Wendy's Grapples With The Price Of Progress

Sunday, August 12, 2012

Would You Spend $700,000 to Grow Your Restaurant Sales 25%?

Every business owner would like to ring up more sales. The problem is, it often costs money to grow - money that owner may not have.

This is exactly the problem currently facing burger chain Wendy's. The company has been looking for a way to grow sales for years - a typical Wendy's restaurant does roughly $1 million a year less in sales than a unit at top-performing McDonald's. The company has made some progress - it passed Burger King to take the number-two slot earlier this year - but needs to do more to help its franchise owners be more profitable.

Now, executives think they've found the answer for sales growth - a dynamic store remodel that creates a light-filled, more upscale look and improvements to the offerings such as fresh-roasted coffee. Ten company stores have been redone with the new format already, and CEO Emil Brolick reported earlier this month that the those stores are seeing a sales boost north of 25 percent.

In an industry where almost no one is seeing even low double-digit comparable-store growth, that's a big number.

The catch: It costs a whopping $700,000 to remodel the stores to this new design and get the sales increase.

Wendy's plans to redo 50 more company stores this year to the new format and open 17 new units, given the success the initial test remodels have seen. But the big question is whether the chain can get enough of its franchise owners on board to create a systemwide makeover.

It can be tough to get franchisees to sign onto a remodel program that costs one-tenth this amount. Franchise lending has increased a bit, but that's a big number for a struggling restaurant owner to try to borrow in hopes of replicating the corporate parent's results.

To do the math here, a 25 percent bump in sales for a restaurant currently doing the chain's average of $1,456,000 in sales means $364,000 in additional revenue. So assuming the remodel works as well for franchise owners as it does at the corporate level, you're talking two years to breakeven on the investment, with profit coming in year three.

That's not a terribly onerous timeline, but it can seem like an eon to franchisees who may be barely turning a profit. The risk of incurring that much new debt for a restaurant in this highly competitive sector may be too daunting. So far, the company reports a big one franchise unit has been remodeled to the new look.

Wendy's is striving to cut the costs of its store remodels. That will be essential to getting widespread franchisee buy-in here.

The linchpins of the company's long-running turnaround plan focus on getting rid of substandard employees and getting stores spotlessly clean. These are initiatives that cost next to nothing.

It's a safe bet more franchisees get with that program, even though the company has found it delivers a much more modest sales increase than redoing the restaurant.

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Wendy's International, Inc.
One Dave Thomas Boulevard
Dublin, Ohio

Phone: (614) 764-8434
Fax: (614) 764-6894

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