Why Wendy's Will Never Be Great Again

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Wendy'sThese should be exciting times for Wendy's (WEN):

  • The company spun off its Arby's sibling last year, freeing it to focus on its flagship burger-flipping chain.
  • In September, for the first time in its 42-year history, Wendy's reformulated its signature sandwich.
  • Just last month, the fast-food giant reentered the Japanese market,
  • And, it's hoping to give the breakfast market another crack soon.

However, pull up a stock quote and you'll find that a single share of Wendy's fetches about the price of one of its value meals. In fact, shares of Wendy's have been trading in the single digits for more than four years. There's little reason to expect that to change.

New Burger, Same Problem

The autumn debut of Dave's Hot 'N Juicy -- accompanied by a retro marketing campaign that brought back nostalgic "Where's the beef?" memories -- should have helped. The new burger features a more bountiful beef patty, bakery-style buttered bun, and extra cheese. In a twisted tribute, the new sandwich was named after the deceased founder, Dave Thomas, who never saw a need for an updated burger.

Wendy's can't help it. The "gourmet" burger joints are coming. Places with names like Five Napkin Burger and the organic-oriented Elevation Burger are raising expectations on the informal sandwich. Then you have the regional faves that are making territorial strides. Virginia's Five Guys is opening hundreds of new locations a year. West Coast icon In-N-Out Burger is taking baby steps eastward.

Upgrading its burger is nice, but even Dave's Hot 'N Juicy is no match for what some of these places are cranking out. In the meantime, retail watcher Technomic reveals that McDonald's (MCD) continues to gain market share at the expense of Wendy's and the now privately held Burger King.

McDonald's hasn't had to toss a new burger on the fryer to keep its charmed streak of success going.

Arby's Wasn't the Enemy

A fire sale for a majority stake in Arby's was cheered by investors late last year, sending the stock up to a fresh 52-week high.


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It's not as if unloading a concept has ever helped Wendy's turn around its namesake concept. A few years ago Wendy's shook off its fledgling Baja Fresh burrito joint and spun off Canadian bakery Tim Hortons (THI). All this did was bring down the stock to value-meal prices.

After all, it's not as if all of this focus led to a revival. Wendy's began 2008 with 6,645 stores. Three years later, there were just 6,576 locations.

This may not be entirely Wendy's fault. Burger King has struggled. Drive-in specialist Sonic (SONC) has also been a market laggard. Behind the Golden Arches, there is no worthy silver medalist these days. However, the facts are what they are. Wendy's is in trouble.

Will Goose Livers and Truffles Do the Trick?

It's not as if Wendy's hasn't gotten around to expanding overseas. It's just that it has been a disappointment as an export. Just 8% of its revenue comes from outside the United States. The burger chain may hail from Dublin, but it's the Dublin in Ohio.

Wendy's is getting crafty after flopping previously in Japan. Taking a page out of the gourmet playbook, the new Wendy's there offers a $16 burger topped with goose-liver pate and truffles. Yes, Wendy's just played the foie gras card. Whether that's the kind of novelty that will win it cult status in Japan or the ire of activists closer to home remains to be seen.

What about expanding the menu? When Wendy's tried to match Burger King and McDonald's in rolling out breakfast in the mornings, the a.m. rush never materialized, and Wendy's nixed its morning menu. (You know it's pretty bad when even Subway is promoting a breakfast menu, and you're not.)

More important, the consumer mind-set already has etched an impression of Wendy's that they can't shake loose. Trying to burn an older image by going all the way back to the glory days of Clara "Where's the beef?" Peller isn't going to be enough. If anything, in trying to be all things to all people, Wendy's may have lost the magic of its originally limited menu.

A few years ago, ordering a Frosty got you a simple frozen chocolate concoction. These days it's either vanilla or chocolate, and then an array of ways to turn what oozes out of that machine into sundaes, fruit parfaits, or shakes.

Wendy's can't go back to the past, and it may not be able to compete in the future.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. Motley Fool newsletter services have recommended buying shares of Tim Hortons and McDonald's.

5 Big Retail Chains That Will Be Gone in 5 Years
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Why Wendy's Will Never Be Great Again

Click through to see 5 Big Retail Chains That Will Be Gone in 5 Years

By Rick Aristotle Munarriz, The Motley Fool

1. Barnes & Noble (BKS)

When the last of the Borders stores closed its doors forever a few months ago, it was only natural to view Barnes & Noble as the obvious beneficiary. Bibliophiles would just flock to the other gargantuan bookstore chain, right?

Wrong. Things aren't going so well at B&N. Sales actually fell in its latest quarter, as sales of the lower-margin Nook e-readers can't make up the sharp decline in physical books.

Yes, B&N is ready for the passing of bound books, but what will this mean for its cavernous stores? Store-level sales will continue to decline, and folks will continue to download their books from a wider variety of sources.

2. Sears Holdings (SHLD)

Lousy sales for Sears and Kmart during the holiday season proved that both department store chains continue to fade in relevance for bargain-seekers, and in late December, the parent of the two struggling retailers revealed that it would be closing as many as 120 stores.

Sears Holdings is in a lose-lose situation. It needs to update its stores if it wants to stand a chance against its "cheap chic" rivals. Unfortunately, the company just began tapping its credit line, so it's not as if it can afford the necessary upgrades.

Sears itself has been around for several generations, dating back to its mail-order catalog. Could it really disappear in the next five years? Well, Woolworth was around for more than 100 years when it was liquidated in 1997.

3. Best Buy (BBY)

Everyone seems to be buying smartphones and tablets. They're just not buying them at Best Buy. Shoppers are finding cheaper prices online, forcing Best Buy to shave its already meager margins just to remain competitive.

It gets worse.

"Best Buy's worst fears are coming to fruition," I wrote after the consumer electronics retailer's latest quarterly report. "The same shoppers whom it has armed over the years with smartphones, tablets, and laptops are now using those devices to find better prices online. Even when folks do walk into a store, they can seamlessly compare prices on their smartphone to make sure that they're getting the lowest price."

Let's also not forget that these are also the same devices that are making all of the shelf space that Best Buy has been devoting to CDs, DVDs, books, and video games obsolete.

For growth, Best Buy has turned to smaller stores that sell only mobile products. That strategy may or may not pan out over time, but either way, the gargantuan Best Buy stores as you know them now are toast.

4. RadioShack (RSH)

If Best Buy focusing on bite-sized stores emphasizing wireless handsets through different carriers and related accessories sounds familiar, welcome to RadioShack. The small-box specialist got into that game awhile back, after realizing that folks just don't need to stop by a strip-mall shop anymore to pick up some batteries or a remote-controlled car.

Is this market wide enough for both RadioShack and Best Buy Mobile?

Forget about the future. RadioShack's situation is ugly right now. The retailer has missed Wall Street's quarterly profit expectations all year long.

5. GameStop (GME)

Today, GameStop has one of the most profitable retail models around. The growing retailer's stores stock the latest gaming systems, video games, and accessories. Margins aren't that hot on hardware, but they're pretty sweet on software.
However, the juiciest part of GameStop's model is where gamers trade in their tired games and systems for store credit. GameStop goes on to resell those items at huge markups.

GameStop stores don't need a lot of selling space given the compact nature of their merchandise, so they fit conveniently in the middle of strip malls where rent is cheap. Sales have held up reasonably well, even though video game industry sales have been largely languishing since 2009.

GameStop definitely doesn't seem very endangered now, but now that even Best Buy and Amazon.com (AMZN) are accepting trade-ins, the most lucrative part of the GameStop model is under attack.

Let's also flash forward a few years. As console makers shift to digital delivery of software, where does GameStop fit in? The retailer has made some intriguing acquisitions in digital delivery, but the days of GameStop's physical stores are numbered.

Add It Up

Some of these chains will last longer than others. GameStop's balance sheet is a far cry from Sears Holdings, where credit ratings agencies are biting their nails as they ponder downgrades. However, all five of these concepts just aren't built to last in today's retailing climate.

Enjoy them while you can.


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