One takeaway from Wendy’s Q4 earnings call last week is the company is very clearly in growth mode. However, its ambitious development plan looks a little different than it has in the past.
The chain announced plans to open 150 to 200 Reef ghost kitchens this year, up from its current 30 such locations. In August, Wendy’s announced a development commitment to open 700 Reef kitchens across the U.S., United Kingdom and Canada by 2025.
These delivery-only units are essentially kitchen trailers located in parking lots and are much cheaper to operate than a traditional brick-and-mortar restaurant.
That Wendy’s is taking a sort of hybrid approach–traditional and non-traditional–for its expansion could create a significant advantage, as no other peers in its immediate competitive set seem to be pursuing the same path at this scale.
Or, it could prove to be a risk to leverage a fledgling model that has experienced some growing pains. That said, Reef (and the ghost kitchen space in general) has caught the interest of both investors and operators and provides Wendy’s with a big upside, according to Kurt Kane, U.S. president and chief commercial officer.
“Reef and ghost kitchens are an opportunity for us to go faster into areas where we’ve been significantly underrepresented for years. For us to go into high density, high rent areas, we didn’t have a great asset model historically to do that. Reef allows us to go into areas where we have a lot of white space and leverage those vessels, and to get people to access the brand. That’s the unlock,” Kane said during a phone interview Friday. “It is complementary to our more traditional development work.”
During a separate interview in December, Wendy’s International President and Chief Development Officer Abigail Pringle added that the Reef partnership allows the brand to better meet consumers where they are and meet their changing expectations. Consider digital sales, for example, which have increased by 75% for Wendy’s throughout the past year.
“For customers, convenience trumps everything. We think that about that when we look at all of our different assets to serve the market. We have to think about what the customer demands are now and how we change to meet them. We need to think about how we create the same food and brand experience through those different channels,” Pringle said, calling the Reef partnership “unbelievably successful.”
For Wendy’s, Reef is part of a bigger nontraditional growth strategy, which represents about 50% of the chain’s new unit plans. Pringle pointed out that the company has been building up its non-traditional team throughout the past few years, including a focus on airports, military bases and travel centers.
That said, non-traditional units pull in lower average unit volumes. CFO Gunther Plosch noted on the earnings call that they’re still very attractive, however, as they are accretive to Wendy’s loyalty rate. The chain collects about 6% on royalties from Reef locations, for example, versus 4% for traditional locations.
Across the entire system, Wendy’s has experienced six consecutive years of net new unit growth and its highest net new unit growth in nearly two decades.
Notably, Wendy’s growth story extends well beyond new units. According to its recent earnings call, the company has experienced double-digit sales increases over 2019 numbers, margin increases, overall traffic and breakfast share gains and a 75% uptick in loyalty program members.
“I think what often gets missed is how much of a growth company we really are and we’re going to accelerate that fully through this year,” Kane said.
Breakfast is perhaps the best example of this narrative. The daypart was launched at the onset of the pandemic when workers stopped commuting. Despite those odds, it now generates 8.5% of the company’s sales and is expected to reach 10% by the end of this year, which would make it a $1 billion opportunity.
The success of breakfast has created (perhaps inadvertently) more efficiencies throughout the system.
“People said it was bad luck that we launched breakfast into the teeth of the pandemic, but I would argue it was the best luck we could have had,” Kane said. “It gave us something to be focused on and forced us to more closely look at our economic and labor models in partnership with our franchise community. Everything we did to be ready for breakfast helped insulate us for other challenges.”
For instance, employees who were hired for the breakfast business gave the company a bigger labor pool to work with. Additionally, the company ironed out its operational procedures at closing time so the morning shift would be better prepared.
Wendy’s also streamlined its menu to ensure more efficient operations throughout the day. An example is its salad prep tasks shifting from in-store to suppliers.
“It still comes in fresh every day, but we took that labor out of the restaurants and pushed it back to the suppliers,” Kane said. “That came about because when we launched breakfast, it helped us look at the pain points we could solve the rest of the day–things like streamlining our menu and making sure we could run breakfast with three, maybe four people, depending on volumes.”
Labor pressures are easing a bit, he adds, which is important to support these growth initiatives. All of this momentum, however, does not indicate the chain is not without its challenges. Inflationary pressures are incredibly real, and Wendy’s has implemented over 5% on pricing to navigate those challenges.
This is a bit lower than the consumer price index increase of 7% and several of Wendy’s peers have been more aggressive on pricing. Kane believes Wendy’s is in a good spot to inch up a bit on costs, but acknowledges that consumers do have a limit and will vote “very quickly” with their wallet once it’s reached.
“Elevated checks drove a lot of our sales, but we’re trying to keep pricing needs balanced by driving customer growth and by providing the best value in the industry with our 4 for $4 and Biggie Bag solutions,” Kane said. “We’re cautious on where we go with pricing and I’m not sure if there is a defined threshold, but I do know we’re well positioned to meet consumer needs.”