Dive Brief:

• Wendy's plans to open 150 to 200 Reef ghost kitchen locations in 2022, CEO Todd Penegor said during the company's Q4 2021 earnings call. This could mark a roughly sevenfold increase from its current roster of 30 Reef vessels in the U.S., U.K. and Canada. By contrast, Wendy's opened about 200 total news stores in 2021.
• This expansion is part of a broader focus on nontraditional store formats, which will make up about 50% of Wendy's new unit development this year, CFO Gunther Plosch said on the call. 
• Wendy's 30-unit store count with Reef falls shy of the 50-unit target detailed in the company's Q2 2021 report, but Penegor expressed satisfaction with the performance of these units so far. Last summer, Wendy's committed to opening 700 ghost kitchen units with Reef by the end of 2025. 

Dive Insight:

Wendy's positive review of its Reef units, which are designed and operated solely as Wendy's outposts, shows the potential this model could have for QSRs looking to grow their off-premise muscle and enter new cities.

"We continue to expect Reef delivery kitchens to help us address underpenetrated urban markets," Penegor said on the call.

About 65% of the planned 150-200 Reef units will be in the U.S., with another 10% in Canada and about 25% in the U.K., Penegor said on the call. Wendy's existing Reef units are concentrated in Toronto, London and San Antonio, Texas, Mark Harrison, director of global communications at Reef, wrote in an email to Restaurant Dive.

Wendy's focus on nontraditional unit designs and ghost kitchen partnerships reflects the chain's investment in digital sales, which made up about 10% of sales in 2021, an uptick of about 75% over 2020. The company's loyalty program also saw its total enrollment grow by 75% and monthly users rise by 25% in 2021. 

Wendy's Reef units have a lower average unit volume than a standard Wendy's restaurant, with AUVs hovering around $500,000 to $1 million, Plosch said on the call. "However, it is accretive to our royalty rate since we are collecting about a 6% royalty rate income on that compared to our regular collection of about 4%," he said.

Reef is also happy with the performance of its Wendy's kitchen vessels.

"We continue to see intense demand for the brand from its loyal base of fans in new neighborhoods around the world and know that we've just scratched the surface as we work to bring the Wendy's experience to customers across the globe,” Michael Beacham, president of Reef Kitchens, said in a statement emailed to Restaurant Dive.

Reef's value proposition to partner restaurants hinges on its ability to quickly deploy brands in dense urban areas, avoiding the cost of building out new stores, saving on labor expenditure and offering strong off-premise and delivery sales.

The ghost kitchen platform continues to win major partner restaurants. On Tuesday, the company announced a deal with Qdoba to deploy as many as 25 test units in three markets. The first of those units will open in April in Seattle, Austin and Atlanta.

These deals come amid a slew of permit and health inspection violations at Reef's mobile kitchens, however, as well as temporary closures. David Chang's Fuku cut ties with Reef in December, teaming instead with Kitchen United, though it's unclear if the move was a reaction to reports of failed inspections.