Top Franchises: Investing in Wendy's

Is it time to take a bite out of a Wendy's franchise opportunity? Photo: Wendy's

Because fast-casual dining is all the rage these days, a Wendy's franchise might not seem the most likely choice for someone looking to buy into a business.

After all, fast food is getting a bad rap. Traffic at quick-serve restaurants was down 1% in the year ending in June, according to a survey released last month by the market analysts at NPD Group, and Wendy's rival McDonald's has been in a year-long slide that's seen the burger chain unable post a single month of positive same store sales since last November.

In contrast, fast-casual chains like Chipotle Mexican Grill can't seem to keep customers out of their stores, and the gap between them is only getting wider.

The great divide between fast casual and fast food, in one easy chart. Data: Company quarterly SEC filings

For individuals willing to work hard but work for themselves, franchising has long held an allure as a limited-risk opportunity. But because it's not no-risk, entrepreneurs and investors will want to carefully weigh where they put their money.

A piece of the action
Franchising isn't a get-rich quick scheme by any stretch -- it can be quite costly to buy into a concept, reiterating the old saw that it takes money to make money -- but there several good reasons to consider the option, and just as many to dissuade you as well.

We're not telling you any one restaurant is better than any other if you're looking to get into franchising, yet for those researching this avenue of avenue of opportunity, Wendy's is a top company that uses the franchise model and could be one you'd want to consider.

Operating 6,500 restaurants in 30 countries, Wendy's is the world's third largest fast food restaurant in the hamburger segment, right behind McDonald's and Burger King Worldwide , with 35,000 and 13,800 restaurants, respectively.

In the U.S. and Canada alone, Wendy's has over 6,100 stores, 80% of which are franchised.

Wendy's goes all fancy-schmancy to dull the impact fast-casual has had on industry sales. Photo: Wendy's

And now might be one of the best times to get in on one. Last year the restaurant chain began a program last year to sell its company-owned restaurants to franchisees and it's seen one franchisee in particular, NPC International, go on a buying spree to snatch as many of these restaurants as possible.

Wendy's also announced in August that it would be selling to franchisees all 135 company-owned restaurants in Canada.

So if fast-casual dining is on the rise and fast food is declining, why might you want to jump on this refranchising opportunity?

Well, where McDonald's is seeing comps continuously fall and Burger King is watching them merely inch higher (comps were up less than a half percent in North America last quarter for the No. 2 burger chain, and actually fell almost 1% across all of 2013), Wendy's enjoyed better than 3% increases in comps in the second quarter, positive growth in the first despite severe winter weather, and almost 2% growth last year.

In short, Wendy's is bucking the trend seen at its rivals and all across the industry.

By the numbers
Yet buying into a Wendy's franchise doesn't come cheap.

While the burger chain is accepting new franchising applications, prospective franchisees need a minimum net worth of $5 million and minimum liquid assets, or those you can quickly turn into cash, of $2 million. Just a few years ago, Wendy's required only $500,000 in liquid assets and a net worth of just $1 million, so it's vastly upped the requirements to make it far more of an exclusive club.

In addition to making more franchising opportunities, Wendy's is also giving its restaurants a makeover, what it calls its Image Activation program, which seeks to visually align itself with the fast-casual boom.

They certainly do look more upscale than your local greasy spoon or burger joint, so as an incentive to have franchisees participate, Wendy's will reduce royalty payments from the restaurants for up to the three years after completing construction, which typically is the greater of 4% of gross sales or $1,000 per month, and is making available a third-party lender to help finance the changeover.

Not your average hamburger restaurant. Wendy's flagship store in Dublin, Ohio. Photo: Wendy's

A business model you'll flip (burgers) for
The franchise business model has been a boon to entrepreneurs and investors. Forbes found that the top 45 franchise stocks outperformed the S&P 500 in 2012 by nearly two to one, generating returns of 23.2% compared with the index's 13.4%.

Income disparities are widening, as yes, the rich are getting richer, and though the poor have a sizable safety net under them, the middle class is being decimated. That's playing havoc with who is actually dining out these days and helps explain why fine dining chains are another growth niche in restaurants.

As Hemingway once replied to F. Scott Fitzgerald about the rich being different, "Yes, they have more money." Data: NPD Group

That means you need to consider the risks and understand the economy could swoon once again, forcing the closure of more restaurants.

So franchising is not for everyone, and you need to consider your own temperament, your finances need to be in order (and sometimes be substantial), and if you're the creative type, the restrictions franchisors place on franchisees may feel constricting, claustrophobic even. You need to do your homework.

If that still sounds like a business you'd like to operate, however, Wendy's just might be one place where you should start your due diligence.

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FollowRich Duprey's coverage of all the restaurant industry's most important news developments. He has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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