Dive Brief:
- Wendy’s franchisee Meritage Hospitality Group filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Western District of Michigan on Thursday, according to a press release.
- Meritage operates 314 Wendy’s, roughly 5% of the chain’s U.S. system, as well as one Bojangles and five independently branded concepts across 15 states. During the Chapter 11 process, Meritage said it plans to maintain restaurant-level operations and pay its roughly 9,000 team members’ wages and benefits without disruption.
- The filing came after Meritage conducted a “candid assessment” of its financial position, including challenges impacting the Wendy’s system over the past few years. Wendy’s has faced double-digit same-store sales declines over the past few quarters and is in the midst of plotting a brand turnaround under new CEO Robert Wright.
Dive Insight:
Meritage is one of the largest Wendy’s franchisees to declare bankruptcy since NPC International did so in 2020, which resulted in a sale of its 393 Wendy’s units and its over 900 Pizza Hut locations. The macroeconomic dynamics are much different compared to NPC, which filed for bankruptcy in the middle of the COVID-19 pandemic. In the post-pandemic period, many restaurant consumers have pulled back on spending because of ongoing inflation.
Beef inflation, deep discounting under former leadership and marketing misses led to franchise store-level margins that hit a 30-year low at Meritage, per a May CEO report. Store-level EBITDA was down by 48%.
These disappointing financials led to Meritage asking for forbearance earlier this year, and during the second quarter, it resumed full interest payments. The company cut over $7 million from its general and administrative and operational expenses related to internal restructuring.
Meritage closed 60 underperforming stores that helped strengthen its system and exited breakfast or altered that daypart in about 120 underperforming locations — a move Wendy’s has permitted its franchisees to make despite the comps hit. This move led to an immediate EBITDA margin benefit of over $11 million, per the CEO presentation.
Meritage also rolled out a catering test with EzCater at 150 restaurants in March followed by a full rollout in May. Average checks have been about $500 with a minimum order for 10 people.
“After more than a year of working constructively with its lenders and its franchisor toward a solution, the Company’s Board of Directors and management team determined that a voluntary, court-supervised restructuring is the most effective and proactive path to strengthen Meritage’s finances, address these headwinds directly, and protect the long-term interests of its stakeholders, team members, guests, and communities,” the company said in a press release.
This year has seen an uptick in franchisee bankruptcies as operators struggle with the highly competitive environment and pullback among consumers. Franchisees from Hardee’s, Carl’s Jr. and Popeyes have filed for bankruptcy protection this year.
