Wendy’s and Arby’s Sales Soft, Revamp In Order

Arby's "Pinnacle" remodel to kick in, photo/Cowen presentation

NEW YORK, N.Y. - CEO of Wendy's Arby's Group (NYSE: WEN), Roland Smith, sought to reassure investors and analysts in New York today that the company is ahead of its plan, despite tough economic pressures. "Customer confidence is running about 50 percent where in a healthy economy it should be around 80 percent," said Smith.

There was little mention of "franchise" in the presentation.

Wendy's same-store sales for franchised restaurants in the third quarter rose slightly by 0.4 percent. As for company-owned units, if those that offered breakfast were taken out, same store sales for company-owned units were up 0.1 percent in the same quarter.

Smith discussed how the company will continue to roll out cheap, value menus for Wendy's. "We have been very encouraged by the $2.99 deluxe value meals," said Smith. Premier items too, like a new bacon and blue cheese burger. The CEO declared, "We believe that the benefit of great new products along with key value messaging will drive sales in 2010."

The brand is readying its stores to relaunch breakfast menus system wide. "They (the breakfast) will have a full systemwide launch by 2011," said the chain's CEO.

It was uncertain from the presentation what Wendy's franchise owners think of opening stores for longer hours.

National purchasing cooperative formed

There is at least one hopeful sign of lowering costs for Wendy's franchisees, instead of the specter of raising it. Wendy's and Arby's announced last year that it would organize a purchasing cooperative so that the two brands could both benefit from larger negotiating power and lower prices in supplies.

Back in November the firm's chief financial officer Steve Hare explained in the Quarter 3 2009 earnings call, "The company and our franchisees completed an agreement to establish a national supply chain co-op for the Wendy's brand. The quality supply chain co-op or QSCC will manage food and related product purchases and distribution services for the Wendy's system in the US and Canada. The creation of the co-op marks the successful combination of an effort to organize an improved supply chain system to pursue cost savings opportunities while maintaining the quality of the Wendy's brand. The company committed to support the co-op with $15.5 million for its initial startup, which will be expensed in the fourth quarter and paid over the next 18 months. Operating costs of the co-op will be paid by all members including franchisees after an initial startup period and will operate independently from the Arby's co-op, as well as from WAG. We are exploring the opportunity to leverage the combined purchasing power of both QSCC and the Arby's co-op for non-brand specific purchases."

The full details of this franchise, duo-branded purchasing cooperative has not yet been released, but it was announced that a national supply chain co-op had been formed this month.

The chief executive this afternoon noted, "We hope to have the Wendy's Co-op work with the Arby's Co-op so that they can negotiate for a total of 10,000 units." He added, "We are beginning to see the benefits for bringing these two brands together."

In regard to the international arena, the brand's chief executive listed a number of regions and countries to point out that the Wendy's and Arby's combined brands had a significantly lower international market share than competitors McDonald's, Yum! and Burger King . At the end of a bullet point of arenas, Smith mentioned that the brand had pulled out of one of the countries — Japan. Wendy's has had a presence there for nearly three decades. He explained that the Japanese firm had not fulfilled any of their development agreement. "We need a new company to expand Japan," he concluded about the world's second largest economy.

In contrast, the former partner, Zensho, told Asian newspapers through spokesperson Naoki Fujita, “We decided that it was no longer necessary to invest funds and human resources” into the chain.

Arby's too

Arby's restaurants have been particularly hard hit. Smith observed that Arby's same-store sales for its franchises were down in the third quarter of 2009 by 10.2 percent, while company-owned units slumped by only 6.5 percent. "The 5.01 combos didn't drive the traffic we had hoped they would drive," he observed. But the value items will continue to roll out. "We plan on expanding the $1 value menu to 2400 stores this month," he stated.

Smith stated that Arby's store margins have been some of the highest in the quick service restaurant industry. But during this economic recession, competitors started to coupon like never before. "Our coupon redemption began to significantly decrease," says Smith about the lower amount of customers taking advantage of coupons and visiting Arby's.

In addition to pulling in customers through value items, restaurant owners can prepare for the rollout of a significant remodeling initiative. Smith commented that the stores that have remodeled to the new Pinnacle design saw a significant increase in traffic. "Seventy-five percent of units will be 'Pinnacle-ized' within three years," he declared.

It was uncertain from the presentation how receptive Arby's franchisees were to remodeling during a soft economy with slow growth predictions.