Wendy's stock tumbled Wednesday after it announced plans to downsize its growth projections by about 500 locations with the struggling ghost-kitchen operator Reef Technology.
In August 2021, Wendy's announced plans to open 700 delivery-only locations with the SoftBank-backed startup Reef. But on Wednesday, the chain revised that number to about 100 to 150 sites by the end of 2025.
Reef operates food trailers, or "kitchen vessels," stationed in parking lots across the US. At its peak last year, the fast-growing startup operated more than 330 food trailers globally through licensing agreements with small and large restaurant brands like Nathan's Famous and Burger King. Wendy's was one of its biggest partners.
But Wendy's company officials said sales in the US were underperforming. CEO Todd Penegor said the chain was cutting growth after a "big change" in the direction of how Reef operated, as well as "challenges with opening Wendy's delivery kitchens in certain locations" because of permitting issues.
Reef wants to "shift operating multiple brands from its locations," Penegor said, adding: "We thought it prudent to call down that number. We did not want multiple brands out of our kitchens. We want to dedicate it to Wendy's, so we'll be slow and steady."
The chain said most of the delivery-only kitchens would be in Canada and the UK, where sales met expectations and outperformed the US.
In the UK and Canada, the average unit volume for Reef-operated Wendy's locations is "between $0.5 million and $1 million, so very consistent with the performance ranges that we have previously communicated," Gunther Plosch, the chief financial officer of Wendy's, said during the call, adding: "In the US, we are not yet performing."
Plosch said: "We still think there's a great urban opportunity to continue to provide access to our brand with some kind of concept in those markets."
Mark Kalinowski, an analyst, called the rollback "a substantial step down" from earlier projections. He attributed a less than 3% drop in the company's stock midday Wednesday to the "significant scaling back of unit-opening plans through 2025 with Reef."
In a statement sent to Insider, Reef downplayed Wendy's announcement.
"Wendy's has been an early adopter of the Reef model and one of the most forward-thinking of our partners," the company said. "We are excited to continue innovating together with a focus on doubling down internationally where we've seen very strong economics in our current partnership.
"As Reef continues to focus on profitable growth, we are committed to increasing productivity and efficiency by delivering multiple brands from every kitchen in our ecosystem — when deploying our multi-brand model, we have already seen the average sales per kitchen double over the last year."
Over the past year, Reef has been plagued by multiple setbacks in its fledgling ghost-kitchen operations.
It has been laying off workers, restructuring divisions, and delaying employee bonuses. It has also been accused by vendors of not paying invoices. In May, the real-estate giant JLL sued Reef over allegations that the startup failed to pay invoices totaling $3.5 million. The two companies reached a settlement a month later.
Public-health officials have shut down some Reef trailers for operating without permits or violating local food-safety rules.
In early June, Reef ousted its president, Michael Beacham, who spearheaded ghost-kitchen deals with high-profile restaurant chains like Wendy's.
Losing hundreds of prospective Wendy's trailers comes as Reef faces stiff competition in the industry.
Ghost kitchens are exploding across the US, with many offering different business models from Reef's.
Longtime rivals are also earning the attention of nontraditional investors. Last month, The Southern California-based Kitchen United announced a $100 million Series C fundraise led by new backers such as Kroger, Circle K, the mall operator Simon Property Group, and Burger King's owner, Restaurant Brands International.
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