In 2008, fast food franchisor Wendy's International-announced it was purchasing the Arby's franchise system for $2.3 billion. Through the acquisition, Wendy's had high hopes of gaining a larger share of the fast food market. But recently, the Wendy's/Arby's group announced it was exploring "strategic alternatives" including a potential sale of the Arby's Restaurant Group. This outcome reveals some of the risks of franchise expansion by acquisition of another franchise system.
Declining Customer Base and Sales
With over 3,700 stores in operation, the company says Arby's is the second largest quick-service sandwich chain in the United States. However, they admit the brand has struggled to keep up in the past several years. According to Reuters:
- Arby's sales declined for four straight years; most likely due to higher prices and the struggling economy.
- Additionally, Arby's has experienced difficulty competing with the variety that McDonald's offers.
- Further, Arby's was at a severe disadvantage in size and found it challenging to compete with McDonald's, which is currently operating over 13,000 restaurants in the U.S. alone.
Nelson Peltz, Chairman of Wendy's/Arby's Group, said that the company plans to focus more on the Wendy's brand, which has over 6,500 stores, to maximize shareholder value.
The Arby's news comes only a week after Yum! Brands, Inc., announced it was putting its Long John Silver's and A&W All-American Food Restaurants up for sale. Yum plans instead to focus on international expansion of its Taco Bell, Pizza Hut and KFC brands. Yum! Brands decision to shed more recently acquired underperforming brands to focus on its original core group of brands is another example of growth by acquisition gone wrong.
Takeover Speculation
Oppenheimer analysts expect the Arby's sale to fetch anywhere from $400 to $600 million, but USA Today speculates that the company as a whole could be a potential takeover target. Roth Capital Partners analyst Tony Brenner notes that aside from a private equity firm purchasing the company, Arby's may simply be sold to its franchisees. This deal, Brenner notes, may have to be partially financed by the company.
The sale of franchise systems, especially those involving underperforming companies, can also be a complex process for affected franchisees. For those franchisees or franchisors concerned about a potential sale or the performance of the business, it is important to discuss your options with an experienced franchise law attorney.
Sources:
USA Today, http://www.usatoday.com/money/industries/food/2011-01-20-arbys_N.htm, 1 Jan 2011
Business Wire, http://ir.wendysarbys.com/phoenix.zhtml?c=67548&p=irol-newsArticle&ID=1517886&highlight, 21 Jan 2011
Business Wire, http://www.businesswire.com/news/home/20110118006428/en/Yum!-Brands-Places-Long-John-Silver%E2%80%99s-, 18 Jan 2011
McDonald's Franchising, http://www.aboutmcdonalds.com/mcd/franchising/us_franchising/why_mcdonalds.html
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On Monday, April 16th, 2012, Julie Lusthaus was interviewed in a 30 minute segment about Franchising on WVOX 1460 AM radio by Marsha Gordon, President & CEO of The Business Council of Westchester.
