Wendy’s offers franchisees reduced royalty rate, slashes fees on new restaurants

Dive Brief:

Wendy’s is launching a new franchisee incentive program, called Pacesetter, this year intended to bolster franchisee recruitment and store development in the U.S. and Canada, the company said in its Q4 2022 earnings call Wednesday.
The program waives the $50,000 technical assistance fee franchisees pay per store when developing new units as well as royalties and marketing fund contributions for three years, the company wrote in an email to Restaurant Dive.
Wendy’s believes these changes will reduce the levered payback time on franchised units by 35% to two years compared to the previous Groundbreaking development incentive, CFO Gunther Plosch said on the earnings call.

Dive Insight:

Wendy’s expects the first Pacesetter units to open in 2025 and to contribute meaningfully to unit growth in 2026. Wendy’s has focused on expansion in the last couple years, though those initiatives haven’t always panned out. A new franchise incentives program could boost long-term development plans, especially if it proves more attractive than the chain’s groundbreaking program.

The Groundbreaking incentive accounts for a significant portion of projected U.S. development, and has helped attract over 300 potential franchise candidates. The Groundbreaking program also waived half the technical assistance fee; discounted the royalty rate from 4% to 1% in the first year and 2% in the second year; and discounted the national advertising fee from 3.5% to 0% in the first year and 0.5% in the second year, according to Wendy’s 2022 franchise disclosure documents.

Pacesetter is intended to help speed up the company’s U.S. store expansion. Last year, Wendy’s cut most of its estimated Reef units, lowering its projected growth. Wendy’s CEO Todd Penegor noted delivery-only kitchens were unlikely to play a significant role in the company’s ongoing development.

“We have tested and learned across several nontraditional formats and locations. And while we continue to be very successful with many of these formats, we do not envision that delivery kitchens will be a large element of our growth trajectory moving forward,” Penegor said on the Q4 earnings call. “We believe our efforts are better spent driving more access to the Wendy's brand through our global next-gen design.”

In August 2022, shortly after announcing the cuts to its projected expansion with Reef, Wendy’s unveiled a new omnichannel prototype for its traditional franchise developments with a more efficient kitchen layout. The chain’s emphasis on adding new franchisees and filling out its development pipeline may be necessary after problems with Reef, which was initially intended to account for 700 new units by 2025. Last summer, Wendy’s said it expected to only open between 100 and 150 Reef locations in the next two years, but Plosch said on the call this number will be even smaller.

Other chains have improved franchisee incentives in the last year. Jack in the Box began offering a steep royalty discount to multi-unit operators in August. In January, Wienserschnitzel announced it would offer reduced royalty and marketing rates for new franchisees. And earlier this week, Tijuana Flats said it would halve the franchise fee for new franchisees and offer steep royalty discounts. All these changes come as chains look for experienced operators to drive long-term growth.