This may be a difficult time to open new units, but Wendy’s incentive programs are apparently doing the trick.
The Dublin, Ohio-based burger chain on Thursday said that it has seen a “significant uptick” in agreements among franchisees to take advantage of incentives created earlier this year to help them with the rising cost of building more locations.
The company’s Build-to-Suit development fund, created to fuel growth in underdeveloped trade areas, is now 70% committed, CEO Todd Penegor told investors on Thursday. Under the program, Wendy’s builds locations in those areas and hands the keys to franchisees, with priority given to those operators who cannot otherwise access capital.
The company has also seen more interest in a pair of incentive programs to help franchisees build new units, called Pacesetter and Groundbreaker.
The efforts “drove a substantial increase in the share of our long-term development pipeline” that is “higher than historical norms and builds an additional layer of certainty into our development outlook,” Penegor told investors, according to a transcript on the financial services site AlphaSense.
Wendy’s made the comments on an earnings call in which it said U.S. same-store sales rose 2.2% in the third quarter. That was a much lower rate than its competitors McDonald’s (8.1%) and Burger King (6.6%).
Company executives said that some of its promotions in the quarter didn’t work as anticipated and also said that they didn’t have any marketing in the first part of the period on breakfast. But they said that more promotions in the back half of the quarter helped drive traffic to the chain, which turned positive in August and into September.
The company launched a Loaded Nacho Cheeseburger and Queso Fries, which drove more premium sales. And executives said an English Muffin sandwich introduced for breakfast, along with a 2-for-$3 Breakfast Biggie Bag Bundle that was offered in the period, helped drive traffic.
So, too, did the Pumpkin Spice Frosty. “We started to deviate from category trends with us starting to grow customer counts as we exited the quarter” compared with the QSR burger category, Penegor said. He called the overall category “challenged.”
Still, for Wendy’s much of its long-term future is tied to its unit growth. The company had struggled to meet unit growth goals. The company operates more than 7,000 global units, including 6,000 in the U.S., but believes it has room to add more. Yet those goals have run into an inflationary buzzsaw as higher construction costs and interest rates thwart operators looking to build.
The company has a new prototype, called Next Gen, which costs about 10% less, executives said. But, CFO Gunther Plosch said, “we know we need to continue to work a little bit of cost out of the building and continue to drive our margins up.”
Wendy’s had an incentive program, called Groundbreaker, which offered up to $200,000 in incentives to franchisees to build new units. That did not do well enough and so the company upgraded it with another program called Pacesetter earlier this year in which Wendy’s helps franchisees open new units in exchange for a higher royalty rate.
Penegor said a Wendy’s franchisee who funds their own location can pay it off in six years. That goes down to 5.5 years with Groundbreaker and four years with Pacesetter. For Build-to-Suit, the payoff is 3.5 years.
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