AVCJ Awards 2016: Deal of the Year - Mid Cap: Wendy's Japan

When US hamburger giant Wendy's exited the Japanese market in late 2009, it sold 71 restaurants to Higa Industries, which in turn targeted an expansion to 100 outlets. A range of factors, notably including high real estate costs, effectively snuffed the Higa plan, and by mid-2016 Wendy's Japan had only one location.

This was about the time North Asia-focused buyout firm The Longreach Group entered the picture with its acquisition of the struggling company in a two-part deal that also secured a more established local restaurant chain, First Kitchen. The idea was to leverage First Kitchen's 136 existing locations as a more economic springboard for proliferating the Wendy's brand in an expensive real estate market.

"In evaluating the investment, that is one key element that made it very interesting for us, because one of the challenges growing a QSR [quick service restaurant] franchise is finding the right locations and the right foot traffic," says Mark Chiba, group chairman and partner at Longreach. "Rather than finding locations piecemeal, the First Kitchen platform can deliver an immediately scalable platform through prime locations that are being remodeled under a thoughtful conversion plan."

Longreach - which targets buyouts in the range of $30-200 million - executed the transaction for an undisclosed sum with both Higa and First Kitchen owner Suntory Holdings. Since 1977, Suntory had helped diversify First Kitchen's more domestically traditional offering into pizza, pasta and fried chicken, but had ceased to grow the brand.

A better user experience

As part of the deal, Higa President Ernie Higa - a Hawaiian who brought Domino's Pizza to Japan before its sale to Bain Capital in 2010 - is expected to be a valuable US contact for Longreach as it institutionalizes the leadership bench, deepens execution power and manages exclusive Japanese franchise rights for the global chain. He is also set to fill the role of chairman for the combined Wendy's First Choice brand after having already managed the new franchise's early-stage ramp-up from two to four Tokyo locations.

"Ernie's done a superb job of fusing the Japan-oriented taste at First Kitchen with the Western menu at Wendy's, which is also very popular," Chiba says. "The two test restaurants pre our acquisition, and the conversions since, have really validated this locally sensitive and more upscale menu co-branding strategy."

Ambiance is one of the keys to Longreach's plan in the "value-to-premium" QSR segment. As such, the ongoing roll-out of Wendy's First Kitchen restaurant conversions is expected to be characterized by multi-story makeovers that focus more on accompanying creature comforts than the molded plastic of a typical fast food layouts.

"It's a true combination of Wendy's and First Kitchen - with branding, menu and the customer experience fusing the best of both. The menu and the venue have a different style and should have wider appeal than a fast food chain like McDonald's," Chiba explains. "The seating is more comfortable and the atmosphere upscale - more like a Starbucks concept. I think it is something that's increasingly attractive in Japan and across Asia, for a sophisticated but value conscious growing middle class."

While the rise of fast-casual versus fast food has been an evident growth story for years in the North American restaurant industry, its potential in other markets has not yet been fully realized. A branding shift away from the traditional style of fast food restaurants also benefits from evolving trends in demand for healthier meal choices. This has recently been highlighted in Japan by McDonald's, which posted its first annual operating loss since 2001 last year on the back of a string of food-safety concerns.

"Due to scandals involving McDonald's, the overall hamburger fast food market in Japan had been on downtrend until 2015. Although the McDonald's sales have been recovering in 2016, they have not recovered to the levels seen prior to the scandals," says Mariko Takemura, lead analyst at Euromonitor International. "Meanwhile, premium hamburger chains are entering Japan, such as Shake Shack, Carl's Jr and Bareburger, which get higher attention among the younger generations. Although they are still niche in the market, these premium chains are more likely to expand in Japan."

Cross-border support

Wendy's First Kitchen appears set to benefit from these trends with a unique combination of cross-border support. The Wendy's system includes about 6,500 restaurants in 29 countries, bringing an operating perspective that could prove invaluable for an aspiring chain contending with fierce competition from entrenched rivals.

Meanwhile, First Kitchen - which is often recognized as Japan's leading restaurant for burgers and pasta - offers a local perspective that international entrants typically lack. Indeed, Wendy's decision not to renew its local franchise agreement in 2009 was attributed not only to real estate costs but challenges related to making the right cultural impact.

With these synergies, the expansion will continue to focus on Tokyo in the near term, although the hybrid outlets will roll out nationwide in time and new stores beyond First Kitchen's current portfolio are also a part of the plan. Momentum in the meantime has been characterized by early signs of positive sentiment, with Longreach reporting that the first refurbished restaurants are connecting not only with consumers, but with staff as well.

"It's very early days but it is a really positive reception, and one interesting sign is that the employees at First Kitchen are really on board in terms of the conversions and the new brand," Chiba says. "They're so keen to be part of the new concept as soon as possible."

Pictured: Mark Chiba of The Longreach Group

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• Topics
• North Asia
• Consumer
• Buyouts
• Japan
• The Longreach Group Limited
• AVCJ Awards