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Why Wendy's is running circles around McDonald's

Wendy's (WEN) was in trouble two years ago. It had just sold off its Arby's division and was struggling to find itself. Nothing had been the same since founder Dave Thomas died in 2002, and Emil Brolick, the restaurant chain's new CEO, described the company as undergoing "an identity crisis."

That's all changed. In fact, Wendy's has come so far so fast that it's now beating the pants off of industry leader McDonald's (MCD). To be sure, Wendy's isn't coming close to beating its larger rival in sales, but it moved past Burger King (BKW) to become the No. 2 hamburger chain in 2012 and continued to ride that momentum through 2013.

Investors have rallied behind Wendy's, pushing shares of the company up more than 80 percent in the last year. McDonald's shares, meanwhile, are up just 7 percent. 
Nick Lachey serenades Wendy's new Pretzel Bacon Cheeseburger with fans' enthusiastic tweets for a promotional Twitter campaign on July 8, 2013, in New York. Neilson Barnard/Getty Images

What's got investors so fired up? For one thing, the "barbell" approach that Wendy's has long espoused seems to be working. The idea is to appeal to all customers with the one-two punch of a broad value menu combined with premium promotions -- bring in budget-conscious customers with the cheap burgers, and them upsell them on the fancy stuff.

Wendy's also lures better off customers with popular items like the $5 Pretzel Bacon Cheeseburger. That burger was so hot, in fact, that the company got 98 Degrees singer Nick Lachey to sing love songs about it.

But alas, even that cheeseburger couldn't survive the ax, and Wendy's killed it in November in favor of yet another premium limited offering: The bacon portabella melt on a brioche bun.

Why kill off such a popular sandwich? Partly because it was just too difficult to make it permanently. Here's what Brolick said about it last July:

When you look at our operating system, I will tell you it’s not easy handling things like Pretzel Bacon Cheeseburgers in the back of the house. And when you think about the build of that sandwich, you’ve got natural cheddar cheese, a very, very high-quality natural cheddar cheese. You’ve got cheddar cheese sauce, you actually have a Smoky Honey Mustard that’s specifically brought in for this. You have a bacon that is extremely hard to find out there; it’s center-cut bacon. . . .You put this on a spring mix, and not just leaf lettuce, and you put all of these things together, and we’re used to custom-building sandwiches and building sandwiches to order.

It's all part of a larger strategy at Wendy's to overhaul its brand and reinvigorate sales. And it's more than just a new burger here and there. Wendy's has been upgrading its restaurant space and its packaging as well.

On a more practical level, Wendy's has also succeeded by selling some locations to franchisees, which streamlines profits.The results? For the third quarter, same-store sales at Wendy's restaurants in North America  rose 3.2 percent for company-owned locations and 3.1 percent for franchisees. Adjusted earnings per share rose to 8 cents from 2 cents a year earlier, The Motley Fool reports.

At McDonald's, by comparison, same-store sales rose by only  0.7 percent. And its attempt at a big promotion, the pricey chicken wings called Mighty Wings, fell flat, leaving the company with an estimated 10 million frozen wings in storage.

Yet Wendy's shares tumbled after its last quarterly earnings report in November. CNBC personality Jim Cramer says it's because the company is doubling down on future growth, spending even more money on sprucing up stores. Investors had high expectations, he said, and are missing the real story.

"Wendy's is now executing at the top of the quick-serve game," he said.
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