Yahoo Finance Presents: Wendy's CEO Todd A. Penegor

On this episode of Yahoo Finance Presents, Wendy's CEO Todd A. Penegor sat down with Yahoo Finance's Brian Sozzi to discuss their recent expansion into breakfast foods, as well as talk about the chicken sandwich wars amongst fast food retailers, the return of business as the COVID-19 pandemic lets up, and the future of Wendy's restaurants domestic and international.

Video Transcript

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BRIAN SOZZI: Wendy's is full steam ahead this year, serving up $5 Biggie Bags and $1.99 breakfast sandwiches to those starting to venture out after getting vaccinated. Let's dive into the world of Wendy's with CEO Todd Penegor. Todd, really good to see you. It has been a while.

We were joking before we came on here, you-- Wendy's is still my last headquarters visit back in early March in 2020. So it's good to be reconnected with you here and good to see you staying safe. Breakfast, after the time of that visit over a year ago, you were getting ready to launch breakfast, very big initiative for you. How's it been going?

TODD A. PENEGOR: Yeah, well, pleasure to see you again, Brian. It's hard to believe it's been a year since we've last chatted. Time really flew through the whole pandemic. You know, breakfast, we could not be more pleased with how our breakfast business is performing. When you showed up here back in February, we were getting ready for the launch, had all our national media cranked up.

We had an unbelievable first week. We were plus 18%. And then the pandemic hit. And we pulled all our media and we shifted our marketing plans because we were going to be the official breakfast of the NCAA last year before the tournament got canceled. But I'll tell you what, throughout the pandemic, we began getting into people's morning routines.

Our business ended last year mixing at about 7% mix, so exactly where we thought it would be in the first year. We supplemented that with some strong support from company-funded advertising as well as the franchise support that we've had throughout the year. And we're really excited about where this business can go in the future.

And as part of our earnings, you know, we just talked about we do believe it can be a 10% mix of our business by the end of 2022 with the momentum we've seen because it's doing well, but mobility's down. People don't have their morning routines. And we know we have a lot of opportunities on awareness and trial, which can drive the business like crazy in the future.

BRIAN SOZZI: How close to you-- so 10% of sales by 2022. How big a business in terms of sales would that make breakfast for Wendy's?

TODD A. PENEGOR: Yeah, so what we've been talking about is, you know, how is it a billion plus incremental sales layer to our business? We're a $12 billion system today. So a 10% mix, you know, a billion 2, a billion 3 as we continue to grow the rest of the day part two. So that's a sizeable business to pick up in the course of a couple years.

BRIAN SOZZI: That's almost-- I'm just crunching some numbers here, that's almost 200 million more than when we originally-- when we initially talked. You were targeting, I believe, $1 billion goal within short order. To me, that sounds like market share gains. Where are you taking market share?

TODD A. PENEGOR: We do see-- in the data that we see, we are picking up our fair share within the business. You know, you got some sourcing from all the traditional big players, you know, the smaller mom and pop and other folks have had a little more challenge through the pandemic. And you've had a lot of restaurants closed, unfortunately, during the course of the last 12 months.

But, you know, we think there's just a huge opportunity. You look at where other traditional QSR players, they're all mixing much higher than 10%. So it's a journey for us. We think there's a lot of growth for us into the future.

But to be able to establish a business that's already at 7% with the line of sight to be 10% by the end of next year, we're well on our way to really have a daypart that's driving a lot of growth and really helping fuel the restaurant economic model for our franchisees.

BRIAN SOZZI: And the franchisees, they're still committed?

TODD A. PENEGOR: Fully committed. We had an opportunity, as we've talked about in the past, after the first year, we were going to allow folks to take a look to see if they wanted to opt out, if they're in a trade area that just wasn't working. We've had literally less than five franchisees ask to opt out.

And the only folks that have asked for a little bit of hiatus are those that are in a trade area that has been completely shut down, if a mall or a athletic venue was right near them and not driving a lot of business during that-- into that trade area. So no, they're all in. And what they really loved, it's driving additional frequency to our restaurants, it's incremental to our [? rest of day ?] business.

And it's profit and margin accretive to the business. So they're feeling good about it. And the pleasant surprise, Brian, it was a lot easier to staff that they thought that that was going to be. So we were able to hire up staff and have a very effective and efficient model for the morning day part.

BRIAN SOZZI: You mentioned mobility. Mobility data, that is starting to come back a little bit. I watch a lot of the Google Trends data, people are going back out, likely after they're getting vaccinated. What have you seen in your business?

TODD A. PENEGOR: Yeah, we're in that quiet period right now. We got earnings coming up in a couple of weeks. But, you know, just in general mobility trends, we're seeing the same thing. Folks are getting a little more comfortable getting out. Everything we look at is seeing mobility pick up. You still got about half of the folks still working from home. So the routines are a little different on the mobility.

You don't really have that dedicated morning routine with the big rush to get to school, big rush to get to the office. But people are out and about during the course of the morning. And what we've really seen in our breakfast daypart is it continues to build all morning long. So our biggest peak half hour in breakfast is the between 10:00 and 10:30.

And I think a lot of that is folks are doing a little more grazing, getting the late morning snack, getting-- be out behind the Zoom camera and grabbing a biscuit and a Frosty-ccino to keep them going throughout the day. And how that changes over time, we will see as the routines come back. But it's not that dedicated mobility. It's not a routine yet, right?

We're all willing to get out a little bit. But it's not like we're on that every morning we're heading to work or every morning we're heading to the gym. But it's starting to pick up nicely.

BRIAN SOZZI: So Todd, I know you as a pretty competitive guy. We're both Pelotoners. But how do you-- what are some of your thoughts on McDonald's entry into the chicken sandwich wars, so to speak? We all love to say chicken sandwich wars. They launched three new sandwiches in mid-February. What have you seen?

TODD A. PENEGOR: Yeah, no, everybody's been launching into that space. You know, a lot of discussion with everybody that plays in traditional QSR. And, you know, the good news is it's created a lot of discussion and a lot of noise around chicken. And we've been very pleased with our chicken business.

It goes back to the fourth quarter of last year when we renovated our home style chicken and renamed it the classic chicken sandwich. You know, we've done work to have a more tender, juicy grilled chicken sandwich. I know we had sent you some over today to have for lunch. And we continue to work on our spicy lineup to make sure that it's got the spice that holds.

But we're not just doing things on our base sandwich. Our Made to Crave lineup allows us to truly innovate on chicken sandwich business. The jalapeno popper chicken sandwich is the one that-- as we talked about on earnings, it was off to a nice start in its early days. We can continue to win in the chicken space, not just with high quality based protein, but with the toppings and the fixings that we can put on them with the Made to Crave lineup.

So we feel really good that we're in a position to compete no matter what McDonald's does, no matter what Popeyes continues to do, no matter what KFC decides to do. We're in a great position to continue to win and get our fair share of that business.

BRIAN SOZZI: Why is the industry-- why do they love chicken sandwiches? What is it about chicken sandwiches?

TODD A. PENEGOR: Well, a chicken sandwich, you think about it, from an entry perspective, you've got a fryer. If you're going with the fried chicken, it's easy, quick to make. You can serve it fresh and hot. And you can do some unique builds along the way.

And if you look at where the protein markets have been over the last couple of years, you know, the chicken protein has been very predictable on a cost pattern. I know it's been creeping up a little bit more recently. But I think that's why folks love it. It's a great eat, it's got a healthier perception to it from a consumer perspective. So I do think that a lot of folks gravitate to it.

And with all the news that's been created, it does drive a lot of trial. And it gets folks to really think about, maybe I need to have a few more chicken sandwiches in my routine. So it's been good for the industry.

BRIAN SOZZI: Is Wendy seeing inflation? You mentioned chicken, but are you seeing inflation in meat and other commodities? And how have you overcome that?

TODD A. PENEGOR: Yeah, we are seeing a little bit of inflation, especially as, you know, the economy comes back and demand starts to pick up. You know, some commodities we have covered, others are uncovered but not insurmountable. We're seeing a little more labor inflation along the way as-- you know, access and cost of labor is a little bit more.

But with all of the productivity that we've been able to drive through the pandemic with getting more cars through the drive-through, the work we've done around labor positioning, the work that we're doing on technology to drive higher average checks, both with mobile grab and go, curbside, as well as delivery, all of those things have helped us along with a little bit of pricing to really overcome those headwinds and still drive a strong restaurant economic model for the system.

BRIAN SOZZI: Todd, you scan the industry right now and there appears to be a lot of folks trying to rethink what the restaurant of the future will look like, a reinvention of the insides. Taco Bell recently came out with touchscreen ordering systems inside of one of their Times Square restaurants. You had some companies now dabbling in autonomous delivery of their pizza or their burgers. What do you think about those moves?

TODD A. PENEGOR: Yeah, they're all out there in the future, Brian. At the end of the day, why QSR has always been so successful, and we've talked about this in the past, is speed, convenience, and affordability. And those are basic human needs that we can deliver in the QSR space. Wendy's we can differentiate on quality.

We talk a lot about, how do we create a frictionless experience at the restaurant, fast and fun? And how do we really turn our parking lots into frictionless transaction centers? And, you know, you think about coming to the drive-through lane, and the lines have been long lately, which has been great for the business.

But how do you skip the line? How do you do a mobile order ahead of time and go in and do a mobile grab and go, or go to the other side of the building and do a mobile order and have a curbside pickup? You know, those are all the near thing-- term things that really solve for a customer need. It is around that speed and how do I skip the line along the way?

We'll continue to look at where things go into the future. And you can start to dream up all these other things with drone deliveries and autonomous vehicles. Those are further down the pike to really drive the business. You know, our business is really driven by two things, personal disposable income and miles driven. And those things are still core to our business today.

So how do you make sure that that restaurant is set up for that success? And then we'll think about those future items. The great news is we've been ahead of it, right? Abigail Pringle has been leading our development team. We've had a smart suite of designs. So we've had 65 seaters, 55 seaters, 40, 30. We're dabbling in drive-through only restaurants right now.

We've got a nice pipeline of those. We're doing a lot of conversions. And we've been playing in the dark kitchen, our ghost kitchen space, which is getting us more access in some of those locations where we don't participate today, especially in the urban location.

BRIAN SOZZI: Drive-through only, so no seats inside?

TODD A. PENEGOR: No seats. I mean, there are certain trade areas that, you know, we've learned through the pandemic that we do think a drive-through only would make some sense. Could be complemented with delivery along the way. We would have never thought about that if you go back pre-pandemic.

But for the right trade area, those are solutions that can actually get us into different footprints, into smaller parcel sizes, and could be a good complement to the business where we're not.

BRIAN SOZZI: And your international expansion, we've talked about this in the past, is that-- how many restaurants do you plan to open this year internationally? And are you still targeting UK as an important market?

TODD A. PENEGOR: Yeah, I'll start with, you know, as you think about where we're going, we just talked about at earnings that we'll be 7,000 restaurants across the globe in the US and international by the end of this calendar year on a way to drive to 8,000 restaurants by 2025. And, you know, the international business is growing about 10% a year on units.

They'll quickly pass the 1,000 restaurant mark, which will be quite exciting for us. UK is a big market for us to really entrench ourselves in that market. So we can start to build out the rest of that market with other franchisees in the UK and then allow us to get back into Europe, where we haven't been for a long, long time. We'll open about five restaurants this year in the UK.

We'll probably open another 10 next year with the pipeline that we have. We really thought we'd have about 20 company restaurants and then really fill out the market with franchisees and then allow us to have a franchise model across the rest of Europe. But what we're really seeing is our business internationally was so strong pre-pandemic, it got paused a little bit with some of the challenges in various countries.

But they really feel great about where the Wendy's brand could go. So as the economies are opening back up, a lot of our franchisees really are eager to start developing and provide more access to our brand in a hurry across the globe.

BRIAN SOZZI: All right, we'll leave it there. Wendy's CEO Todd Penegor, always good to see you. Don't be a stranger. Come back to "Yahoo Finance." It's been too long.

TODD A. PENEGOR: Absolutely, Brian. I look forward to talking soon.

BRIAN SOZZI: All right, stay safe.

TODD A. PENEGOR: You too. Bye, bye.