FDD Talk: The Arby’s Franchise Opportunity (Financial Performance Analysis, Estimated Costs, and Other Important Stuff You Need to Know)

In this FDD Talk post, you’ll learn the following:

• Section I – Background information on the Arby’s franchise opportunity, including relevant news updates

• Section II – Estimated initial investment for an Arby’s franchise, based on Item 7 of the company’s 2015 FDD

• Section III – Presentation and analysis of Arby’s financial performance representations, based on Item 19 of the company’s 2015 FDD, including information on the:

• 2014 average monthly sales for the 23 Arby’s Restaurants opened after January 1, 2013, which is the year when Arby’s new management team was put in place and the company refocused its efforts on new licensed restaurant development, and operated for at least 6 full months as of December 28, 2014 (the “New Restaurants”)

• 2014 average gross sales for the 3,132 Arby’s Restaurants that operated continuously for the full year from December 30, 2013 until December 28, 2014 (the “Mature Restaurants”)

• 2014 average gross sales, cost of sales, wages, payroll expenses, controllable expenses, advertising, property taxes and insurance, and EBITDAR for the 922 affiliate-owned Arby’s Restaurants in the United States that operated continuously throughout the last 4 fiscal years (the “Covered Restaurants”)

Section I – Background Information

It was 1964 when Leroy and Forrest Raffel noticed that quick-serve and fast-casual eateries were almost all exclusively focused on hamburgers. What about people who want quick service but also wanted something a little different?

With that in mind, the pair of brothers opened their first sandwich shop in Boardman, Ohio to serve up freshly-sliced hot roast beef sandwiches just as fast as any burger joint, and started franchising the concept in 1965. The name Arby’s, by the way, is a play on R. B. for Raffel Brothers.

By 1971, the chain had settled upon its classic roast beef sandwich formula that it continues to use to this day – marinated, slow-roasted beef that makes for a mouth-watering sandwich experience. 1974 saw a newly designed hat logo, although the original ten-gallon hat can still be found at some locations. Adding a major twist to the classic roast beef sandwich, 1978 saw the creation of Arby’s Beef ‘n Cheddar, which added in a warm Cheddar cheese sauce, red onion, and a toasted onion roll.

The chain reached 1,000 locations in 1980, and opened its first international location in Japan in 1981. It passed the 3,000-locations milestone in 1996. The chain merged with Wendy’s in 2008, although the two split apart from each other in 2011. Today the chain has more than 3,400 locations around the world.

Here’s how Arby’s slices things up in the competitive sandwich segment:

Menu Innovations

Back in 1964, the menu consisted of roast beef sandwiches, potato chips, and iced tea. Needless to say, many menu additions have occurred since then, including lots of great sides, such as its famous curly fries, and milkshakes.

In 2004, the chain took its Market Fresh Sandwiches nationwide, and rolled out an alternative to chicken nuggets, opting instead for hand-cut, seasoned, breaded, and perfectly fried breast meat. 2005 saw the addition of corned beef to the menu with its classic Reuben sandwich. Angus Steak was added to the menu for the Philly and Three Cheese and Bacon sandwiches. Roasted turkey came on board in 2012, and Smokehouse Brisket in 2013.

Giving Back

Sure, every chain has its pet cause or foundation, and Arby’s is no exception. The Arby’s Foundation was established in 1986 and over the course of its 30-year history has donated more than $76 million to various charitable causes.

In 2011, the foundation made ending childhood hunger its primary focus, and since then has contributed more than $21 million to hunger relief groups in all 50 states, funded in part by purchases made from the Kids Meals menu.

Pioneering Healthy Options

In the early 1990s, Arby’s was one of the first to roll out menu options that included sandwiches and other items with less than 300 calories. It was also the first fast-food chain to ban smoking in all its locations.

Its Turkey and Cheese Kids Meal meets the National Restaurant Association’s Kids LiveWell program requirements, with a particular focus on increasing consumption of fruit and vegetables, lean protein, whole grains, and low-fat dairy, and limiting unhealthy fats, sugars, and sodium.

New Leadership

Paul Brown joined as CEO in 2013 to revitalize what was feeling like a stale brand. The results have been good, with a 5.7% increase in sales in 2014 when competitors only managed an overall increase of 0.8%, and same-store sales growth of 7.6% in the second quarter of 2015, whereas the industry average was only a 2.3% increase. That’s impressive.

Section II – Estimated Costs

• Please click here for detailed estimates of Arby’s franchise costs, based on Item 7 of the company’s 2015 FDD (updated).

Section III – Financial Performance Representations (Item 19, 2015 FDD) and Analysis