Dive Brief:

• Wendy’s will shutter its domestic Reef Technology units this quarter, CEO Todd Penegor said during the restaurant’s Q1 2023 earnings call.
• The closure of these Reef units, and lengthy development for traditional units, will bar Wendy’s from reaching net unit growth until the second half of the year, Penegor told analysts. 
• The end of Wendy’s U.S. Reef experiment comes amid a general restaurant pullback from delivery-only concepts like ghost kitchens. Restaurants are also folding virtual brands into their core menus. 

Dive Insight:

The announcement comes less than two years after Wendy’s said it would build 700 Reef units in the U.S., U.K. and Canada. A year after striking the deal, Wendy’s cut back on its projections, saying it would hit 100 to 150 units with Reef by 2025 as Wendy’s shifted back toward traditional development. 

“In the second quarter you'll see [about] 15 U.S. Reef closures,”  Penegor said on the call.

In Q1, Wendy’s opened 39 restaurants worldwide, including 24 U.S. franchised units, 13 international franchised restaurants, and two company-owned units, including one U.S. and one international location. These closures resulted in flat unit growth. In the U.S., closures exceeded openings and Wendy’s saw a net loss of 5 stores in Q1 2023, according to the company’s 10-Q. Penegor said some of the closures were temporary for remodels.

As late as March 2022, Wendy’s was predicting that ghost kitchens and nontraditional units would account for half of its unit growth going forward. But on March 17, 2022, the Federal Reserve raised interest rates for the first time since the onset of the COVID-19 pandemic. That decision was intended to slow the U.S. economy by making borrowing more expensive, which was intended to lead to lower inflation, and may have impacted Wendy’s development plans. 

The tech sector was particularly impacted by the interest rate hikes, and while specific business developments are difficult to tie to broader macro-economic policies, restaurant tech companies and startups saw a flurry of layoffs, closures and diminished expectations. Reef cut 5% of its global workforce in May 2022, though the company insisted that it was still expanding.

On top of this, high delivery fees, customers returning to dine-in service and consumers trading down pressured delivery-only and delivery-heavy business models, making it difficult for ghost kitchens to attain sufficient per-unit sales. While Wendy’s rapidly cut its expected unit growth with Reef, other restaurants re-examined their own virtual brands. Brinker announced it would phase out its Maggiano’s Italian Classics virtual brand last week, after trimming SKUs failed to yield improved sales. Applebee’s moved some of its virtual brand items onto its core menu in 2022.

Still, the outlook for virtual brands and delivery-only concepts is not wholly grim, as brands continue to launch new offerings, like IHOP and Nextbite did in March. 

Neither Wendy’s nor Reef responded immediately to requests for comment.