How a Pretzel Saved a Fast-Food Giant

How a Pretzel Saved a Fast-Food Giant

When I was on vacation in Cologne, I walked into a bagel shop to get some breakfast. The most popular item being sold was a pretzel-bun sandwich with ham and cheese. I ordered it, because it looked odd enough to be delicious, and I was right--for 4€, it was the perfect breakfast for a day of sightseeing. So you can imagine how thrilled I was when this concept of pretzel buns finally hit America this year with Wendy's (NASDAQ: WEN)Pretzel Bacon Cheeseburger.

Yet, who would have guessed that something as simple as swapping bread with a pretzel would become such a huge profit maker and begin the latest fast-food trend?

The pretzel profit

Last month, Wendy's introduced the Pretzel Bacon Cheeseburger, hoping to drum up more business as it seeks to compete with Burger King and McDonald's for fast-food supremacy. Before the launch, Wendy's had been stuck in neutral on sales with a small 0.7% revenue increase and roughly a 0.4% increase in same-store sales last quarter. The company had been selling-off more stores to franchises and trying to recover from the lukewarm reception of the Flatbread Grilled Chicken Sandwich. When the new burger was released, it was a bolt of lightning for the company.

Wendy's saw a jaw-dropping 42% jump in share price in just one month, increasing market cap by $800 million to $3.1 billion. Estimates show a 5.5% increase in sales for this quarter, largely on the back of the new burger. Even better, the strength of the new burger, according to company insiders, will probably lead to an expansion in the pretzel-bun range over the next few months, going beyond just cheeseburgers and into more artisan offerings.

This is what Wendy's needed to set itself apart from its other two competitors, which at the moment don't have something like this on their menus (at least not yet). By pushing for an expansion of the line, which is likely, Wendy's can create a near monopoly on the pretzel-burger craze and pack the customers in for more than just Frosty desserts.

With success comes copycats

However, this is the fast-food world. If a product is bringing in the customers, expect copycats looking to get a slice of the brown and salty action.

Drive-through chain Sonic (NASDAQ: SONC)rolled out a pretzel hot-dog line for the summer, with the expectation of "15 to 25 per drive-through per day" to be sold. This seems like a small number, but Sonic is being cautious because it doesn't want "cannibalism" within its own hot-dog range, where people buy pretzel dogs in lieu of similar items. Also, the release seems to be limited to the summer, when Sonic posts its best sales numbers.

It has sold well so far, though it didn't have the huge advertising campaign Wendy's had for its offering. Like Wendy's, though, it also has to rebound from a lackluster 2Q earnings report that saw same-store sales only up 0.1%, thanks largely to a 2% drop in revenue. Sonic made up for this by spinning-off more company stores as franchises and cutting operating costs, but it was the cold spring in big-market places like Texas that hurt the company.

With the limited-edition Pretzel Dog, Sonic hopes to have strong third-quarter sales to make up lost ground. Given the better weather, that seems likely, though it will be interesting to see if the Pretzel Dog is able to post strong numbers in such a limited run.

Pretzel sandwich

Dunkin Brands' (NASDAQ: DNKN) is trying to get into the act with a line of pretzel sandwiches for its evolving lunchtime sandwich menu, which drove a 4% increase in US same-store sales. While still new to the lunch crowd, it is clear that Dunkin has had solid growth owing largely to its sandwiches and healthier options, giving a little diversity to a formerly breakfast- and donuts-only menu.

With the new pretzel sandwich line, including tuna and chicken salad varieties, Dunkin may have a chance to tap into an early market for healthier versions of the Pretzel Bacon Cheeseburger.The company's lunch options have typically avoided fried foods and leaned more toward bagels with salad fillings and lean meat. However, Dunkin may not have as much room for pretzel-based growth at the moment because of its long-standing breakfast reputation, which carried the company for decades, but entering into the lunch industry puts them in a crowded marketplace where they don't have the same brand-identification.

The bottom line

Wendy's has so far been the most successful with this product launch, resulting in share price increases and market cap boosts unseen by the company, in nearly a decade. With the increased sales estimates for the product, and glowing Wall Street reviews, Wendy's may have hit the jackpot for the time being as the first pretzel-burger joint on the block, giving them a noticeable first-mover advantage.

Sonic might be the nearest competitor at the moment in this category, but with limitations and low estimates for its version and a highly seasonal business model (drive-up restaurants don't typically thrive in snow), it won't have the ability to match Wendy's growth, being one of the "big three" as it were.

Pretzels are definitely the growing trend in the fast-food world, though until we see movement from the other two big shots, Wendy's will reap the benefits and fill its pockets while filling our stomachs.

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