Wendy's Can Learn a Few Lessons from Yum Brands

In looking at the June 29, 2009, Barron’s “puff-piece” article on Wendy/Arby’s Group (WEN) and its upward price movement Monday, I was reminded that one of the company's projected growth platforms, other than increasing number of US stores, improving margins at Wendy’s and improving R&D (Wendy’s breakfast was pulled until 2010) was international growth, via franchising and multi-brand development.

On the new US units growth front: good luck. Perhaps WEN has some acquisition in mind that would rocket the number of stores and markets up quickly. It’s still difficult and expensive to find the right sites in the US.

The multibrand development thrust is interesting. Perhaps they have research that points to the desire of international consumers to sample two iconic US food brands under one umbrella.

The history of QSR multi-brand development is limited, with only YUM really making a go of it. Dunkin Brands sold Togo’s, its sandwich brand that it hoped to co-brand with Dunkin and Baskin. You do not see much Dunkin/Baskin Robbins development together anymore, except in high volume, high cost urban or touristy environments. Yum itself disposed of Pasta Bravo (now down to 18 units, just a local niche player in LA). Wendy’s sold Tim Horton’s (THI), Noble Romans never got its pizza/sub concept off the ground and has 100% of its franchisees suing it. Carl’s Jr. (CKE) does have 200 plus co branded Green Burrito units, but has no dual buildings per se and generally features the Green Burrito menu as a subset via a menu panel.

YUM always was the leader in marketing and rolling out multi-branding, beginning to work that idea as early as 1992. In 2008, Yum had 4958 world-wide multi-brand units, 4600 in the US, and up from 1566 units in 2001. Dave Deno, the then Yum COO was quoted in the New York Times (7/11/2005) that multi-branded units had a $250K to $300K higher AUV baseline.

So the multi-branding experience has been primarily US, to date.

Yum does not break out individual brands' sales or margin, but does break out US, International (YRI Division) and China Division sales, restaurant margin, and operating profit margin, so it’s difficult to tell if multi-branding worked absent other factors.

The YUM US Division EBITDA had a 2% negative EBITDA CAGR comparing 2008 vs. 2003, versus +13% EBITDA CAGR International and +23% in China, same timeperiods. As a partial explanation, Yum has been pointing to KFC weakness for some time, and confirmed that at its December 2008 Analyst Day. Since, they have rolled out Kentucky Grill and others measures to improve KFC.

And, looking at 2004-2009 same store sales trends, really only Taco Bell stands out as a consistent strong performer, versus its QSR sector peers, except in 2007.

Wendy’s/Arby’s future success with multi-branding may have a lot to do with its franchisee mix and pipeline and whether it can find franchisees with success in operating a mix of its Wendy’s or Arby’s brands. In 2005, Tom Burress, Yum’s VP of Restaurant Excellence noted in an interview:

Multi-brands are definitely more complicated to operate… Franchisees will need a number of the same type of multi-brand restaurants proportional to the size of their operation. We believe it is so critical to success that it’s now part of the multi-brand contract.

Since Tricon/Arby’s acquired Wendy’s in 2008, it may be some time for the proper franchisee mix can be found or it may militate towards company operated execution at first, or until the franchisee mix can be found.

Disclosure: No stock ownership