Financing

Wendy's wants to open more restaurants, just not in ghost kitchens

The burger chain is increasing its incentives to convince operators to open additional restaurants as it seeks to speed unit growth. But it is also walking back its deal with Reef Kitchens.
Wendy's development
Wendy's wants to focus its development on standalone locations with its new "Next Gen" prototype. / Photo courtesy of Wendy's.

Wendy’s is intent on building more restaurants around the world. It just wants the right type of restaurant.

The Dublin, Ohio-based burger giant on Wednesday detailed strategies to convince more of its franchisees to build more units and fill markets where there is limited access to Wendy’s restaurants. The fast-food chain is beefing up its incentives to convince operators to open new locations and believes improving sales, thanks to its growing breakfast business and more digital sales, will persuade them further.

But the company is also stepping back its once-ballyhooed deal with ghost kitchen operator Reef Kitchens. Wendy’s, which once planned to open 700 locations inside Reef ghost kitchens, said it no longer considers such locations part of its growth plan.

“We do not envision delivery kitchens as part of our growth trajectory moving forward,” CEO Todd Penegor told investors on Wednesday. “We believe our efforts are better spent driving more access to the Wendy’s brand through” its most recently updated “Global Next Gen” restaurant prototype.

The comment represents a further scaling back of the Wendy’s-Reef deal. The burger chain in 2021 announced plans to open locations in 700 Reef facilities, by far the largest deal of any kind in the growing ghost kitchen business and one that would have made Reef one of Wendy’s largest operators.

But sales at Reef locations underperformed expectations and Wendy’s late last year said it would only open 100 to 150 Reef locations and that it could close some of its restaurants.

The company now says that it expects to open fewer locations than it initially planned by 2025, due in part to the scaleback in that Reef agreement. Wendy’s last year said it expected to have 8,000 to 8,500 restaurants open globally by 2025. On Wednesday, executives said they expect 7,600 to 7,800 restaurants open by then, meaning they expect to have as many as 900 fewer restaurants than anticipated.

Another reason for the slower-than-expected unit growth projection is due to slower unit growth in 2022. Wendy’s opened 275 restaurants in 2022, representing 2.1% growth in the number of locations. But that was less than half the 5% to 6% unit-growth target Wendy’s began the year with.

Executives suggested that some other ideas they were trying last year are no longer part of the chain’s growth equation. They said their previous efforts were focused on finding ways to get more people to access to the brand through a variety of nontraditional options, but that they are now shifting their focus to traditional restaurants. About half of the expected new units in 2022 were nontraditional locations.

“Beyond Reef Kitchens, we were testing and learning a lot of things,” Penegor said. “Frosty carts, hamburger stands, snack shops. Those were all in the old growth algorithm. We’ve learned a lot on all of those. But our focus is really shifting to that traditional freestanding restaurant moving forward.”

Still, for Wendy’s, unit growth is paramount. The company is a stand-alone brand, and one that has spent recent years pulling various levers to generate shareholder value, notably selling most of its restaurants to franchisees. That means it must rely heavily on unit growth to generate revenue and earnings growth.

But convincing operators to do so can be difficult, particularly when interest rates are rising and profitability has yet to recover from the pandemic. And the brand is still working to add locations in international markets, unlike rivals like Burger King and McDonald’s that have a strong presence in markets like China, where unit growth is aggressive.

Yet executives also say there is a lot of room for unit growth, both at home and abroad. “In the U.S., we continue to be underpenetrated,” Penegor said, noting that there are “thousands of trade areas that sit untapped and without a Wendy’s.”

Wendy’s has been using development incentives to convince operators to open locations, building the restaurants themselves and then charging higher royalty rates. The company on Wednesday announced a new set of incentives called “Pacesetter,” in which the company will help operators get units built in exchange for a higher royalty rate of 5%, compared with its normal royalty of 4% of revenues.

Executives believe that the new program will ramp up unit growth by 2025. Executives thus increased the estimate for unit growth from 2% to 3% a year this year and next to 3% to 4% by 2025.

“We feel good that the pipeline is in place,” Penegor said. “We’ve got programs in place to deliver that 2% to 3% net unit growth, which should be a step up from the 2.1% we had in 2022.”

UPDATE: This story has been updated to fix the name of Wendy's new incentive program.

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