Wendy's (WEN) Returns to Japan

With the exception of the global fast food industry leaders - McDonald's MCD and Yum! Brands YUM - restaurant stocks haven't been in favor over the past year. The economy hasn't been kind to the market laggards - Burger King was bought out for $4 billion in September, Darden DRI Restaurants (the parent company of Olive Garden and Red Lobster) crashed after it reported a 28% decline in second quarter earnings, and Wendy's WEN was forced to sell its struggling Arby's brand to a private equity group for $430 million.

Of these, Wendy's, which is beginning an ambitious re-entry plan into Japan via a joint venture with local company Higa Industries, could become attractive to investors once again if its efforts bear fruit. Wendy's previously operated stores in Japan, but withdrew two years ago when the company fell on hard times caused by weak North American sales. During that time, industry heavyweights McDonald's and Yum! Brands expanded heavily into Asia, and dominated the Chinese market. For investors, Wendy's became a footnote in fast food history. While Wendy's international presence isn't as impressive as its larger industry peers - consisting of several key Central and South American markets, New Zealand, the Philippines, Singapore, Malaysia, Indonesia, the U.A.E. and Russia - it has room to grow, especially through franchises and joint ventures.

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This week, Wendy's opened its first restaurant in Japan, the first step of a five-year plan to open 100 restaurants, and a longer-term plan for 700 restaurants. Investors might be skeptical of Wendy's ambitious plans for Japan, and with good reason - the strong yen can significantly hurt the company's quarterly earnings, reported in U.S. dollars. However, Ernest Higa's Higa Industries is no stranger to helping American companies gain footing in Japan. Higa had previously owned 180 Domino's Pizza franchises in the country prior to selling them all in 2010. Wendy's International President Darrell van Ligten expressed confidence in the joint venture with Higa Industries, stating, "We are delighted to join with a highly capable partner, Ernie Higa, to bring Wendy's brand to Japan and rapidly grow our presence in one of the largest quick-service restaurant markets in the world. The opening of our first joint venture restaurant in Japan is an important step in our international growth plans, and an expression of our confidence in the bright future of Japan." Wendy's Japanese restaurants will serve some of the same items as their American counterparts, along with some new additions, such as an Avocado Wasabi Hamburger and a Truffle and Porcini Chicken Sandwich. This pits the company against McDonald's and Yum!, which both have a heavy presence in Japan - setting the stage for a David versus Goliath battle in which Wendy's will have to fight hard to gain ground against its larger rivals.

Wendy's global footprint has shrunk significantly since the 1980s. Due to declining popularity and poor sales, the company withdrew from Europe, the United Kingdom, South Korea, Thailand, Taiwan, Hong Kong, Australia, the Middle East, Argentina and Brazil. These forfeited markets include some extremely high growth areas, and the company is taking steps to reclaim lost ground - Wendy's returned to Brazil, one of the key emerging markets, earlier this year.

Many investors have also overlooked the company's slow but steady growth in the United States since being bought out by investor Nelson Peltz's Triarc Companies in 2008. Earlier this month, Wendy's overtook privately-held Burger King holdings to claim the title of the second largest fast food restaurant in America, for the first time since its founding in 1969, despite operating less U.S. locations than Burger King. Wendy's currently operates 5,883 stores in the U.S., less than both Burger King's 7,264 stores and McDonald's 14,027 stores. However, Wendy's earned more revenue per store in 2010, at $1.4 million, than Burger King, at $1.2 million. Both are still dwarfed by McDonald's, which earns $2.3 million per store. Wendy's has followed in McDonald's footsteps, broadening its menu, changing to higher quality ingredients, and raising some prices to offset increasing commodity prices.

A shaky economy usually aids fast food restaurants such as Wendy's, and analysts forecast that by the end of this year, American customers will have spent approximately $175 billion at fast food restaurants, a 3% increase from 2010. That number is likely to increase in both North America as well as international markets. While Wendy's isn't likely to double overnight, investors should keep an eye on its continuing domestic and international growth to see if it can ride the coattails of McDonald's and Yum! Brands over the next five years.

Other News About WEN
Wendy's Adds $16 Foie Gras Burger in Second Bet on Japan
Wendy's adds some pricey fare to its new Japanese menu.
Wendy's Enters Japan with Grand Opening of Tokyo Restaurant
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Published on Dec 29, 2011
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2020. Content published with author's permission.

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