Franchise revolt at Wendy's

`Mismanagement,' silly ad campaigns have many asking: Where's the beef?

October 17, 2007|By JAY HANCOCK

The characters in the newest Wendy's ads are transvestite parodies of the hamburger chain's adorable little-girl mascot. Wendy's summery fruit salad - introduced two years ago in the depth of winter - flopped. Around the same time a hoaxer put a severed finger in an order of Wendy's chili.

McDonald's and Burger King are eating Wendy's lunch.

No wonder Wendy's shareholders got mad. But at least they can sell their stock. Breaking up isn't so easy for Wendy's franchisees. They are joined at the hip to a company that hasn't gotten it right since founder Dave Thomas died, and have finally decided to turn up the heat.

"Twenty years ago it was a partnership" between Wendy's parent and its operators, says David Norman, executive vice president of Crofton-based DavCo Restaurants Inc., employer of 6,000 and the biggest Wendy's franchisee. "Today it's strictly a business, as with everything else."

And not a cordial one. The trials of DavCo are an object lesson for entrepreneurs: In franchising, there's no such thing as divorce when things go wrong.

"For the past several years, the franchise community has watched with mounting concern the slow decline of our brand due to mismanagement and an apparent lack of concern or even oversight by the board of directors of Wendy's International," opens a bombshell letter signed last month by Norman and other top franchisees. The letter was obtained by The Wall Street Journal and posted on its Web site.

Franchisees accused Wendy's management of an "autocratic style of decision-making," "insufficient, incomplete or inaccurate" communication, forcing them to cut the size of products and portions.

That Wendy's appears to be up for sale isn't making anybody feel better.

Corporate raider Nelson Peltz is looking at Wendy's books with an eye to buying it.

Peltz, who owns the Arby's chain, started acquiring Wendy's shares after the finger-in-the-chili fraud, which hurt sales and furnished late-night joke fodder for what must have seemed to company executives like forever. (Leno: "Instead of a spoon, they serve it with nail clippers.") Peltz owns about 10 percent.

Also reportedly considering bids are Wendy's franchisee David Karam and a private-equity consortium. Wendy's says it would consider strategic alternatives other than a sale, but those seem unlikely.

The auction caps several years of foolishness. Thomas, a high-school dropout who built Wendy's into a national chain in the 1970s, died of liver cancer in 2002. His disappearance deprived the company of its most effective spokesman and one-man franchisee support team, and ushered in what DavCo's Norman calls "the corporate bureaucrats."

The awful "Mr. Wendy" ad campaign lasted less than a year in 2004. (The character was "an anonymous bozo," says Norman, prompting "very contentious" reactions from franchisees.)

This year's ads, with men wearing pigtailed Wendy fright wigs, are worse. Sales went through months of decline before stabilizing and rising again this year, but in June Wendy's had to lower profit forecasts. Where's the beef?

Peltz was the first to put big pressure on Wendy's headquarters in Dublin, Ohio, forcing the company to sell off its Baja Fresh and Tim Hortons chains and pushing for seats on the board. But the franchisees weren't far behind.

Wendy's had always been known for good restaurant relations, thanks to Thomas' steady hand and frequent field visits. But in April 2006, DavCo and other franchisees declared war by forming the first-ever franchise association. "It was basically symptomatic of a franchisee revolt," said Norman. Among the rebels: Pamela Thomas Farber, Dave Thomas' daughter.

Days later, Wendy's CEO Jack Schuessler resigned.

"I would respectfully disagree with Mr. Norman that it is contentious" says Wendy's spokesman Denny Lynch. "Wendy's has done everything possible to increase contact and communication with the franchisees and his made it a priority to listen to their input."

Unfortunately, Schuessler replacement Kerrii B. Anderson is another corporate bureaucrat. She has a CPA, an M.B.A. and has never run a restaurant. "I'm not an operator. I didn't grow up in the business," she told USA Today last year. "But leadership is about passion. And I love the Wendy's brand."

Wendy's needs more than love and pep. Peltz or another smart buyer can probably revive the parent company, and the likelihood of a buyout has already propped up the stock.

Making franchisees happier is a bigger job. Store operators are leery of Wendy's renewed interest in selling breakfast, an idea that bombed 20 years ago.

Profit margins at DavCo, majority owned by Citicorp Venture Capital since the 1980s and operator of 160 stores, fell nearly 4 percentage points in the course of a year because of higher energy costs, Norman says.

Unlike most franchisees, DavCo can still expand in its Mid-Atlantic territory, but it faces high real estate and labor costs. Eventually it'll probably either acquire another franchisee or sell out to somebody else, he says.

But first it needs Wendy's to commission a decent ad campaign and reinvest in the brand. That might get the parent and franchisees reading from the same menu again.

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