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Vincent McPhillip

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Triarc operates and franchises Arby's, a chain of fast food restaurants specializing in roast beef sandwiches with a total of 3,700 company-owned and franchised restaurants nationwide.^[1] In May, 2008, Triarc announced its $2.4 billion acquisition of Wendy's International,^[2] one of the world's largest hamburger chains, with just under 6,000 total restaurants in the United States as well as an additional 600 international locations.^[3] As of FY 2007, Wendy's had a 14% market share of the fast food, or Quick Service Restaurant (QSR) industry. The combined company will have approximately 10,000 restaurant units and projected annual sales of approximately $12.5 billion, making it the nation's third largest quick service restaurant company.^[4]

The newly merged company will face several important challenges moving forward. The cost of doing business has increased due to rising foods prices; because of intense competition from McDonald's , Yum! Brands (YUM) and Burger King, Wendy's and Arby's often absorb these costs to preserve market share, squeezing margins.^[5] Since mid-2007, the effects of these rising costs have been compounded by falling consumer spending in the U.S., a region which accounts for the lion's share of Wendy's and Arby's sales. Triarc's long-term success hinges on its ability to realize synergies through the merger that will improve sales and offset rising input costs. Post-merger, Triarc expects improved cost controls over food and labor expenses generating $100 million a year in operating profits with corporate restructuring saving an additional $60 million.^[6]

Business Overview

Franchising

Wendy's and Arby's both franchise the majority of their restaurants. A franchisee, usually a local entrepreneur, requests permission from the company in order to open a Wendy’s or Arby's restaurant. The company's franchising agreement requires the franchisee to provide the initial capital for equipment, signs, seating and decorations. Meanwhile, the company owns or obtains long-term leases for the building of the restaurant and the land. These franchises generate revenue for the company through payment of rent, royalties based on sales, and initial fees.

Arby's Restaurants

Arby's is distinguished from is QSR competitors with its unique menu which features roast beef sandwiches. ^[7] Arby’s opened its first restaurant in Boardman, Ohio in 1964. As of December 30, 2007, ARG and Arby’s franchisees operated Arby’s restaurants in 48 states, and four foreign countries. As of FY 2007, there were 3,688 total Arby's restaurants of these 1,106 (30%) were company-owned and 2,582 (70%) were owned by franchisees.^[8]

Wendy's International

Wendy's Old Fashioned Hamburgers was founded in 1969 in Columbus, Ohio by Dave Thomas. Since 1969 Wendy's International Inc. has become one of the largest restaurant operating and franchising companies in the world. Wendy's ended 2007 with just over 6,600 Wendy's Old Fashioned Hamburgers restaurants in operation.^[9] Of these, 1,414 (21%) were company owned and operated while the remaining 5,231restaurants were franchised^[10]. In addition to Wendy's Old Fashioned Hamburgers, Wendy's is invested in the Cafe Express and Pasta Pomodoro restaurant chains, owning 70% and 29% of those chains, respectively^[11]. Until 2006 Wendy's International Inc. also owned the Tim Hortons and Baja Fresh franchises.

Wendy's revenue decreased after divesting Tim Horton's in 2005^[12][13]

Wendy's and Arby's have seen mixed results since 2005^[14][15]

Trends and Forces

Lack of International Exposure leaves Triarc Exposed to Slump in U.S. Consumer Spending

• U.S. consumer belt-tightening: Soaring food and energy prices^[16], the housing slump^[17] and a weakening job market^[18] have a negative impact on restaurant spending in Triarc's core North American market^[19]. Unlike competitors like McDonald's, Yum! Brands (YUM) where 65%^[20] and 50%^[21] of sales are generated overseas, Wendy's and Arby's operate almost exclusively in the United States. Their reliance on the U.S. make Wendy's and Arby's particularly susceptible to a slowdown in U.S. consumer spending- evident in weakening same-store sales:

Triarc Unable to Pass Along Rising Food Costs

• Rising Food Costs Bite into Margins: Wendy's and Arby's are both heavily dependent on a wide array of agricultural commodities such as beef, corn, cheese and poultry. Over the past few years, the prices of these commodities have increased drastically; on the other hand, intense competition in the QSR industry limits Arby's and Wendy's ability to pass these costs onto customers^[34].

Historical and USDA forecasted Corn prices per bushel

Wheat prices have since risen more dramatically-Data from USDA

• Fresh Beef Costs at Wendy's: Wendy's main product is hamburgers, making it particularly sensitive to fluctuations in the price of beef . Wendy's purchases as much as 17-20 million pounds each financial quarter. Wendy's battle with volatile beef costs is further complicated by the fact that the company uses fresh beef in its food offerings. Because Wendy's ships its beef no more than seven days in advance, it is unable to take full advantage of drops in the price of beef through stockpiling. However, Wendy's tries to hedge these risks by by buying beef futures and other derivatives to lock in prices and lower volatility.

Beef Prices Data from USDA

Wendy's- Introducing Breakfast

Breakfast is a large component of sales for the fast-food industry, with long-time offerings from McDonald's and Burger King. McDonald's breakfast sales comprise 28% of its total restaurant sales^[39] In mid-2007 Wendy's re-entered the breakfast market after a 20-year hiatus. The breakfast menu will be rolled out across its franchises over the next few years, starting with selected markets in the US. If Wendy's can successfully take over a significant share of the fast-food breakfast market, it will augment revenue substantially as well as increase the strength and awareness of its brand. As of the first quarter of 2008, approximately 1,000 Wendy's nationwide offer breakfast menus.^[40]

Competition

The Quick Service Industry (QSR) is one of the largest components of the over $440 billion restaurant and food service industry, and is one of the most competitive industries in the world.^[41] Wendy's International most clearly falls under the fast food hamburger category, and competes against multi-national giants McDonalds, Burger King and Wendy's. Arby's, on the other hand, competes more closely with specialty QSR's such as Sonic , Quiznos and Subway. More broadly, both company compete with Yum! Brands, parent company of KFC and Taco Bell.

Analysis

Breakfast

Wendy's and Arby's have been slower to move into the fast-food breakfast market than competitor McDonald's. Breakfast sales have propelled growth at McDonald's in the last fiscal year; 2007 breakfast sales were expected to top $8 billion or over a quarter or total sales. Breakfast is partly responsible for the discrepancy in the per restaurant sales of the two chains. McDonald's generates $1.8M per year compared with $1.4M and $1.01M at Wendy's and Arby's. As of the first quarter of 2008, Wendy's offered breakfast menus at 1,000 of its 6,600 locations.^[42]

International Exposure

Wendy's and Arby's have negligible international exposure compared to McDonald's and Yum's where 65%^[43] and 50%^[44] of sales are generated overseas. Lower international exposure makes Triarc much more dependent on U.S. consumer spending than Yum and McDonald's

References

1. ↑ Triarc 2007 10-K Item 1. Business- Arby's Restaurants
2. ↑ Marketwatch- Triarc and Wendy's Sign Merger Agreement
3. ↑ Wendy's Investor Relations- Company Profile
4. ↑ Marketwatch- Triarc and Wendy's Sign Merger Agreement
5. ↑ McDonald's absorbs some costs to keep customers
6. ↑ MSNBC Arby’s owner buying Wendy’s
7. ↑ Triarc 2007 10-K Item 1. Business- Arby's Restaurants
8. ↑ Triarc 2007 10-K Item 1. Business- General
9. ↑ Wendy's Investor Relations- Company Profile
10. ↑ Wendy's 2007 10-K Item 1. Business- Franchise Restaurants
11. ↑ Wendy's Investor Relations- Company Profile
12. ↑ Yahoo Finance- Wendy's Income Statement
13. ↑ Yahoo Finance- Triarc Income Statement
14. ↑ Yahoo Finance- Wendy's Income Statement
15. ↑ Yahoo Finance- Triarc Income Statement
16. ↑ The Boston Globe- Surging costs of groceries hit home
17. ↑ Bloomberg Case-Shiller Index Falls
18. ↑ NYTimes Unemployment Rising
19. ↑ Bitter taste: Food costs, less consumer spending hurting restaurants
20. ↑ McDonald's 2007 10-K- p. 24
21. ↑ Yum! Brands 2007 10-k p. 41
22. ↑ Wendy's 2007 10-K Item 7. Executive Review
23. ↑ Triarc 2007 10-K Item 7. Net Sales
24. ↑ Restaurant News Resource Wendy's First-Quarter Same-Store Sales Down
25. ↑ Wendy's 2007 10-K Item 7. Executive Review
26. ↑ Wendy's 2007 10-K Item 7. Executive Review
27. ↑ Restaurant News Resource Wendy's First-Quarter Same-Store Sales Down
28. ↑ Triarc 2007 10-K Item 7. 2006 vs 2005
29. ↑ Triarc 2007 10-K Item 7. Net Sales
30. ↑ Triarc Press Releases Q1 Earnings
31. ↑ Triarc 2007 10-K Item 7. 2006 vs 2005
32. ↑ Triarc 2007 10-K Item 7. Net Sales
33. ↑ Triarc Press Releases Q1 Earnings
34. ↑ McDonald's absorbs some costs to keep customers
35. ↑ WSJ.com- Margins & Returns
36. ↑ WSJ.com- Margins & Returns
37. ↑ WSJ.com- Margins & Returns
38. ↑ WSJ.com- Margins & Returns
39. ↑ Daily Herald- McDonald's adds burrito to breakfast menu
40. ↑ Wendy's Investor Relations- Company Profile
41. ↑ National Restaurant Association http://www.nationalrestaurantassociation.com/pressroom/print/index.cfm?ID=900
42. ↑ Wendy's Investor Relations- Company Profile
43. ↑ McDonald's 2007 10-K- p. 24
44. ↑ Yum! Brands 2007 10-k p. 41