Lunch with Wendy's honcho, Friday's sauce on the side

Several of us had lunch yesterday with Roland Smith, the new CEO of Wendy’s, who’s shouldering that responsibility while continuing to lead the Nelson Peltz-affiliated corporation that previously ran only Arby’s. Besides providing a guilt-free chance to indulge in a Double and a Frosty—hey, it was research—the sit-down at a midtown Wendy’s yielded a few guarded indications of what the chain’s new owner may do with its $2.3-billion prize. But even better was a reality check the unit’s franchisee gave us after Smith left, not so much about Wendy’s, but about general industry conditions and his other concept, T.G.I. Friday’s.

Here’re the highlights of what Smith had to say about Wendy’s and its new parent, Wendy’s/Arby’s Group Inc.:

• Co-branding is definitely in the works for the company's two chains, particularly in high-rent locations like the midtown location where we ate. Smith said the pairing of the concepts—separate kitchens, but paired menus sporting the signature items of each brand—would be especially synergistic overseas.

• The acquisition of other restaurant brands is definitely a possibility for Wendy’s/Arby’s. Smith of course wouldn’t be specific about the possibilities, but he said the company favors concepts that are viewed as quality providers. not bargain peddlers.

• Although the two concepts will be run as separate brands, without any sharing of "trade secrets" like menu products, personnel could be transplanted from one to the other as need and availability arise, Smith said.

• The emphasis for Wendy’s near-term will be on boosting profits. Smith remarked that Arby’s unit-level margins are among the best in the business. Wendy’s was once up there as well, he said, but the profitability of company units slipped, with margins now falling below what franchisees have been able to maintain. Not that licensees are content with their incomes, either, he suggested. Asked for the top three present-day concerns of Wendy’s franchisees, Smith counted them off on his fingers: “Profit, profit, and profit.”

• Wendy’s and Arby’s may indeed cross-franchise, so an operator of one chain could open units of the other if the situation would be appropriate.

As we were leaving, we were asked about our meal by someone who was obviously a person of authority, but just as clearly not a part of Smith’s posse. Turns out he was the franchisee, Brad Honigfeld, CEO of multi-brand The Briad Group.

Honigfeld said he was optimistic about Smith and the change in ownership, and praised in particular the selections of David Karam as Wendy’s new president and Steve Farrar as the new COO.

He voiced more concern about his Friday’s restaurants, noting that Briad is that chain’s largest franchisee. Stores in Arizona are running 25 percent below what they were a year ago, he lamented.

Bakery-café concepts like Panera are stealing the lunchtime customers of casual chains, Honigfeld explained, and the battle for dinner patrons is just brutal. He dismissed discounting as the way to go, suggesting instead that the established players in casual dining need to re-invent themselves.

Perhaps not coincidentally, he revealed that Briad has just signed on to become a franchisee of Corner Bakery, a competitor of Panera.

Honigfeld also noted that his Wendy’s units in the New York area have been doing well, but that Briad’s restaurants on the West Coast suffered a “significant” decline last month. He called it a sign of things to come, which I took to mean the chilling effect could roll eastward.

It's a jungle out there

Here on the Peltz-engeti Plains, the beasts of the restaurant wilds are hitting the watering holes a bit more enthusiastically. After watching Nelson Triarcus carnivorous ruthlessly stalk its prey, the wounded Wendy red-hairus, the herd winced in horror as the predator brought down one of the kingdom’s most storied specimens. But the blood-letting didn’t end there. No sooner had Kerrii Anderson’s head been mounted than another proud denizen of the restaurant jungle find himself being measured for a spot on the lodge’s trophy wall. In a move that shocked everyone, including the prey, Craig Miller found himself at the wrong end of an angry board’s scope. He was summarily dispatched as CEO of Ruth’s Chris Steak House, a post he assumed four years after Bill Hyde had been dropped because of a vertical climb in beef costs. No wonder the beasts left standing are taking a big gulp and wondering, Who’ll be next?

Rock Bottom answered that question with the simultaneous resignations yesterday of three top executives, including CEO Ned Lidvall. The smart money says he won’t be the last chain chief to feel as if he’s in a National Geographic special, cast as the wildebeest in a study of investors’ meat-eating habits.

Worst of all, the situation isn’t purely Darwinistic. Everyone is mired in an economic swamp that has customers spending less, suppliers charging more, employees bailing for other trades, and landlords forgetting there’s a real estate glut. Even if you’re better than the competitions’ CEOs, you can still look like a prime cut of meat to an unforgiving investment pack. Outside of McDonald’s and Chipotle, the only executives who are looking fit these days are the ones who’ve dropped out of the restaurant business to work as head hunters.

Of course, if could be worse. They could be among those unfortunates who come to work one day and find a registered letter on their desks from William Ackman, Sardar Biglari or some company whose name starts with T-R-I, the mark of Nelson Peltz and the now industry equivalent of “666.” It’s one thing to pack up all your office belongings in a cardboard box and head down to HR for an exit interview. It’s another to be hounded like a wobbly gazelle trying to limp its way across the African veldt.

And it’s just a matter of time until that happens. In the announcement of its deal to takeover Wendy’s International, Arby’s parent Triarc Cos. specified that the fast-food empire formed by the chains’ merger would grow in part through acquisitions.

Not that you should feel too bad for Anderson, who’s about to be replaced as Wendy’s CEO by her counterpart at Arby’s and Triarc, Roland Smith. News reports say she’ll be paid $20 million in severance, which includes about $5 million to defray her income taxes.

How lemmings draft a menu

Listen: That crunch you hear is the sound of quick-service chains squashing their points of differentiation. Instead of learning from the tragic blunder of casual dining, players one click down the service spectrum are just as avidly turning their menus into clones of the competition’s line-up. If they haven’t already copycatted McDonald’s Snack Wrap, vis-à-vis Wendy’s, Sonic, and KFC, it’s only because smoothies, premium coffees and espresso-based drinks are higher on their To Develop list. And that’s after deciding how to join the discounting binge.

In the currrent environment, you can readily understand why a chain copies a sure-fire hit for someone else. But it clearly speaks to a dearth of cleverness and creativity within the sector. Instead of analyzing why a certain product appeals to consumers and then crafting an alternative that sates the same desire, even contenders with considerable marketing knowhow are merely giving a twist to what’s already selling well.

The follow-alongs are not only betting that lightning will strike twice, but leaving themselves vulnerable to the upstart that hatches a true New Idea. If a newcomer hits on the next Bloomin’ Onion, fajita, Blizzard, chicken nuggets or smoothie, the old guard is cemented into the role of hawking commodities. How much pressure on prices can a concept take when costs are squeezing margins from the other direction?

The copycats would be better served by staying attuned to what makes their concept unique and then nudging their menus in the direction in which public tastes are moving. Leapfrogging to a far afield idea just because it worked for another player is like trying to make it as a rock star by covering last week’s hits.

No longer coverage-worthy

Two days ago, a 60-year-old in a suit and tie walked into a Wendy’s in West Palm Beach, Fla., and pulled a pistol. First he fired at the lunchtime crowd clustered near the counter, killing an off-duty EMT who’d already eaten but had come back into the restaurant to exchange the toy his child had gotten in a kid’s meal.

The shooter then turned toward the dining room and blasted away at random, hitting four people. Without having uttered a word, Alburn Edward Blake then shot himself in the head and died. The police say any explanation went with him.

Google any of the details and you’ll snag dozens of stories about the incident in local and even some national media. But you won’t see a word about it (other than these) on the pages or website of Nation’s Restaurant News. Because we’re a national news outlet focused narrowly on the business of restaurants, a multiple shooting in a lone fast-food place just isn’t coverage-worthy. The situation per se offers no business insight, and the incident is no longer sufficiently extraordinary, like the shootings some 15 years ago at a Luby’s in Killeen, Texas, or the rampage a few years earlier at a West Coast McDonald’s. It’s a heartless call, but a sound one news-wise.

But it’s unnerving to think we’ve reached a point where a random multiple shooting is no longer enough of an unusual occurrence to merit a spotlight.

Secret holiday diary of Nelson Peltz

Nelson popped over with a bottle of Captain Morgan last night to catch “Dancing with the Stars” and left without his backpack. I know you shouldn’t peek at a person’s diary, but it was right there under his copy of “Eat, Pray, Love.” I couldn’t resist.

Wednesday
Played Monopoly with relatives at the holiday party; was shocked to learn the money wasn’t real. Just as well, I guess; they thwarted my attempts to take over undervalued assets—the hotels on Baltic and Oriental—and refused to discuss how the railroads could be managed more profitability. After a few well-placed investments, they’ll rue that stubbornness.

Tuesday
Watched the umpteenth airing of “It’s a Wonderful Life,” one of the greatest tragedies of all time. A good man, that Potter. To watch him be destroyed by wussy George Bailey still brings tears to my eyes.

Monday
Went to see “The Grinch Who Stole Christmas” but was asked to leave. The Grinch said he couldn’t stand the competition. The screams of fright from the children were intolerable in any case, so I headed over to Fifth for some shopping. But Saks said it wasn’t for sale.

Sunday
Sent “21” into conniptions by giving Billy Ackman a surprise atomic wedgie. The lad thinks he knows a thing or two about forcing companies to heed his wishes. But he’s merely the Popeye to my Blutto.

Saturday
Fielded a call from George Clooney, who’s already casting “Ocean’s 27.” He’d like me to reprise my roll from “Ocean’s 10,” Nameless Man at Posh Party. But I’m not sure we’re simpatico on the character’s direction. What I’d really like to do is direct. Or take over DreamWorks.

Friday
Visited Washington and stumbled on a lovely house that has to be mine. All white, with a decent yard by Washington standards, though that big monument across the street will have to come down. Even comes with a heliport and guard stations. Maybe I’ll just buy the city.

Thursday
My pursuit of the Cadbury candy company continues. Nevermore will Caramello have to take a second seat to Royal Dark.

­Wednesday
Note to self: Check status of Wendy’s takeover attempt. Spending far too much on Doubles to remain just an investor.

Oh, well. Off to raid the retail sector!

Testing less testing

Taco Bell probably has nothing against surveys, but it won’t be getting the usual Christmas card this year from whatever company makes the forms and the stubby pencils that consumers use to fill them out. The chain alerted financial analysts last week that it, too, is veering away from the traditional process for gauging customers’ reaction to possible menu additions, a detour that’s already being explored by McDonald’s, Wendy’s, Baja Fresh and presumably other chains. The old standard of exhaustively testing new products is apparently going the way of the rabbit-ear TV antenna as restaurant brands try to respond with more alacrity to the zigging and zagging of consumer preferences.

But not all franchisees view shortened product tests—or the elimination of testing altogether—as a positive shift. Some licensees of McDonalds, Wendys and Baja have yelped about having to add products or a whole new menu line before the operational and marketing support has been adequately pressure-tested. And misfires, they complain, can do more damage to their businesses than to a franchisor. They say the streamlined assessments fail to balance sales benefits against such factors as local labor expenses, the cost of capital, or the longer-range perceptions about service times.

At least one Baja franchisee is irate because he believes the home office isn’t effectively gauging even the top-line impact of introductions. He asserts that the chain recently shot-gunned a product into the market with advertising support, only to discover that it didn’t have sufficient supplies to meet the heightened demand. But, in fairness, that couldn’t be confirmed with the franchisor.

Wendy’s, on the other hand, has publicly disputed franchisees’ even louder assertions that the chain is inadequately testing new products and operational changes. The charges were levied in a letter sent to headquarters late in the summer by 16 franchisees, who cited the current testing mindset as one reason for “the slow decline of our brand.”

Having seen my share of franchisee disputes, I’d be a fool to take sides in a fracas like that one. But it certainly was curious that Wendy’s current management included a rollout of breakfast in the turnaround strategy it disclosed last year. The same announcement noted that the meal service would be tested. That’s like proposing as soon as a blind date opens her door, then suggesting the two of you discuss compatibility after you’ve been getting together for a year or so.

Franchisees of McDonald’s have been more discreet in their complaints about the chain’s recent quickness in adding new products, particularly beverages. But the dismay was evident in the latest survey of McD’s licensees by former analyst and current restaurant-company investor Mark Kalinowski. In his most recent quarterly canvass of the operators, several complained that lattes and other specialty drinks were being shot-gunned into the market without sufficient research on service issues or even the long-term payback of buying the required equipment.

"The Combined Beverage Initiative is a real concern for me," said one respondent, refering in McDonald's-speak to the beverage program."I have heard a number of
estimates from $100,000 to $130,000. The train has left the station, stores surveys are being done and we have yet to see any FACT-BASED INFO to know if this is a good
investment or not."

One anonymous respondent suggested that franchisees form a renegade association that’ll be more vocal than the official franchisee organization in shaping the chain’s strategy.

In fairness to Taco Bell, there are no evident signs that its franchisees have an issue with the new testing strategy, known internally as the Explore in Store process. The shift is intended to help the chain double the number of new products it fly-casts into the market in any given year. To crank out products at that speed, Taco Bell execs told analysts at last week’s special meeting, possible new options will be introduced in just a few stores, with the new choice highlighted in signs. If the reception by consumers is encouraging, the item could be quickly rolled systemwide, presumably as a limited-time offer.

Lehman Brothers’ Jeffrey Bernstein, one of the restaurant analysts who attended the meeting in Taco Bell’s hometown of Irvine, Calif., said in a report that some products will continue to be developed and tested in the chain’s usual fashion. Indeed, he noted that Taco Bell is still testing breakfast, an initiative that executives disclosed at the same meeting one year earlier. Yet the testing is continuing, and “the expansion appears slower than initially expected,” Bernstein wrote in a report to clients.

The new streamlined rollout process could serve Taco Bell well in catching up with other quick-service chains on two fronts. During the meeting, executives aired intentions to add a frozen beverage to the Mexican chain’s menus, and to explore some health-oriented “better-for-you” products.

Maybe Bobby Bacala would do

Wendy’s best hope may not be Nelson Peltz, Bill Foley or a nameless twentsomething in a pigtailed wig. If the company wants to avoid a pitched two-front war with investors and franchisees, the person it really needs is Paulie Walnuts.

As any Sopranos fan knows, Paulie has his issues, like occasionally beating people into hamburger. But he was also the go-between when warring parties wanted a sit-down. Too bad the folks at Wendy’s apparently weren’t HBO subscribers, because they’ve been focused on sending messages instead of sharing some grappa in the backroom of the Badda Bing. Franchisees are clearly squaring off with the home office, if they’re not looking to buy the company and impose their own strategy. And how’s Wendy’s coping? By sending letters, like the feel-good click here it dispatched to licensees and employees yesterday.

In fairness, it should be noted that headquarters has instituted monthly webcasts with franchisees and employees to keep the whole system apprised of chain activities. CEO Kerrii Anderson also indicated in her letter that enhancements have been made to WeNet, presumably the chain’s intranet.

But neither of those media is face-to-face. Indeed, they tend to be used for one-sided disseminations than a true give-and-take.

What seems to be needed is a war council, where the parties can sit down and work out their differences in the spirit of Dave Thomas. Instead, franchisees and the home office have been using postmen as their proxies, sending letters back and forth. A dozen licensees sent a scathing one to Wendy’s home camp a few months ago, blasting management for lowering the value of their business. The executives denied it, and followed up with yesterday’s assertion that the turnaround is going well.

Does this sound like a system that’s talking?

In her letter, Anderson also noted that meetings were held in August with franchisees specifically to discuss plans for 2008. Why, then, was yesterday’s communication even necessary? Might it have been more of a defense than an explanation of what the home office has chosen to do?

Interestingly, in ticking off Wendy’s achievements during the last year, Anderson cites “enhanced communications” as an accomplishment on par with improving operations or bolstering sales and profits. Clearly the management team felt the need for an upgrade. You have to wonder if executives and franchisees still do, and if both sides are doing their part to ease tensions through conversation.

“We’ve made significant progress in the last 12 months,” Anderson told franchisees and employees. But “we have so much more to accomplish.”

Perhaps maintaining peace with franchisees through a true disarmament sit-down should be item No. 11 on her to-do list. With that problem allayed, the whole system could address the larger issue of bolstering finances, which might even make Nelson Peltz smile.