HITS & MISSES OF WENDY'S OVERSEAS FORAY

19.12.09

With the merger of Wendy’s and Arby’s in Q4 of 2008, the US$12bn company which ranks number 3 behind McDonalds’ and Yum! has chugged along with plans to grow its international market share which it deems to have a potential of 8,000 stores outside USA.

Three significant milestones wrapped up Wendy’s Arby’s offshore foray in 2009:

• Appointment of Al-Jammaz to launch 135 dual-concept stores in 9 countries throughout Middle East and North Africa;
• Re-opening in Singapore after shutting down in 1987 with partnership with Kopitiam Group to start 35 stores in the island; and
• Seeking new franchise or JV partner for Japan with the non-renewal of franchise contract with Zensho Co., culminating to closure of 71 stores in Japan by end 2009.

Middle East/North Africa (MENA)
Al-Jammaz, also the Master Franchisee for Domino’s Pizza with over 100 outlets throughout Middle East, North Africa and Pakistan has been awarded the franchise rights to Wendy’s for MENA. In negotiating with Middle East partners, it is a common request to group the region as one rather than separating by countries. Wendy’s has effectively signed away 9 countries under MENA for 10 years with an expected return of US$8,775,000 (estimates only) or an average of less than US$1m per annum. Is this reasonable, too much or too little?

Firstly, is 135 stores for 9 countries over 10 years justifiable? McDonalds’ has an estimated 500 stores in Middle East and North Africa (MENA) in 2008. KFC has over 530 stores . Wendy’s target of 135 stores is only 27% or less of McDonalds or KFC. The less ambitious expansion plan maybe benchmark against the development of Domino’s Pizza, rather than base on the potential of the markets in sum.

Even if Wendy’s is satisfied with 135 stores over 9 countries, putting all eggs in a basket for a 10-year tenure has its risk. Each country in Middle East has very different demographics, economic and political structure. Al-Jammaz, Saudi-based conglomerate, may have presence throughout these countries, a prudent approach would be to award development plan for each country after earlier milestones have been achieved. Unwinding a contract by restricting territorial rights during the tenure of 10 years will be difficult.

While Al-Jammaz is already handling Domino’s Pizza and has the necessary F&B set up to facilitate the growth of Wendy’s, there are two key factors to success in Middle East. One is a direct presence to support the franchisee. Setting up an office in Middle East by Wendy’s would be critical if they do not have it already. Partnership with Middle East companies often require very close hand holding in the initial 3 years to ensure success. Next key factor would be a dedicated professional team to oversee the business is important. Very frequently, the assumption by the Master Franchisee may be to leverage on the existing team running the F&B business to run the new business. This is doom to fail. Without specifying the basic requirement of the management team required, Wendy’s may face issues subsequently.

McDonald’s Middle East strategy is a good reference for all aspiring QSR companies. Due to the cultural sensitive, McDonald’s adopts the concept of ‘100% locally owned and operated with pride’. Independent and separate Master Franchisee is appointed for each of the GCC nation. Even the Kingdom of Saudi Arabia has two franchisees, one for the Eastern, Northern and Central, the other for Western and Southern. McDonald’s understands the potential of the markets and exercises prudent decision in setting expectation for each market such that the potential is fully developed. By appointing separate franchisees, McDonald’s has enabled the brand to be fully developed in a focus approach. The downside of such an approach would be the need to step up control to ensure consistency in brand image. McDonald’s Middle East Development Company (MMEDC) based out of Dubai is set up to provide consultancy advice and support to the franchisees and to foster cooperation in marketing efforts throughout the Middle East countries.

Singapore
Kopitiam Group - the S$200m company is an F&B industry veteran in foodcourt concept. Its proven track record is in management of foodcourts and operating kiosks concept. Its venture into QSR hamburger joint is the first attempt.

Leveraging on its existing locations, the first Wendy’s store is set up in Lau Pasat, a gazetted national monument where Kopitiam Group bought over after paying S$8m and spent another S$4m in renovation before re-launching. 35 stores are expected to be opened in the island republic over the next 10 years, which is a fairly reasonable development plan.

McDonalds, being the largest fast food chain in Singapore has an estimated 120 stores, followed by KFC’s 75. Local chains such as Delifrance and Sakae Sushi have less than 40 outlets. Taking a quick count of the number of shopping malls in Singapore to be less than 80, Kopitiam Group’s 35-store projection is doable.

However, one may wish to reflect upon the performance of Carl’s Jr to-date. Being in Singapore since 2005, there are currently around 7 outlets in Singapore after 4 years. With the F&B landscape getting more complex with wider consumers choice of Japanese and Korean-style dining concepts, and a saturation of McDonalds’ and Burger Kings, the profitability of Wendy’s is yet to be seen to finance its organic growth plans.

Assuming the AUV of US$1m, franchise fees of US$25k per store and royalty of 4%, Wendy’s Arby’s expectation from this Singapore franchise deal is in the range of US$2.3m over a period of 10 years, which is a drop in the ocean.

To Kopitiam Group, if each Wendy’s store can generate US$1m per year, adding US$35m to its turnover is a respectable business to operate.

Japan
71 Wendy’s will be shut down by the end of 2009, with a potential loss of royalty fees of US$2.8m (assuming 4% royalty from US$71m turnover by Zensho). Wendy’s spokesperson claimed that the shutdown is ‘immaterial’ and notified that it is looking for new partners in Japan.

While McDonald’s may be operating over 3,700 stores and KFC over 1,100 in Japan, which may have led Wendy’s management into believing that 71 stores are not worth keeping, it may not have considered the deeply battled Japanese economy, the entrenched dominance of McDonald’s (65% market share) and impact on brand reputation as key factors to rethink the strategy with Zensho.

Wendy’s started in Japan in 1980, already a decade later than McDonald’s and KFC. Zensho operates multiple F&B brands in family restaurant and QSR. While its Gyudon (Beef Bowl) business and family restaurant business appeared to be growing, the fast food segment has stagnated . The breakdown in discussion between Wendy’s and Zensho is anybody’s guess but cross cultural difference and the lack of understanding in Japanese business practices may be a contributing factor.

McDonalds’ and KFC’s rapid expansion in Japan can be attributed to their involvement in decision making. Both have stakes in the Japanese entities to facilitate control and decision making. Wendy’s-Zensho relationship is purely arms length as franchisor-franchisee, the ability to exercise influence in this case may be limited despite governing terms in the franchise contract. Having said so, to source for a new Japanese partner may be an uphill task given the present economy is in doldrums and Japanese companies are extremely prudent in their investment during this period. Even if there are JV potentials, Wendy’s may have underestimated the cultural difficulty in forging JVs between US and Japanese partners.

The question is whether Japan should be a priority focus for Wendy’s at this juncture for it to exercise such a drastic decision. Burger King pulled out of Japan in 2001 terminating 16 stores and did not re-enter till 2007. Unless Wendy’s has a strong Plan B in the pipeline, risking loss of royalties, loss of brand reputation, further opportunity loss in even moderate unit growth expansion through fees and new royalties cast doubt on the decision making process by Wendy’s International team.

Summing Up
Wendy’s has shut its door on Middle East by limiting itself to one single franchisee for MENA with an expected units of 135 over 10 years. It will have to wait for another 10 years before having a chance to relook into this fast growing and rich market. It is worth noting that Yum’s system sales from 2002 – 2007 in Middle East/Africa raked in a CAGR of 24%, highest relative to Europe, Asia/Australia or The Americas.

Terminating 71 stores in Japan appears to be a bad move given there is no clarity of immediate replacement in the near horizon. For any new Master Franchisee to be setting up 70 stores again may take a few more years. The time and effort focused on Japan currently may not be worth its while given that the much battled economy is unlikely to recover anytime soon. This may be another minus in Wendy’s international growth strategy.

Re-opening in Singapore could be a potential gateway to Wendy’s re-establishing its presence in Asia. Wendy’s Hong Kong regional office may have to play a more instrumental role to increase unit growth and SSS growth in the Asia region.

Overall, 2009 appears to be a hit and miss year for Wendy’s with no clear definitive strategy. New market entry requires deliberate effort and a focused approach. Selecting the right markets to focus on and invest in is critical. It could well be in the pipeline but we have not seen any plans for China, one of the biggest and fastest expanding economies for F&B sector.

Looks like Andy Skehan will have his hands full in 2010.



References:-
2009 Morgan Stanley Global Consumer and Retail Conference, 19 Nov 2009
Zensho Corporate Website, http://www.zensho.co.jp/en/index.html
“Wendy’s will leave Japan by year’s end”, http://www.ajc.com/business/wendy-s-will-leave-238539.html?cxntlid=daylf_artr
“Wendy’s burger chain to withdraw from Japan”, http://www.ajc.com/business/wendy-s-burger-chain-237560.html?cxntlid=daylf_artr
Wendy’s to Exit Japan, Zacks Equity Research, 14 Dec 2009
“Wendy’s Arrives in Singapore”, Zacks Investment Research, 16 Dec 2009
“Wendy’s/Arby’s Group Signs Major Development Agreement for the Middle East and North Africa”, Business Wire, 16 Jun 2009
“Wendy’s, Arby’s to debut co-branded stores, Breaking News, http://www.nrn.com/breakingNews.aspx?id=368486#ixzz0a0MPrJGq