WEN - Wendy's: I Continue To Await New Developments From '70/30 Strategy'

2024-05-20 03:59:44 ET

Summary

• International Expansion: Wendy's is eyeing the global market with an ambitious "70/30" growth plan, where 70% of future growth will come from international operations.
• Smart Strategies: In the US, Wendy's is winning new customers and expanding its fan base with promotions like breakfast burritos and Cinnabon Pull-Apart.
• Three Pillars of Success: Wendy's growth is supported by three essential pillars: driving same-store sales (SSS), accelerating new location openings globally and improving operational efficiency.
• Operating Cycles: Wendy's does not have a negative cash cycle, meaning it pays its suppliers before receiving payment from sales. This positive cash cycle is an indication that the company is unable to use commercial credit to its advantage to optimize cash flow.
• Growth with Sustainability: The company has managed to increase third-party capital participation without increasing the total cost of debt, demonstrating efficient leverage management.

Corporate Overview

Wendy's ( WEN ) is a company that operates and franchises an international chain of quick service restaurants known worldwide mainly for its hamburgers, and is the second larges t company (in terms of sales volume and customer traffic) in the segment in the United States.

Currently, with 55 years of history under its shoulders, Wendy's has a broad global restaurant chain of 7,240 restaurants , of which approximately 6,030 (83%) are within the United States and 1,210 (17%) in other countries. The vast majority of its restaurants are franchised. Currently, about 6,823 of all Wendy's restaurants are franchises, this represents about 94.97% of all its restaurants. While in international operations franchised units represent approximately 99% of all units, in the United States they represent approximately 93.3%.

Using the franchise expansion model, Wendy's has already outlined its expansion program: "70/30 Growth Strategy". I will discuss international developments in detail later, but basically this strategy predicts that 70% of the company's future growth will come from its international operations, while 30% of the growth will come from within the United States. It seems to me that this strategy is based on implementing processes that aim to continue the slow expansion of sales within the United States, while aiming for more aggressive strategies internationally.

As these are almost antagonistic strategies for both life cycles in certain countries, Wendy's will need an almost symbiotic integration with its franchisees. Smoothing this all out, when we measure the average number of units per franchisee, this gives a total of 11 for each international franchisee. And, as penetration strategies in new markets tend to be those that most require mobilization and remodeling of processes to deal with tighter margins, in addition to specialized training of employees to adapt to brand standards, the concentration of units to single franchisees is a positive thing.

Speaking of brand expansion strategies, for penetration into new markets, in principle we have four types of insertion: slow skimming, fast skimming, slow penetration and fast penetration. In the case of QSR's, the slow penetration strategy is generally recommended, since the products have a low unit price, consumers are already familiar with the products and are highly price sensitive. This is the typical volume market. And if you notice, Wendy's international sales volumes have been increasing rapidly. While company-owned restaurant sales in the United States grew 2.60% in 2023, and franchise sales within the country grew 5.25% in the same year, international sales at the twelve restaurants operated by Wendy's grew more than 75%, while franchise sales grew 11.65%.

In the United States, strategies need to be differentiated, not only to grow in volume, but also to extend their life cycle. Basically, a mature company must do this on three fronts: converting non-users, entering new market segments and attracting customers from the competition. These are called "aggressive strategies" or "attack strategies". We saw Wendy's doing some of this in the first quarter when they had their March promotions and strategies to increase turnover during breakfast with burritos and Cinnabon Pull-Apart . It worked. They managed to increase turnover in the yard in the mornings. We can't neglect the taste, after all, most people I've talked to about the new breakfast options at Wendy's have found them delicious, but at QSR's price sensitivity is almost always the loudest, and it really is quite cheap....

For further details see: