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Wendy's/Arby's outlines plan for Wendy's

Chain to push breakfast, burgers and international growth

Wendy’s/Arby’s Group Inc. told investors Thursday that selling the Arby’s chain would help provide capital for reinvestments at Wendy’s, including new breakfast and burger lines, restaurant remodels and international growth.

Chief executive Roland Smith called Wendy’s “one of the most attractive growth stories in QSR” during Wendy’s/Arby’s Group’s investor day in New York.

Executives outlined several strategies for Wendy’s this year, including the expansion of a long-tested breakfast menu to 1,000 stores, the rollout of a premium burger line, a remodeling program and a new store prototype. The company also will look to expand Wendy’s abroad from its current base of 340 restaurants to as many as 8,000 over several years.

Wendy’s/Arby’s Group said last week it was exploring strategic alternatives for the 3,700-unit Arby’s chain, including a possible sale, in order to focus on growing Wendy’s.

EARLIER: Analysts: Arby's could fetch $300M-plus

“Given Wendy’s relative size and scope of 6,600 restaurants, it’s the key driver of [Wendy’s/Arby’s Group] shareholder value,” Smith said during the conference Thursday. “We have made solid progress building on its foundations: We have re-engineered the brand positioning, improved operations, reduced overhead and significantly improved store-level profitability. We’ll drive more sales in the coming years over our fixed-cost base.”

Nelson Peltz, whose activist investment fund Triarc Cos. created Wendy’s/Arby’s Group in 2008 by merging its Arby’s brand with Wendy’s in a $2.3 billion deal, said Wendy’s remains an “iconic brand.”

“Most iconic brands are mature, and they’re great cash flow generators but with little or no growth left in them,” he said. “This brand is different. It’s very unique to have a large QSR with so much white space. … We have a balance sheet that allows us to plan major store expansions and remodeling programs, while simultaneously investing in hamburgers, Natural Cut Fries, breakfast and a beverage platform.”

Wendy’s/Arby’s highlighted several factors meant to drive its projected average earnings growth of 10 percent to 15 percent over the next several years:

Breakfast test on the rise

Wendy’s hopes to add about $150,000 to average unit volumes with a new breakfast menu, which president David Karam said the could “serve as a gateway to 24-hour service for many of our restaurants.”

The breakfast menu — which Karam called the “most extensive research effort in the history of Wendy’s” — includes an Artisan Egg Sandwich with bacon or sausage, Asiago cheese and hollandaise sauce; a sourdough breakfast panini; a breakfast burrito made with multigrain tortillas; sides like “homestyle” potatoes and warm oatmeal bars; and a premium coffee blend developed by the chain’s coffee supplier.

The new morning menu is in place in about 200 units in Pittsburgh; Phoenix; Kansas City, Mo.; Shreveport, La.; and Louisville, Ky. The menu will be rolled out to San Antonio in the first half of 2011 and will be in place in 1,000 restaurants by the end of the year, Wendy’s officials said.

Smith said Wendy’s will roll out the breakfast menu more aggressively as it gains momentum in the coming years, saying it will eventually be in place in 75 percent to 80 percent of the system. Though the menu would not penetrate 100 percent of the Wendy’s system, there still would be enough to allow for national advertising in the future, he said.

Menu innovation all day

Wendy’s has other new menu items planned outside of breakfast, including an Asiago Chicken Sandwich in February and a fish and chips combo in March. The chain also plans to roll out its premium burger line, Dave’s Hot ‘N Juicy Cheeseburgers, in the second half of 2011.

The cheeseburger, with a 40-percent thicker beef patty and upgraded bun and ingredients, is being tested in five markets, with positive preliminary sales results. Wendy’s officials said sales of the new burgers increased 27 percent in the first month of advertising support in those markets and 36 percent in the second month.

Calwell and Karam said the new burgers would roll out in the second half of this year as soon as upgraded toaster ovens and grills can be installed in the restaurants, at an average cost of about $12,500, for which Wendy’s will lend support to franchisees.

Calwell highlighted the new menu rollouts of the past year, such as the new Natural Cut Fries with sea salt that launched in November and the premium line of salads that rolled out systemwide in July. Sales of French fries have increased 16 percent since the launch of national advertising for Natural Cut Fries, Calwell said. The new salads resulted from 18 months of R&D, he added, beginning first with four varieties of full-size salads, then a half-size option used as a side for building incremental sales.

“We now have a salad line rivaling Panera, but at a much more affordable price and with the convenience of our pick-up windows,” Calwell said. “We more than doubled our premium-salad units we sell each week, and at a price point that’s roughly 20 percent higher.”

A line of seasonal salads with fruit also will debut this year.

North American and international expansion

Wendy’s 340 restaurants outside North America units put it far behind quick-service competitors like McDonald’s and Yum! Brands Inc., which both have thousands of international locations. But chief executive Smith said Wendy’s late start may benefit it.

“A pessimist would say that our competition has a huge head start on us,” Smith said. “We tend to see it in a glass-half-full way: Our competitors have paved the runway for us to make inroads much more quickly than they could. … It’s a great opportunity to go in and compete, as long as we don’t vary from our ‘real’ brand positioning.”

Darrell van Ligten, senior vice president of strategic development for Wendy’s/Arby’s, said the brand has the potential to open as many as 8,000 international stores.

“We’re bullish [on international growth] because the marketplace accepts Western QSRS, the support infrastructure has been established in most global markets … and in some markets we’ve built a loyal customer following,” he said.

Some of Wendy’s markets abroad already boast average unit volumes higher than the chain’s domestic $1.4 million average, including $1.9 million in Puerto Rico, $2 million in New Zealand and $4.2 million in the Bahamas.

Wendy’s said it has experienced franchisees in Singapore, the United Arab Emirates, Russia, Trinidad and Tobago, and Argentina, where a 50-unit development pact was announced before the investor conference Thursday.

Of Wendy’s 8,000-unit potential abroad, van Ligten said, 30 percent of the restaurants would open in China and Brazil, while 9 percent would open in Japan, a market Wendy’s exited in 2009 with the closure of 75 franchised stores.

Wendy’s executives also see room for growth in North America over the next few years, calling for as many as 1,000 more domestic stores. Plans for 2011 include 20 new corporate stores and 45 franchised openings, with an additional 100 store remodels. A new store prototype will be unveiled in the second half of the year, executives said.

Contact Mark Brandau at [email protected].

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