Hit products, sharp eye on costs fuel Arby’s turnaround
With the Smokehouse Brisket a triumph, plus 14 straight quarters of sales growth, Arby’s is now adding stores. It’s welcome relief after a long stall, changes in ownership and the arrival of a new CEO.
Triarc Companies, the owner of Arby’s restaurants, bought the perpetually struggling Wendy’s system in the spring of 2008, more than six years ago now. The idea was to create a “powerful restaurant company” and a “must-own restaurant stock.”
Arby’s presented its latest remodel version, above, to operators in May.
That never happened. In the following two years as the smaller sibling in the newly mixed QSR household, Arby’s struggled. Sales were weak. And though the weakness coincided with the worst recession in 80 years and the worst performance for the restaurant industry in modern history, it was clear that Wendy’s/Arby’s wasn’t quite the restaurant power many envisioned.
Arby’s average unit volumes fell below $900,000. Lenders wouldn’t touch the chain, and neither would many franchisees. As sales kept falling in 2010, Wendy’s put Arby’s up for sale. Roark Capital snapped it up in 2011.
Talk about a good move for Roark. All Arby’s has done since then is turn into perhaps the best-performing large quick-service restaurant concept over the past three years, thanks to a succession of hit products and a focus on efficiencies by management, led by CEO Paul Brown who joined last year.
Now the brand is doing something that would have been unfathomable just three years ago: adding new units. The company has inked development deals with a number of big franchisees in recent months—including a 38-unit deal with U.S. Beef, the chain’s largest franchisee that operates 323 locations. Arby’s has 216 units under development by franchisees but also some by the company.
“I think that strong business performance will certainly result in a greater amount of interest both in reinvestment by existing franchisees, as well as interest from other prospective franchisees,” said Arby’s president and chief operating officer, George Condos. “They see Arby’s doing much better, and the level of interest goes up.”
The company posted 14 straight quarters of same-store sales growth, driven by a combination of value offers and a series of successful product introductions. In the past couple of years the chain has introduced King’s Hawaiian Roast Beef sandwiches, Angus Three Cheese and Bacon, a reintroduced Reuben and the Smokehouse Brisket.
Each of those sandwiches increased sales by at least 5.6 percent and the brisket boosted same-store sales by 12.6 percent during its initial run.
“A good friend of mine is in the barbecue business,” said John Davis, president of U.S., Beef. “He called me the other day and told me to quit promoting that brisket. ‘You guys are buying out the whole market.’ We’re competitive, hitting the whole market, not just fast food and quick service.”
Arby’s has worked at the other end of the income statement, looking at cost initiatives to make the stores more profitable. The company under Brown has a new training program to help franchisees become more efficient, and has worked to make the kitchen and drive-thru window work better. The company also has improved the standards for franchisees, and improved its assessment and coaching guide, Davis said.
The Smokehouse Brisket, right, boosted sales by 12.6 percent during its debut run.
The efficiency effort, combined with the higher sales, has improved store profitability by 500 basis points, Condos said. “When sales and profits are improving, typically franchisees are much happier,” he said. “Our role is to create a model that provides a profitable business for the franchisee, and help them reinvest in the business.”
The company and its operators have a big opportunity in the coming years with remodels. Many brands are remodeling their store bases, as consumers drift toward chains with upgraded facilities. Condos estimates a third of Arby’s locations could use a remodel.
Arby’s is putting the finishing touches on how that remodel program will work. The company tested 14 remodeled restaurants in Greensboro, North Carolina, and Erie, Pennsylvania, and Condos said sales results “were extremely positive.” The company then cut some costs from the remodels, and tested sites in Huntsville, Alabama, and Salt Lake City.
“They need to do a lot of remodeling in the system,” Davis said. “That’s the big opportunity I see in the system for the brand.” Arby’s presented the latest remodel version to operators in May, with a tour of Huntsville locations. The company planned to take feedback, make tweaks and then release that program to the operators.
Franchisees say changes in the Arby’s system haven’t been just cosmetic. They say that management, under Brown, Condos and Chief Marketing Officer Rob Lynch, has sought to get feedback and encourage cooperation. . “They want to cooperate in a long-term manner with franchisees,” Davis said. “That affects the whole system. So far we’re really happy.”
The happier franchisees are more willing to develop, and Arby’s is intensifying those efforts. The company is rebuilding its development team, recruiting franchise development specialists and real estate specialists. “We’re very optimistic about future development,” Condos said. “There is plenty of room for additional Arby’s.”
The company is also developing some new units itself, in core markets. That’s also a big change: Three years ago, following the decline in its unit volumes, leases for many company stores had been looking rather costly—the expensive leases were the legacy of its acquisition of big franchisee RTM Restaurant Group in 2005.
“There’s going to be a limited amount of company development, primarily to help show the confidence we have in the brand,” Condos said.