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DECEMBER 21, 2011.

Wendy's Stages a Palace Coup
Despite Fewer U.S. Locations, Chain Set To Unseat Burger King as No. 2 in Sales.

By JULIE JARGON

Burger King, the perennial No. 2 in the burger wars, is about to be beaten out by a pigtailed girl.

Wendy's Co. is poised to pass Burger King Holdings Inc. in U.S. sales, trailing only industry behemoth McDonald's Corp., in the first reordering of the industry-leading trio since Wendy's was founded in 1969.

Americans are expected to spend more than $175 billion at fast-food restaurants this year, up about 3% from 2010. Wendy's U.S. same-store sales are forecast to rise 1.1%, while Burger King's U.S. and Canada same-store sales will drop 3.9%, according to market-research firm Technomic Inc.

That means sales at Wendy's U.S. restaurants—both franchised and company-owned—are on track to be $8.42 billion or $53 million higher than Burger King's this year, according to an analysis conducted for The Wall Street Journal by Technomic. That's in line with expectations from some other analysts. The outcome will become clear when the two companies report fourth-quarter results early next year.

Wendy's has gained on Burger King without opening more restaurants: its number of outlets in the U.S. has remained flat, at roughly 5,800, compared with Burger King's approximately 7,200 U.S. stores. McDonald's is the far away the leader with more U.S. restaurants than Wendy's and Burger King combined, and almost four times the U.S. systemwide sales than either of its direct rivals.

Wendy's fortunes have been revived since investor Nelson Peltz's Triarc Cos. bought the chain in 2008. Much the way McDonald's has broadened its menu and remodeled its restaurants, Wendy's has upgraded its menu, changing the lettuce in its salads and softening the edges of its trademark square burgers. It has also raised some prices.

The changes come amid intensified competition for market share in the fast-food industry, as room for restaurant growth has dwindled and the wobbly U.S. economy has prompted many to eat at home instead.

Burger King reports its U.S. and Canadian sales together, but Technomic extrapolated the data to show that Burger King had 2010 U.S. systemwide sales of $8.7 billion, just $370 million higher than Wendy's, compared with a $542 million difference in 2009.

Analysts focus on systemwide sales in assessing relative size in the U.S., rather than company revenue, because some chains franchise many more restaurants than they own and collect royalty fees from franchisees.

Wendy's spokesman Denny Lynch declined to comment on the possibility of surpassing Burger King. "We're staying focused on our business," he said.

Wendy's has benefited in part from weakness at Burger King, which analysts say has suffered in recent years from a series of management and ownership changes, a lack of menu development and an over-reliance on young adult customers at a time when high unemployment hit that market hard.

Burger King spokesman Miguel Piedra said speculation about market rankings in the U.S. "highlight[s] the degree of competition" in the sector, but that such projections "do not illustrate a complete picture of the industry's competitive landscape, globally." He said Burger King has nearly 12,400 restaurants world-wide, almost double the number of Wendy's around the world. Burger King is "focused on driving strong expansion in its many markets around the world," and that "will strongly position the brand" to remain the No. 2 burger chain world-wide, he said.

Wendy's has focused on improving the dining experience.

Shortly after its acquisition by Triarc, Wendy's began an 18-month process of interviewing 10,000 consumers. "They told us they liked the idea of fresh foods with as little processing as possible and ingredients they were familiar with," Mr. Lynch said.

The customer survey led to the "reinvention of our core menu," he said. Out went the traditional iceberg lettuce topped with tomatoes and onions, and in came four new salad varieties featuring 11 different greens and new ingredients like apples, pecans and asiago cheese.

Wendy's then turned its attention to French fries, switching from a mixture of potato varieties to only Russet potatoes, sliced with the skin still on, and sprinkled with sea salt.

More recently, Wendy's beefed up its burgers, switching to a looser grind of beef to make its burgers thicker and juicier. The company also refashioned its trademark square burgers with softer edges after customers said those burgers looked processed, even though they were fresh.

Andrew Ofisher, a 24-year-old software engineer, went to a Wendy's in downtown Chicago last week to try the new burger. "This was more like a normal burger, not like a fast food burger," he said. "There was actually a pink part to it; it wasn't burned to a crisp."

Tim Perry, a 30-year-old product manager who ordered a spicy chicken sandwich, likes Burger King but goes to Wendy's more often. "It's good, it's fresh and you've got the sea salt fries," he said.

More customer visits and higher prices are showing up in Wendy's sales this year. The company said revenue for its fiscal third quarter ended Oct. 2 rose 1.8% to $611.4 million, although the company's quarterly loss widened to $4 million from a year earlier, due to costs associated with the July sale of the Arby's chain.

Burger King, which went private in a leveraged buyout last year by 3G Capital Management Inc., said revenue in the third quarter ended Sept. 30 rose 1.4% to $608 million, while net income fell 24% to $48 million.

Burger King also has been trying to emulate McDonald's lately by introducing oatmeal for breakfast and testing fruit smoothies in an effort to broaden its appeal. Mr. Piedra said the company is focusing on operations, menu innovation, brand image and marketing. In May, Burger King set a goal of remodeling 1,000 restaurants by the end of 2012.

McDonald's isn't likely to feel much change from any shift in ranking. But with Wendy's getting stronger, McDonald's could lose market share in certain parts of the business, such as breakfast.

"As the leader in the [fast food] industry, we remain focused on our customers and our business," a McDonald's spokeswoman said.