S Casual Dining Caution: Is "Labor Lite" Workable?

At last week’s ICR Exchange Conference, investors and analysts heard from about 30 publicly traded restaurants and another 10 non-public companies. One of the most interesting operational stories heard was from Red Robin (RRGB), which provided more detail on their plan to rework their store service model. Specifically, the Red Robin chief financial officer noted they eliminated the store expeditor role in Q4 2017, and they were eliminating the busser role currently. The reason cited was to offset minimum wage changes, the latest round of which hit January 1, 2018. This was somewhat of an accentuation from November, where the company took a “let’s wait and see” attitude on labor and service tests underway.

More broadly, Red Robin’s goal as outlined in its last two earnings call and its 2017 Investor Day presentation, was to transition the service model to more “labor lite”[1]. In its 2017 Investor Day presentation, Red Robin noted a “near perfect” correlation between casual dining average ticket increases and traffic declines, and that they couldn’t take price increases. Red Robin seems to be very worried about its average ticket, and does not see its future in product mix additions.

Red Robin Q3 Earnings call, Nov. 6 2017, Guy J. Constant - Red Robin Gourmet Burgers, Inc.

Greg, let me handle a couple of those questions. So first of all, we think affordability is an issue in casual dining. The efforts that have been going on in the space for some time now to drive PPA higher has simply resulted in a corresponding decline in traffic, and so we've avoided doing that for some time now. And as a result, given the traction that we get and the positive perception of value that we get at the Tavern menu, I think we're okay with seeing that mix in the Tavern menu expand, where perhaps traditional casual dining strategy would be to offer those kinds of value components, but try to keep the mix down. We're not really trying to do that right now, and we think it's a big part of the reason why we're seeing such outperformance in traffic as we move forward.

Implications of Labor Lite in Casual Dining

As to the operational staffing role changes, if there isn’t an expeditor or a busser scheduled that means the server primarily must be doing that work going forward. Interestingly, Red Robin didn’t announce they were doubling the number of servers and contracting table coverage zones. Instead, the server, who has the responsibility of being the primary guest service and revenue interface to the guest, gets double or triple duty. Of course, at times management can step into expo, but loss of their flexibility is then assured.

Everyone reading this sees the potential problem. Red Robin got many labor/service-related questions from the normally pro-cost-reduction sell side analyst group in the November 2017 call, and there may be even more now that the more role changes were reported. Aside from real world experience, there are boatloads of academic studies that show keeping the server focused on the guest is critical. With the average check premium that casual dining guests pay versus other ways to get something to eat, the potential of service downturns exist.

A look at some numbers is illustrative:

Red Robin Corporate Key Operating Statistics[2]

Year

2011

2012

2013

2014

2015

2016

SSS

-1.0%

-.6%

-.4%

-.5%

-.4%

-3.4%

Labor %

33.8%

33.6%

33.5%

33.0%

32.6%

34.3%

Average Ticket, $

$11.88

$11.73

$12.17

$12.63

$12.99

$13.05

 

So, Red Robin’s average ticket (per person average) is less than its casual dining peers--$4 to $5 dollars or more lower. Part of that is due to very low alcohol sales. With flat to negative SSS, labor cost increases simply aren’t leveraged because the ticket is lower. And yes, then, with wage rate inflation and a lower average ticket base, labor cost percentage at Red Robin is higher than what we would hope.

Brand decisions decades earlier have a way of showing up and serve to constrain companies at the worst possible time. For example, at some earlier time Red Robin made the decision to de-emphasize alcohol and bar sales. It has a very low alcohol sales mix, despite having a bar; they would love to get to 10% sales mix, which itself is not a good number. They are well south of that, and no mention of bar initiatives showed in the investor day presentation, unlike in prior years.

A Better Opportunity?

One other interesting fact seen that the Red Robin off-premise sales average ticket is less than the dine-in average ticket. That generally varies much worse from its casual dining peers. How to build ticket size?

Red Robin Earnings Call, Nov. 6 2017,   Guy J. Constant - Red Robin Gourmet Burgers, Inc.

In terms of off-premise mix and how it impacts overall, the average check for off-premise is lower, which is almost completely due to the lower beverage incidence that you see with off-premise. So actually, overall it results in a lower average ticket than you might see for dine-in traffic

There are good people at Red Robin, and everyone knows the struggle that casual dining has become. But I have to say I would have looked anywhere else for cost savings first—such as the $100 million in projected G&A run rate[3]. Darden (DRI) CEO Gene Lee addressed this at the ICR Conference, by noting “there is no service model….there is no piece of equipment” that will dramatically revolutionize the casual dining service model. What can be done is to have great, distinctive food and deliver it in a wonderful experience, go after profitable new sales platforms, and take advantage of system efficiencies. 

 


[1]  My words and characterization.

[2]  Piper Jaffray 2017 Cookbook, Actual values may vary minutely due to calendarization. 

[3]  $100 million 2017 guidance verified on Q3 earnings call, November 6 2017. The press reported on Red Robin G&A cuts on January 11, 2018.

Disclosure: The author has no positions in any stocks mentioned.

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