Wendy's is Seeing Ghosts and Plenty of Growth Potential

    The burger chain struck a deal to open 700 delivery kitchens. But that's just the start.

    Fast Food | August 12, 2021 | Danny Klein
    Wendy's store exterior seen at dusk.
    Wendy's
    Wendy's could have as many as 9,000 stores by 2025.

    On the heels of one of its “best quarters ever,” Wendy’s global development is about to get a serious jolt. And it’s going to come from multiple angles as the burger chain races toward 8,500–9,000 locations by 2025—500–1,000 more than previously outlined.

    Perhaps most buzzworthy, though, Wendy’s struck a deal with REEF, a mobility and logistics operator—to open and run 700 ghost kitchens over the next five years in the U.S., Canada, and the U.K. Fifty will debut in 2021 alone.

    Wendy’s tested eight of these in Canada, and expects sales to range from $500,000–$1 million per unit. The delivery-focused venues offer a higher royalty rate for Wendy’s (nearly 6 percent in the U.S.) and allow it flood urban markets, of which CEO Todd Penegor said Wendy’s is “dramatically underpenetrated.”

    “If you look at our footprint across all urban locations, whether that's east, west, north, south, and as you think about where their opportunity is on delivery-only providing more access to our brand, urban locations will be job one, and we're excited to get them rolling quickly,” he said.

    READ MORE: See where Wendy's stacked up is this year's QSR 50

    REEF puts up all the dollars to get vessels going and to train and hire employees. Wendy’s offers support, but the best way to view the relationship is REEF as a franchisee, or three franchisees given the contracts in the U.K., Canada, and U.S.

    Either way, the effort will bring Wendy’s to guests it wasn’t reaching before, and far faster than traditional development ever could.

    Speaking of that, Wendy’s announced the creation of a $100 million “built to suit” development fund that’s going to drive additional physical growth of its own. The company is funding the program with cash obtained through a debt refinancing program completed in Q2. This plan, along with newly implemented lower liquidity and net worth requirements, “will transform how we recruit and engage diverse franchisees into the brand,” Wendy’s said. From this, about 80–90 new franchise restaurants should open from 2022–2025.

    Essentially, it’s a strategy where Wendy’s secures and builds locations and hands over turnkey solutions to franchisees. Operators need to invest in signage and equipment. Roughly 70 percent of the capital is Wendy’s. The chain then gets a slightly elevated royalty rate and rental income, creating a “high-quality income stream in future years for us,” CFO Gunther Plosch said.

    Previously, liquidity requirement was about $2 million. With “built to suit,” it’s $500,000. Net worth drops from $5 million to $1 million. “At first blush, it looks like we’re taking on a lot of risk,” Plosch said. “I have to say, we studied competition. We actually were too conservative and not competitive. The king of requirements that we have are very much in line with what the rest of [the] competition is doing.”

    The third stool of Wendy’s growth boost is its “groundbreaker program,” which offers up to $200,000 in incentives and has resulted in incremental commitments for about 240 new restaurants in the U.S. and Canada.

    Overall, Wendy’s now has about 70 percent of its global new restaurant pipeline through 2025 committed under a development agreement—the highest level seen in brand history, Penegor said.

    It’s why Wendy’s isn’t shy to raise its long-term guidance and why it believes it will hit 7,000 stores by the end of 2021 (Wendy's started the year with 5,881 U.S. restaurants and 6,828 total). The company expects global unit growth of 2 percent-plus in 2021, with an acceleration between 2022–2025 to about 6 percent. The starting point being 10 percent international and 1 percent in the U.S.

    But recent performance doesn’t hurt, either.

    Wendy’s delivered its second consecutive global double-digit same-store sales performance in Q2, the three-month period that ended July 4. The chain’s sales led to a restaurant margin of more than 20 percent, an almost 600 basis-point expansion, year-over-year. The franchise system grew EBITDA dollars by nearly 20 percent as well, to what Penegor said were likely record profits. Franchisees’ U.S. sales upped about 2 percent compared to last year.

    As a company, adjusted EBITDA increased 35 percent to $131 million and Wendy’s adjusted EBITDA outlook climbed $10 million to $465 million–$475 million.

    Global same-store sales in Q2 lifted 17.4 percent, or 11.6 percent on a two-year view. In the U.S., Wendy’s comps soared 16.1 percent (11.7 percent over two years), with record average-unit volumes of $1.9 million on a trailing 12-month basis. Domestically, it was the fourth straight period of two-year, double-digit comp gains for the brand.

    A few levers are working in Wendy’s favor. Firstly, breakfast sales accelerated in Q2 (as expected with consumer mobility increasing) by 10 percent over the previous quarter. Wendy’s $1.99 Honey Butter Chicken Biscuit and 2 for $4 deal drove trial and nurtured a funnel Penegor said provides strong customer repeat and satisfaction once people give breakfast a shot.

    Wendy’s now plans to pour an incremental $10 million into breakfast advertising (up to $25 million) in 2021. The chain’s goal remains to grow breakfast sales by 30 percent this year and reach 10 percent of total business by the end of next. Breakfast mixed 7.2 percent of sales in Q2.

    “I think the key unlock on the breakfast front really is continuing to drive trial. Our awareness levels are quite healthy, as it's north of 50 percent,” Penegor said. “We're in there in that same range with where Burger King is around awareness, and they've been there for quite some time.”

    “And what we need to do is continue to create news, have trial-driving events, get folks to try our food,” he added. One example being the free croissant deal running this weekend.

    Penegor believes Wendy’s can play a role in consumers’ routines returning to normal as schools get back and people travel to work again. Whatever the routine ends up being exactly, he said, Wendy’s needs to be part of it. “And that’s why we’re putting additional $10 million of advertising to work to make sure that message is loud and clear.”

    Looking back over the past 12 months, the frequency and numbers of visits to Wendy’s, on an annual basis, are up 20 percent from 5.5 to 6.5. Breakfasting is helping, Penegor said, and so is digital.

    In that same period, quick-service burger category frequency saw declines of 5–10 percent. “So we always get the question, is breakfast incremental? That helps prove it out. Is digital helping drive the business? Clearly it is for us. So we're seeing folks engaged and we're seeing our frequency heading in the right direction. And that's at a time where traffic is still impacted through the COVID challenges,” Penegor said.

    Wendy’s digital sales dollars grew over 10 percent in the U.S. last quarter, fueled by delivery and mobile ordering. Regarding the latter, Wendy’s launched “several impactful acquisition campaigns,” Penegor said that ballooned its loyalty program membership 25 percent to 17 million. Digital held steady at about 7.5 percent of Wendy’s business. This helped hike average checks—a common COVID balance weight as customer counts remain down versus 2019 levels. Mobile ordering produces 15–20 percent higher average checks at Wendy’s, while delivery typically is 40–50 percent above.

    It’s an omnichannel effort, however. “We need to continue to get folks through our drive-thrus even quicker,” Penegor said. That's why we're doing all the work on mobile grab-and-go. That's why we're doing the work on getting folks to do more mobile ordering. And that's why we continue to roll out curbside across all of our restaurants. Folks are looking for speed to support their need, and we want to be there to continue to support that. Our opportunity is to continue to make sure our restaurants are fully staffed to truly complement a great experience and that speed along the way.”