Wendy's will close 140 underperforming restaurants in the fourth quarter

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Diving certificate:

• Wendy's will close a number of aging restaurants in underperforming areas where average unit volume is about $1.1 million and operating margins are well below the system average, according to Kirk Tanner, Wendy's president and CEO, said Thursday during an earnings conference call. These closures will strengthen the overall health of Wendy's system, Tanner said.
• Total closures in 2024, including 140 more in the fourth quarter, will offset new restaurant openings, leaving net business unit growth roughly flat, CFO Gunther Plosch said.
• The chain that posted U.S. same-store sales growth of 0.2% expects the third quarter to open 250 to 300 new restaurants worldwide this year, This emerges from a presentation of results.

Insight into the dive:

Other chains have closed underperforming locations to strengthen their overall operations while maintaining plans to develop new units. Denny's, for example, plans to close 150 restaurants that have low volumes but still rely on new construction and renovations by 2025. Shake Shack closed nine underperforming restaurants earlier this year but expects to open 75 restaurants this year.

During the first nine months of the year, Wendy's closed 111 units systemwide, including 78 franchise units and six company-owned units in the U.S., according to a filing with the U.S. Securities and Exchange Commission. The chain ended the third quarter with 7,292 units worldwide, compared to 7,166 a year ago.

Wendy's uses data-driven insights to target high-growth commercial areas that have resulted in unit sales exceeding $2 million and above-average operating margins, Tanner said. These restaurants typically offer a better customer experience thanks to new technology and improved drive-thru and delivery operations. Thanks to more efficient working models, you also achieve higher employee satisfaction.

In 2022, Wendy's Next Gen prototype became the standard model for new restaurants. This design includes a pickup window for deliveries, a mobile order parking lot and in-store shelving for digital orders, as well as redesigned kitchen layouts.

“Overall, Wendy’s system is incredibly healthy,” Tanner said.

To keep the system healthy, management conducted a “thorough review” of individual restaurants to ensure they were meeting sales expectations and had the profitability to sustain growth and could provide a great customer experience, Tanner said.

“I have made the strategic decision to close additional restaurants this year that are aging and located in underperforming trading areas,” Tanner said. Over time, many of these restaurants will be replaced by new construction in areas with better sales, higher profitability and an expected AUV of over $2 million.

The restaurants slated for closure are scattered across the U.S. and are not tied to a specific region or market, Tanner said. Looking at the bigger picture, this does not represent a significant number of closures, he added. The chain still has the headroom to open about 1,000 units in the U.S. and great potential internationally to achieve its market penetration goals.

Moving forward, Wendy's expects the new units to be split 70% international and 30% domestic. After adding franchise incentives in the U.S. in 2023, the chain is also offering incentives in Latin America and Canada to accelerate growth in those regions, which has already led to numerous development discussions, Tanner said.

The chain also has made development commitments that will allow Wendy's to meet its new construction goals and support its forecast for net growth of 3% to 4% in 2025, he said.

“By the end of 2024, we will have opened more than 500 new restaurants over the past two years and are confident of achieving increased growth in 2025 and the years to come,” Tanner said.