Daniel Gross

How Wendy’s Caught up to Burger King

Contrary Indicator

There's been a disturbance in the natural order of things. In many important realms, competition has historically been dominated by a pair of competitors, the market leader and the long-running runner-up. Coke and Pepsi. Avis and Hertz. General Motors and Ford. McDonald's and. . . Wendy's?

Yep.

As Time reported last week, Techonomic, Inc.,, the restaurant industry consulting firm, is set to report in April that Wendy's has surpassed Burger King, which has been the Red Sox to McDonald's Yankees for nearly 40 years, as the second largest burger chain in the U.S. by restaurant sales volume. "Wendy's had sales of $8.5 billion in 2011, compared with $8.4 billion for Burger King." Wendy's overtook Burger King even though it has significantly fewer restaurants in the U.S. than Burger King does.

How did the perennial third-place burger joint managed to pull this off? As Aaron Task and I discuss (and taste) in the accompanying video, several factors help explain this surprising reversal.

Burger King, which underwent an ownership transition in 2010 and inexplicably retired the awesome King from its ad campaigns, has become less popular. As the company reported, same-store sales fell 4.4 percent in 2010 and another 3.4 percent in 2011. The chain is simply getting fewer dollars out of each outlet than it was a few years ago, either because traffic is down or because Burger King has held the line on prices to compete with McDonald's.

Wendy's has chosen a different path. Wendy's is aiming to occupy the ground in between cheap, quasi-nasty burger joints like McDonald's and Burger King and the rapidly proliferating high-quality burger chains like Five Guys. And it seems to be succeeding, to a degree. I made my first Wendy's visit in several years earlier this week. The Single, now served wrapped in paper in a cardboard stand, would have fared decently in a blind test with a burger from the Shake Shack. The menu is stocked with premium gut bombs, like the Baconator, that cost $4 and $5. More expensive burgers lead to greater sales. According to Wendy's recent earnings, same-store sales at Wendy's company-operated restaurants in North America rose 2 percent in 2011, and average unit volume in the U.S. "grew to an all-time high of $1.46 million."

There's a second factor at work. Burger King may no longer care as much about the U.S. market as Wendy's does. Burger King is much more of a global brand. It's owned by a Brazilian private equity firm, and has thousands of outlets outside the U.S. At the end of 2011, there were 7,500 Burger Kings in the U.S. and Canada, and another 5,012 planted around the world. Like Yum Brands, which owns KFC, Taco Bell, and Pizza Hut, Burger King is clearly staking its future on growth in rapidly growing emerging markets.

By contrast, Wendy's remains largely tethered to the U.S. As the company's 10-K shows (see page 26), Wendy's has 5,876 restaurants in the U. S., and only 718 outside the U.S., with most of those in Canada. So if the company can't get it right in the U.S., it doesn't have much of a future. As a result, Wendy's is investing in large-scale renovations, or what it calls "image activation," to make its U.S. restaurants more appealing. The company has focused on improving operations, and squeezing more dollars out of existing stores by adding breakfast. The breakfast menu includes Cinna-Middles, a brilliant innovation in junk food. Cinna-Middles have all the congealed sugar and frosting we've come to expect from airport cinnamon roll joints without the annoying dry and dusty outer layers.

Finally, it's also possible that Burger King got caught out it because it never took Wendy's seriously as a competitor. With its folksy ads, self-deprecating sense of humor, and unwillingness to engage in massive overbuilding, Wendy's never seemed to be all that much of a threat to Burger King and McDonald's. The gains it has registered in the past few years have come without any flashy marketing campaign.

A generation ago, Wendy's got under the skin of its competitors with its long-running "Where's the Beef" ad series. Now it's unsettling Burger King's crown simply by delivering more beef.

Daniel Gross is economics editor at Yahoo! Finance

Follow him on twitter @grossdm; email him at grossdaniel11@yahoo.com

His next book, Better, Stronger, Faster: The Myth of American Decline and the Rise of a New Economy will be published in May and is available for pre-order.

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