Franchises Try New Fast-Food Combos
By Jeffrey A. Tannenbaum

10/16/1996 The Wall Street Journal Page B1
(Copyright (c) 1996, Dow Jones & Company, Inc.)

When Jonathan Huth , a 30-year-old marketing manager for a Toronto bank, recently strolled into a Cow's Inc. ice-cream store on Prince Edward Island, he hesitated before ordering.

The problem: He was put off by the aroma of pepperoni and onions wafting from a Subway sandwich shop that shares space with Cow's.

Welcome to the eclectic world of what the franchising industry calls "dual branding." It's a hot concept these days with fast-food restaurants: When two -- and sometimes even three -- restaurant brands share the same quarters, operators say they can cut costs and build traffic. And by satisfying the myriad tastes of picky eaters, chains are trying to mitigate the so-called veto vote, by which one holdout in a group can kill plans to visit a restaurant.

As competition in the industry intensifies and as many brands mature, the strategy seems to be working more often than not. In rural areas, especially, a single chain brand often doesn't draw enough traffic to justify investment in an outlet. And in many urban areas, a switch to takeout and home-delivery has reduced eat-in business at many outlets -- leaving them with extra space for another type of food.

Most consumers seem to like the variety. Cow's owner Scott Linkletter says he hasn't heard any complaints about offering ice cream cones beside sandwiches. At Subway, overseen by Doctor's Associates Inc., development official John P. Skerritt says "ice cream is a complementary product that works well with our brand."

CKE Restaurants Inc., Anaheim, Calif., which oversees the Carl's Jr. hamburger chain, began offering G.B. Foods Corp.'s Green Burrito brand Mexican food last year in about 50 of its outlets. Since then, sales at these locations have surged an average of 25%. Besides the extra Mexican-food sales, they also sell more Carl's Jr. food than before, CKE reports.

The idea makes sense to Kim Osness, a 36-year-old secretary at Disneyland. She ate at Carl's Jr. recently with a family that included a 13-year-old girl who likes cheeseburgers and a 15-year-old boy who prefers Mexican food. With its combined burger-and-burrito menu, she says, there's "twice the opportunity to make everybody happy."

Doubling up on brands "is working even better than we thought it would," says Rory J. Murphy, executive vice president of CKE. At least 150 more Carl's Jr. units will add the Green Burrito menu within four years.

"All this is a natural evolution of the franchise concept," says David J. Kaufmann, a New York franchising lawyer.

Where real-estate costs are steep, doubling up offers efficiencies. Sometimes, two food chains share the same premises but erect separate signs and operate autonomously. In other cases, one restaurant company oversees two or more brands at the same site, sometimes with a single work crew.

The details of each arrangement vary, but when one chain plays host to another's brand, it pays royalties on the portion of sales that the added brand contributes. Most of the combinations are initiated by franchise headquarters.

The strategy also helps solve a perennial problem in the fast-food business: filling in gaps to create a round-the-clock menu. In Canada, Wendy's International Inc. now operates 40 hamburger-and-doughnut outlets. The combination resulted from the Dublin, Ohio, hamburger franchiser's purchase last year of TDL Group Ltd., the Canadian overseer of a chain of doughnut shops named Tim Hortons. The Hortons menu draws many customers early in the morning, when the Wendy's menu isn't even offered. "The concepts work synergistically," says Gordon F. Teter, chief executive officer of Wendy's.

By each occupying half the space, Wendy's and Hortons save about 25% on building and site costs, or some $400,000 at each equally shared site, Wendy's says. (At five other locations, Hortons has a small kiosk inside a Wendy's outlet.)

PepsiCo Inc., which owns both KFC Corp. and Taco Bell Corp., also is seeking synergies. Some 230 KFC fried-chicken outlets have added Taco Bell Mexican food during the last three years. KFC says one outlet in Kansas City, Mo., and another near San Diego even offer a third PepsiCo brand, Pizza Hut Inc.'s pizza.

Still, combining two or three brands in a single store can be tricky. For example, three CKE outlets in Southern California combine the Carl's Jr. menu with that of Long John Silver's Restaurants Inc., a fish chain based in Lexington, Ky. CKE says these have been notably less successful than the Carl's Jr. outlets that have linked with Green Burrito -- possibly because the Long John Silver's name wasn't wellknown in Southern California at the outset.

Nor is doubling up on brands a panacea for ailing outlets, says Terry Davenport, a senior vice president at the restaurant group of Triarc Cos., the Fort Lauderdale, Fla., parent of Arby's Inc. It takes top work crews to juggle two concepts, he says.

While fast-food chains have long expanded their menus to build sales, some believe a distinctive new brand enhances consumer acceptance. The 3,000-unit Arby's chain developed a new brand -- p.t. Noodles -- when it decided to add a pasta menu to some of its roast-beef outlets. In several other units, it licenses a Mexican-food menu from restaurant franchiser ZuZu Inc. in Dallas and may add a third brand, T. J. Cinnamons baked goods, which Triarc recently acquired.

Says Mr. Davenport: "I look out three or five years and hope that the majority of Arby's units are multiple-branded by then."