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Arby's facing Biggie-sized challenges with Wendy's buyout
The Arby's cowboy hat might be an awkward fit on Wendy's red-pigtailed head.
Triarc Companies Inc., the franchisor of the Arby's sandwich chain and the winning bidder for a struggling Wendy's International Inc., boasts operational excellence and brand-building experience as strengths it can apply across the 6,645-restaurant chain from Dublin.
But industry observers say the outlook for its efforts is anything but clear.
"Nothing in (Arby's) background suggests they can take (Wendy's) where it needs to go," said New York-based restaurant consultant Malcolm Knapp. "There might be some improvement, but I just don't think they stack up management-wise."
Atlanta-based Triarc agreed April 24 to acquire the nation's No. 3 burger chain for $2.3 billion. Triarc CEO Roland Smith, who will step in to head Wendy's, said the brands will remain separate but the company will consolidate administrative and back-office operations to save money and improve efficiency.
Darren Tristano, executive vice president at the Chicago consulting firm Technomic Inc., said Triarc was slow to bring changes to Arby's after buying the roast beef sandwich chain in 1993. He thinks that likely won't be the case with Wendy's.
The Arby's menu remained mostly unchanged under Triarc until 2001, when it debuted its Market Fresh sandwiches. Its advertising had been handled by the same agency until 2004, despite mixed results.
Indeed, Arby's has been inconsistent, Knapp said, including a contentious period in the late 1990s and early 2000s when franchisees took over marketing duties from the company. He said the chain experienced a resurgence in 2004 under CEO Douglas Benham, who took the job after working as chief financial officer at RTM Restaurant Group, the chain's largest franchisee.
"He brought the system together," Knapp said. "He reintegrated the marketing. He started initiatives that put them on a good path."
Triarc acquired RTM in 2005 and Benham was replaced the following year by Smith, who had been Arby's president from 1997 to 1999.
With its buyout of Wendy's, Arby's will face a central issue in leadership, Knapp said. Wendy's executives have been weak - it will drop CEO Kerrii Anderson - and the Arby's group is not an improvement, he said. And neither, he said, can match the competition at McDonald's Corp., the burger industry leader.
If there are any similarities, he said, it is that Wendy's and Arby's have vocal franchisees and both companies were at their best when led by CEOs from that community: Benham at Arby's and James Near at Wendy's.
In retrospect, he said, the 2006 spinoff of Tim Hortons Inc. by Wendy's was a strategic error.
"I would've given control to (Tim Hortons chief Paul House)," he said. "They've performed brilliantly."
Arby's executives get high marks for improvements to the chain's menu. Tristano said Arby's has a reputation as an innovator, shifting from strictly roast beef fare to a general sandwich business, with hot foods and a rotating selection of wraps and flat-bread meals.
The menu, which includes turnovers, potato cakes and jalapeno poppers, is more reflective of an independent chain's offerings. Tristano said Arby's favors limited offers that have insulated it somewhat from big menu misses.
Wendy's, once considered a forward-thinking chain, has struggled with new foods, such as the Frescata deli sandwich line it dropped, and it is playing catch-up to industry trends in snack foods, breakfast and coffee.
"At this point, Arby's is innovating better than Wendy's, but that's because Wendy's isn't innovating," Knapp said. "This fight (with activist investors) has been paralyzing to the business."
Smith, in an April 30 call with stock analysts, said Arby's will continue to look at breakfast, late night and snack items - all Wendy's initiatives - but plans to bring more innovation and improve product development.
An area where Arby's might take cues from Wendy's is in value pricing.
To compete with the dollar menus that Wendy's launched and are now widely copied in the industry, Arby's has used coupon mailings to draw customers to its restaurants. Wendy's has used coupons to promote its nascent breakfast offerings, but otherwise avoids the practice, Tristano said.
"People already know they can find value at Wendy's," he said.
Arby's has attempted to introduce value meals over the past year, but those efforts didn't bring in the customers. The company cites its value problems and discounting by rivals for lower sales and customer visits.
Knapp said Triarc could attempt to beef up Wendy's store management, which was cut by 450 positions last year in a move that saved money but hurt operations.
Tristano said he doesn't know of specific operational improvements Arby's might make to increase profit margins, aside from potential cost savings from added purchasing power. But one way to save money and potentially spur efficiency, he said, would be to sell company stores to successful franchisees. The chain would save capital expenses while putting a more direct hand in control of restaurants.
Smith cited the performance of company-owned stores as an area for improvement at Wendy's and said the experience gained through acquiring RTM has given Triarc an owner-operator mentality. Wendy's had been exploring the sale of up to 500 company-owned restaurants, but that effort was stalled by the uncertainty over the company's future in the past year.
Smith said RTM's management group, which at the time didn't include him or Chief Financial Officer Steve Hare, purchased 519 restaurants in 39 deals between 1997 and 2005 and improved operations and margins at most.
Since Triarc bought RTM in 2005, the company has improved average annual sales by nearly 10 percent at the 235 restaurants Triarc operated.
Smith expects the combined company won't see the full financial benefits of the improvements before three years.
Triarc will have its work cut out on the marketing front, Knapp said. Wendy's has been trying to forge a consistent message to consumers since founder and popular pitchman Dave Thomas died in 2002. Most recently it careened from an edgy ad campaign featuring men in red pigtail wigs to one featuring cutesy caricatures of the Wendy logo.
"Wendy is no match for Ronald McDonald or Jack from Jack in the Box," Knapp said. "People like them. No one talks about Wendy. Dave was their icon, not Wendy."
Advertising and marketing spending has been on the upswing at Arby's. According to Triarc's annual reports, the chain began increasing its marketing spending in 2006 and plans a "significant increase in national advertising" this year.
Business: Fast-food restaurant chain
Based: Dublin
CEO: Kerrii Anderson
Employees: 44,000
Area employees: 550
2007 revenue: $2.45 billion
2007 profit: $87.9 million
52-week high: $42.22
52-week low: $22.18
April 29 close: $28.87
Market:ticker: NYSE:WEN
Web site: wendys.com
Business: Franchisor of the Arby's fast-food chain.
Based: Atlanta
CEO: Roland Smith
Employees: 26,605
2007 restaurant revenue: $1.2 billion
2007 profit: $16 million
52-week high: $18.23
52-week low: $5.88
April 29 close: $6.91
Market:ticker: NYSE:TRY
Web site: www.triarc.com
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