After about 15 minutes of listening to Aneil Lala and Neal Wadhwa talk about bringing humanity into the Wendy’s restaurants they bought in 2020, we couldn’t help but wonder: Didn’t you guys come from a hedge fund? That business is not exactly known for its humanity.
“In the restaurant space it is a completely human-focused business,” Lala said. “At hedge funds, you’re staring at a Bloomberg terminal and Excel spreadsheets. You engage with management a fair amount but mostly you’re at a desk.
“In restaurants, interpersonal relationships will make or break you. If you’re in an ivory tower, you’re going to fail pretty quickly.”
And in reality, humanity is good business. Since the partners formed Legacy Capital Partners in 2020 and acquired 10 Wendy’s units, they’ve found that humanity can translate into lower turnover and higher overall profits—particularly in an era dominated by phrases like “quiet quitting” and “the Great Resignation.”
The pair didn’t just walk into the business without some prior knowledge of what they were getting into. Both looked at the stocks of publicly traded restaurants while at hedge funds. And their respective families were involved in restaurants—Lala’s with Dunkin’ and Wingstop, Wadhwa’s with Subway.
They thought they would take what they’ve learned in the hedge fund space and add it to what they knew about the restaurant space to start building a portfolio of restaurants. And thus they acquired their 10 Wendy’s units at the end of 2020.
“It was right in the throes of COVID,” Lala said. “We cut our teeth pretty quickly.”
They picked Wendy’s because it is a Tier 1 brand and quite stable. It's also predictable and focuses on its brand. “Wendy’s is kinda boring in a good way. It’s a conservative business. It has great brand equity, but it just kind of plods along and protects its brand equity,” Lala said. “We love the management team. They know what they’re doing.”
As we said recently, franchising is not a low-risk investment. But buying a group of Tier 1 restaurants is as close as an investor can get.
What’s more, as a growing number of companies are proving, they can generate strong returns over time. While it’s functionally less profitable to operate a restaurant than it is to operate a restaurant brand, that restaurant is going to generate a lot more cash. And with plenty of operators potentially looking to sell, there are acquisition opportunities that could provide for long-term growth.
Wendy’s is kinda boring in a good way. It’s a conservative business. It has great brand equity, but it just kind of plods along and protects its brand equity. -Aneil Lala, Legacy Capital Partners.
But first, those investors must run good restaurants. And the early returns for Legacy Capital appear to be strong. EBITDA, or earnings before interest, taxes, depreciation and amortization, has grown 59% since they acquired the business.
They also say that participation in employee benefits is up 80%, retention is higher and customer satisfaction has improved 15%. Turnover is half the industry average, they said. Even then, “There is a lot of turnover. We’re half the industry average. And that’s still a huge amount,” Lala said.
Legacy looks at a lot of data—they are hedge funders, after all. But they also understand the importance of getting out from behind their desks to understand what’s going on with employees and with customers.
The partners said they provide health care and other benefits even to part-time workers and pay “above market” wages to improve turnover. But they also argue that transparency is a key element in how they do business.
They work to let employees know where they stand, while taking into account that while some employees want to grow and make a career out of the business others are looking for flexibility or have other priorities. “We invest a lot into big data with many different vendors,” Wadhwa said. “We boil it down to what our employees can understand so they know where they are every week.”
Legacy Capital has also held the line on price increases. While they’re facing some of the same cost pressures as other operators, they’ve also said they’ve been cognizant of the impact of prices on consumers. The consumer is getting pinched,” Lala said.
He noted that many brands have focused on maintaining margins they generated when sales were strong in late 2020 and raised prices to maintain them. But they also worry about the long-term impact of high prices on the consumer psyche.
“That’s proven to be the right choice,” Lala said. “Our traffic is up.”
Legacy Capital is built for growth. They believe they’re in a good position to pick up more stores, even with rising interest rates and uncertainty.
And while their early returns have been good thus far, they also know they have a lot of work to do. “It’s not a win quite yet,” Lala said. “It’s going to take a few more years. But obviously it’s a very fun, dynamic environment.”