Fast-Food Face-Off

By Jyoti Thottam

The scandal started out as a CEO's worst nightmare. Three months ago, a Nevada woman named Anna Ayala claimed to have found a severed finger in a bowl of chili she ordered at a Wendy's restaurant in San Jose, Calif. The fast-food chain became the butt of every late-night comedian's jokes, and its CEO, Jack Schuessler, faced an embarrassing lawsuit and more than $15 million in lost business, thanks to the unwelcome publicity. Then things took an even more bizarre twist. Authorities in San Jose turned their attention to Ayala, alleging that she fabricated the story and that the finger belonged to an associate of her husband's. Ayala dropped her lawsuit against Wendy's, and the company was exonerated. CEO Schuessler can almost laugh about the "finger incident" now, but he says it taught him that "no matter how good you do your job, one person can really throw a company's life out of balance." The only thing that kept customers in the stores, he says, was the company's good reputation.

Reputation alone may not get Wendy's through its current slump. Well before the recent troubles, sales at Wendy's restaurants had been stalled for two years, budging just 0.9% in 2003 and 2.9% last year, far below the pace set by its competitors. The culprit? A sudden burst of creativity from the big guns in the fast-food wars, McDonald's and Burger King, as well as some smart plays by smaller chains like Hardee's and KFC. For years, McDonald's and Burger King had relied on their size to generate growth, opening hundreds of new stores every year to pump up sales. Meanwhile, Wendy's had some very lucrative ground to itself. It is only one-fifth the size of McDonald's in terms of sales, but Wendy's kept growing and generated healthy profits by pulling people into its stores with a steady stream of carefully tested new ideas and products, like the 99-c- value menu, salads and high-quality chicken sandwiches.

Over the past two years, its competitors wised up and realized that they too could goose up sales by adding some variety to the menu. In some cases they copied many of Wendy's most successful products. "That never happened before," says Janice Meyer, a fast-food-industry analyst for Credit Suisse First Boston (CSFB). "It took them out of their game." McDonald's launched a line of salads, preaching a newfound concern for health. Burger King and Hardee's took the low road, heavily promoting gut-busting sandwiches like the Enormous Omelet and the Monster Thickburger--names that only hint at the fat and calorie content between their buttered buns. Burger King also upgraded its chicken sandwich, a move McDonald's will make this summer. KFC has added a 99-c- chicken sandwich. The situation got so bad that Wendy's had to launch its latest innovation, an entree-size fruit salad, in February--not exactly when most people are yearning for a slice of cantaloupe--because it knew that McDonald's was launching an apple-and-walnut salad in May. Even Schuessler concedes that archrival McDonald's strategy has been a success. "I give them a lot of credit," he says. "They've really improved the quality of their food."

If Wendy's has been the innovator, these days it's not above some copycat tactics either. Taco Bell started tiered pricing for its lower-priced menu, and Wendy's will soon do the same, introducing some new value-menu items at $1.29 to help boost its margins. Taking a page from McDonald's marketing playbook, Wendy's has just launched a new advertising campaign that combines some youth-oriented national commercials with targeted radio, print and Internet ads. McDonald's has relied on that strategy for the past two years, using cable-television networks like Lifetime and print ads in women's magazines to promote its salads while running a separate national campaign.

Schuessler says he wants to appeal to the "MTV generation" with the national spots, which feature twentysomethings on the move--racing for a train, riding a skateboard, cavorting in a Laundromat--with a Wendy's product in hand. Having tried and failed with the anonymous "Mr. Wendy" as a spokesperson (Wendy's beloved founder Dave Thomas died in 2002), Schuessler says the company is going for something a "little edgier." The new spots are not above using talking rodents or gross-out humor--in one of them, a woman drinks from a fish tank to tame the spiciness of a chicken sandwich. Another ad cleverly spoofs The Bachelorette.

Wendy's has done some targeted marketing in the past, but "this is the first time we've gotten this deep into it," Schuessler says. He wants to remind consumers that Wendy's has exactly what its competitors have been pushing lately: salads, like a new Mediterranean chicken salad, and extra-large burgers.

Harry Balzer, a vice president of the consumer-marketing research firm NPD Group, says every fast-food company has to find a way to attract young consumers. People in college and in their 20s are the most frequent consumers of fast food, he says. But he is skeptical about the marketing aimed at women. Hamburgers, not salads, are the most popular entree ordered in restaurants by both men and women, he says. "Where is the burger that's directed at women?"

A well-executed marketing campaign may be enough to re-energize Wendy's sales even if it doesn't join the health bandwagon. Balzer, who has spent 25 years monitoring restaurant habits in the U.S., has become cynical about whether Americans will ever really eat healthily. In the early 1980s, he notes, the big chains were in the same position they are today. "The fast-food industry was beaten up by Americans' desire to eat healthy," he says. "What Americans say they want and what they actually do are two different things." Wendy's put salad bars into the stores and then took them out a few years later. McDonald's introduced its McLean burger to great fanfare. "That was hailed as a breakthrough," Balzer quips. "And then someone ate one."

So why did those efforts fail? Balzer suspects that every generation goes through a healthy-eating craze, but it never lasts long. Schuessler was a Wendy's regional manager in Atlanta when the chain first introduced salad bars, and he remembers how much customers loved them, at least at first. "Their eyes were just wide open," he says. That doesn't mean fast-food chains should ignore the trend. They have to give consumers enough options to avoid the "veto vote"--people who won't eat somewhere because they perceive it as unhealthy, Balzer says.

Having learned its lesson with salad bars, Wendy's is trying to give consumers "choices along the whole continuum of health," Schuessler says. But he isn't willing to go all out in pursuit of the bad-boy burger. (Although the Classic Triple features three-quarters of a pound of beef.) "Every company has to ask themselves, Are you going to be relevant to the consumer tomorrow?"

To keep growing, fast-food chains have to offer new reasons for people to come into the store. That's what Wendy's has always done best. It will have a chance to prove itself again later this year when it unveils its Frescata cold sandwiches. The Frescata line uses high-quality meat and focaccia bread developed with the artisanal bakery La Brea. Wendy's has a financial relationship with La Brea through the Canadian company Tim Hortons, a coffee and bakery chain that Wendy's bought in 1995. That's one reason Schuessler plans to hold onto Tim's, despite pressure from some hedge funds to spin it off. The bread gets its final baking in the restaurants, a technique that Meyer of CSFB says will be harder for other companies to copy than earlier innovations were.

Wendy's is also using the Tim's expertise in baked goods to experiment with breakfast, a category the chain hasn't touched for 20 years. Its first try was a disaster. "It was expensive, and it wasn't portable," Schuessler says. Since that experience left such a bad taste, Meyer says, Wendy's will move cautiously here. The first breakfast items will appear, at the earliest, in 2007.

Of course, now that the game is a little hotter, Wendy's will have to pick up the pace in introducing other new products. "They've always been very conservative in testing and rolling out product news," Meyer says, sometimes taking years to develop and test a single new sandwich. "They have to get more things in the pipeline." It may take a little while, but she is optimistic that Wendy's will restore its reputation as a fast-food innovator. "That's their bread and butter," she says. It now comes with some healthy competition on the side.