Wendy’s to open 700 ghost kitchens with Reef

The strategy is a key part of the chain’s ambitious global growth plans that include lower franchisee requirements and a new $100 million development fund.
Wendy's Reef unit
Photograph courtesy of Wendy's

Wendy’s will open 700 ghost kitchens over the next five years in Canada, the U.S. and the U.K. through a partnership with operator Reef Kitchens. 

The announcement Wednesday follows a test of eight Reef units in Canada, and is part of an ambitious global development plan for the Dublin, Ohio-based burger chain that includes eased financial requirements for prospective franchisees and a new $100 million development fund.

Wendy’s expects to have about 50 delivery-only Reef units up and running by the end of this year, with the remaining 650 spread evenly across the ensuing four years. It will open the kitchens in urban areas, where the brand remains “dramatically underpenetrated,” said CEO Todd Penegor on the chain’s second quarter earnings call Wednesday.

Average unit volumes for the ghost kitchens will be lower than a traditional Wendy’s, at about $500,000 or $1 million annually, Penegor said. Reef will act as a franchisee and will cover the cost of staffing and training and setting up the pod-like units that are mostly located in parking lots.

"The good news is, we've got a higher royalty rate, in the U.S. almost 6%, 5.5% in the U.K.," Penegor said. "So even though there's a little bit lower sales dollars coming out of those vessels, we got a nice healthy economic return."

The deal makes Wendy’s the largest chain in the U.S. to pursue ghost kitchens at such a large scale.

The 700 new outlets represent a big part of the chain’s five-year global development plans. It now expects to reach between 8,500 and 9,000 locations worldwide by 2025, up from a previously forecast 8,000. Wendy's had just over 6,800 stores at the end of 2020, meaning the additions would grow its footprint by about a third.

Wendy’s newly lowered requirements for franchisees should contribute to that growth. Prospective operators will now need to have a minimum net worth of at least $1 million and liquid assets of at least $500,000, down from $5 million and $2 million, respectively. 

"At first blush, it looks like we're taking on a lot of risk," said CFO Gunther Plosch on the call. "I have to say, we studied the competition—we actually were too conservative and not competitive." The new, lower bar is "very much in line with what the rest of competition is doing," he said.

The chain also established a $100 million build-to-suit development fund, made possible with by a recent debt refinancing, in which it will put up 70% of the cost of new restaurants, with the franchisee covering the rest. That is expected to yield 80 to 90 new franchised locations between 2022 and 2025, the company said.

To make a return on the investment, the chain will raise royalty rates and rent for those locations, Plosch said.

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