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Wendy's: finally ready for international growth?
Floris van der Pijl published on August 19, 2022
A-INSIGHTS is specialized in analyzing company figures, which captures detailed information on the activities of companies and explains the drivers behind their performance. This blog contains a combination of financials and news sources.
- Net sales development (2021): above average
- Operational profit (2021): above average
Last week, US-based Quick Service Restaurant (QSR) Wendy's released its new Q2 2022 results. The company performed roughly in line with expectations. Quarter on quarter, Wendy's managed to grow 3.5% in the US and 5.6% internationally. As the international QSR market has been fastly growing over the past years, we analyzed Wendy's performance in comparison to the broader QSR industry.
Wendy's managed to significantly outgrow the industry
Over the period 2017-2021, Wendy's has managed to significantly outgrow its industry. This is the result of some serious steps that the company took between 2015-2017. Wendy's closed and remodelled a large part of its existing North America-based operations and made a strong(er) shift towards franchising. After this rebuild, the company found success in the United States and has been outgrowing its competitors thereafter. Especially at the beginning of the pandemic, where Wendy’s strongly outperformed its competitors in the breakfast segment.1
Figure 1: Wendy's net sales development vs. the global QSR landscape
On the contrary, the franchise has been struggling internationally: Wendy's has withdrawn from several European and Asian markets in the last few decades. Given its limited presence in these major economic hubs, this is where the company should look for growth. In 2021, Wendy's reopened in the United Kingdom and the franchise plans to open in Ireland in 2022; these markets opened up for them after the Brexit. Although the growth ambitions are there, Wendy's has had to slow down in recent months. To give a few examples:
- Planned opening of locations in the UK in 2022 has been reduced from 50 to 35 due to 'pressure on the UK consumer as a result of inflation'
- Planned openings of remote (delivery) kitchens in the US, Canada and the UK (in partnership with Reef) have been reduced from 700 to 150 because sales of remote locations have been disappointing so far
Due to these recent developments, Wendy's is likely to look for alternative growth paths. One area where it is unlikely to happen is the EU given the legal dispute with a local snack bar in the Netherlands that registered the Wendy's brand name for the Benelux in 1995.3 When the EU was established, this was extended to all EU member states. Wendy's will first have to settle this dispute before establishing itself in other EU member states.4 Still there are other international opportunities for Wendy’s. These are likely to be found in Asia, where it is currently present in key growth areas such as India and the Phillipines.
Below average profitability levels due to inflation
For Wendy’s to enter international markets, the budget to invest should not be an issue. The company is realizing a healthy 25% EBITDA margin and is more profitable than most other players in the industry (~ 8% EBITDA margin above the industry average). One of the key factors for profitability in the QSR industry is the degree of franchising versus owned restaurants.
In the case of Wendy's, about 90% of the company's restaurants are franchised. In addition to a start-up fee, Wendy's franchises reportedly pay $55,000 per restaurant, a 4% royalty fee, and a 4% advertising fee. These sources of revenue are relatively easy for a business to manage, allowing for high and relatively risk-free margins, especially if you can realise scale. To illustrate: McDonald's, the largest franchisor of restaurants in the world, can consistently achieve an EBITDA margin of 50%.
Figure 2: Wendy's %EBITDA vs. the global QSR landscape
Will Wendy's expand internationally?
If Wendy's wants to achieve that scale, it will have to expand internationally. What is certain is that there is an international market; its biggest competitors McDonald's, KFC, and BK all realise more than 50% of their sales outside the US. And while the US market is still growing (~2.5% per year) many markets are growing faster. As others were expanding internationally, Wendy's was fixing its business in its core markets. So the challenge will be to beat the established players already operating in these markets. Will Wendy's finally be able to settle its legal dispute and move further into Europe? Or will they make a new attempt at the competitive and locally organised Asian markets?
How is your company performing?
For now, this analysis has focused on %Net Sales Development and %EBITDA of Wendy's and the QSR industry. However, A-INSIGHTS will give you extensive insight into all of the important financial metrics and the performance of the top 50 most important companies in your industry. All in one easy-to-use tool, the Performance Monitor.
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* For the worldwide QSR landscape, A-INSIGHTS has analyzed the 30 largest QSRs in the world, with net sales of €1 billion and more.
1. May 2022 – cnn.com: Wendy’s puts up for sale sign as cost rise
2. August 2022 - Big Hospitality: Wendy’s Rolls Back on UK growth Targets
3. November 2021 - RTL Nieuws: kleine Zeeuwse snackbar zit grote Amerikaanse keten dwars
4. November 2021 – Mashed: The real reason Wendy’s doesn’t have locations in the EU