
McDonald's has done exactly that. It moved away from a dollar menu, but not from offering deals. It's a balance of trying to push affordability while also making sure you charge enough overall to cover increased costs.
Plosch also pointed out that despite the increases, Wendy's remains affordable relative to other options.
"So on the systems side in Quarter 4, the system price is slightly below food-away-from-home inflation. The company priced about 6% in the fourth quarter, and that was about in line with the food-away-from-home inflation we saw in the fourth quarter. If we step back on company on the year in 2021, we priced slightly below food-away-from-home inflation in 2021.," he said.
Wendy's Still Plans Sales and Deals
Remaining an affordable option is especially important because Wendy's has a lot of lower-income customers.
"We're going to watch value and value perception. You know about 30%, 35% of our consumers are making less than $45,000 a year. So we need to make sure that we are striking the right balance and maintaining value perception," he said.
Wendy's also expects to be able to grow its business by driving more breakfast sales. That's something Chief Executive Todd Penegor talked about during the earnings call.
"We think there's a lot of legroom, a lot of opportunity to grow the breakfast in the future," he said. "As morning routines come back, as folks start to routine, move back into the office a little more, kids all getting back into school, all of those things play to continue to drive our business quite hard."
Sales and deals will be a part of driving breakfast business, according to the CEO:
"The disruptive promotions do get folks' attention. It allows us to talk about the Wendy's brand, to talk about the quality at a very great price point, and it does drive a lot of people in for trial," he said.
