From the hearth: Fort Lauderdale-based Arby's looks to join the fast-food big leagues—by eschewing burgers - Retail

South Florida CEO, Sept, 2003 by Rochelle Broder-Singer

For Michael Howe, president and CEO of restaurant chain Arby's Inc., the question is how to get customers to eat "adult fast food." It's the same question for everyone at the Fort Lauderdale headquarters of the roast beef sandwich Mecca, which has long played second fiddle to the dominant fast-food chains.

Arby's has positioned itself as an alternative to the sameness of burgers, right from its start nearly 40 years ago. Now, however, its test kitchens in Fort Lauderdale are turning things up a notch. How else to explain the half-dozen sandwiches they are now experimenting with, like grilled chicken breast with smoked mozzarella cheese, roasted red pepper and feta cheese sauce on focaccia bread? Seems better suited to a Greek taverna than to a fast-food roast beef chain.

The new sandwiches are the next phase in a journey that began in 1999, when Arby's started studying consumer fastfood preferences, and continued by Howe in 2001, his first year as CEO. "Baby boomers were saying ... 'I want something that tastes better. I want more intense flavors,'" says Howe. That year, the company introduced its "Market Fresh" line of deli sandwiches, on thicklycut whole wheat breads, with strongly flavored sauces.

The result was a same-store sales increase of 2.1 percent in 2001 and another 2.2 percent in 2002. While that may not seem huge, it flies in the face of last year's shrinking sales trends at both McDonald's and Burger King. What's more, Arby's actually saw a 4 percent increase in same-store sales for the first three quarters of 2002, before bad weather in its top markets slowed the pace.

The new sandwich additions will be even less mainstream, says Howe. "We don't want them to be so widely accepted that they're boring," he says.

The real challenge is to get customers into stores to taste those new sandwiches, to change the association in their minds that Arby's is just about roast beef, and to take advantage of nationwide trends away from traditional fast food.

Enter Oven Mitt. The cartoon character, the star of an $85 million advertising campaign launched by the brand's franchisee-owned marketing group in February, was intended to remind consumers that Arby's meats are oven-roasted. "We found that oven roasting was a huge deal, because oven roasting has an emotional kind of connection for consumers--to the oven, to the holidays," Howe says.

But the campaign was also more than that, created in response to consumer focus groups which revealed that Arby's brand had no sense of personality to it--one reason actor Tom Arnold was chosen to provide Oven Mitt's spunky voice. With the campaign only six months old, Howe says it's too early to judge its affect on store sales, but it has upped un-aided brand awareness some 40 percent, and the company's Web site has been flooded with requests for Oven Mitt memorabilia. It's a far cry from the chain's previous campaign, which used "Appetite Man" (dubbed by now-deceased soul-singer Barry White) to highlight menu items.

Next on Howe's list of priorities is attracting large operators into the franchisee system. That is one reason why Triarc Companies, Arby's New York-based parent, purchased the second-largest Arby's franchisee late last year. Triarc acquired 239-store Sybra Inc. by paying $8.3 million to the creditors of its bankrupt holding company, ICH Corp., and invested another $14.2 million into the firm. Howe, who also runs Sybra for Triarc (Arby's has no restaurants that it considers corporate stores) is already in negotiations with a couple of operators who want to buy between seven and 30 stores; Sybra, in turn, will offer an exit strategy for existing franchisees. The Sybra stores also give Howe an immediate outlet for testing new products, new equipment and new marketing strategies, and allows him to avoid asking other franchisees to risk their money and sales levels.

Still, Howe has a long road ahead if he wants to meet his self-proclaimed goal of taking last year's system-wide income of $2.76 billion to $4 billion. Compared to companies such as McDonald's or Burger King, Arby's is still small: it has 3,200 units, compared to 13,596 and 7,978, respectively, at McDonald's and Burger King.

Small size doesn't have Howe worried, though. Among other strategies, he wants to raise the average sales volumes at existing stores from their current level of around $900,000 per year to $1.2 million per year. And that will come about, ultimately, through the same marketing philosophy and customer response that allowed the original Arby's to charge 65 cents for a roast beef sandwich while McDonald's was charging 10 cents for a hamburger--the perception of quality. To maintain that perception, Howe will have to address one possible threat: the many older stores in the chain. "We have a number of facilities that are aged, we have an asset base that needs to be refreshed," he says. "To make that profitable for the franchisees, I haven't figured out the exact solution on that."

For Howe, though, facility refurbishment is another challenge for a brand that he believes in deeply. "This is a fun business," he says, as he reclines in a rocking chair at his office conference table. "The good news is, we've only got 3,200 restaurants, so there is an opportunity for growth. The bad news is, we've only got 3,200 restaurants, so we're missing a lot of volume."