Wendy's Arby's Cryptic New Supply Chain Arrangement

Wendy’s Arby’s Group (WEN) on Thursday reported Q3 numbers which show a reported 9.1% increase in EBITDA. The company has been diligent about reducing costs, and Thursday also announced a Supply Chain Co-Op which will start in Q4.

There was very little information provided other than the fact the franchisee’s will be financial partners. The question becomes, 'who gets the benefits and why penalize the shareholder and advantage the franchise owners?' Initially, Wendy’s will fund the co-op and then the franchisee’s will start to contribute. But there is no real information on the financial model and, therefore, how do you understand the risks.

The co-op is seeded with $15.5 million over the next 18 months. Wendy’s has approximately $645 million in cash and equivalents. If it’s an opportunity to reduce costs why not take full ownership and maximize shareholder wealth.

Comments

[John Gordon:]

Having just monitored the Wendy's/Arby's (WAG) earnings call, I'd make the following observations:

(1) The Wendy's co-op was a part of the $60M in WAG G&A savings that has been planned and promised for some considerable time, and is already in their guidance.

The co-op will be (and should be) a separate entity apart from WAG and will receive corporate G&A expense from WAG, that will be paid for via either cost savings and/or a markup applied to all company and franchisee purchases.

Also, future synergies with the Arby's Co-op (another 3800 stores) is likely on non-brand specific product and in the works.

(2) The Co-Op apparently was introduced to the franchisee community last week at their convention, and 50% have already signed up.

(3) The WAG $15M start up no doubt is for an inital budget, working capital, inventory, etc, and might be repayable.

(4) They are still working this, and its early.

Cooperative ventures with franchisees that save money for all parties are good. Economic theory is that 10K units can buy more cheaply than can 6K units. But it is an open question whether additional savings will be generated to offset any potential additional costs, either at the WAG or franchisee level.


John A. Gordon
Chain Restaurant Earnings and Economics Expert
pacificmanagementconsu...

Nov 05 02:28 PM

[What_the_heck?:]

Annual report page 4 re New Bakery Company of Ohio part of the co-op???

www.newbakerycompany.c...

Nov 07 12:13 AM