The brand's omnichannel approach has welcomed a host of new loyal guests.
While the character of Cheesecake Factory’s business hasn’t changed, the nature of it has in many ways. The brand remains an experiential, high-touch, high-service concept with zero plans to slim a menu with more items than some companies have employees. “People want to get value through hospitality,” brand president David Gordon said Thursday, “not just through getting in and out of the restaurant as fast as they can.”
Don’t expect tablets in the dining room anytime soon, either. “That’s not the type of style that we want to be in high-end casual dining,” he added.
However, COVID realities have shaken up Cheesecake Factory’s traditional model. And it’s something that led executives to field a consumer research study to figure out who exactly is dining with the brand at this stage in the pandemic rebound.
What Cheesecake Factory found was it has attracted a “significant” number of new guests throughout COVID, Gordon said. Particularly via off-premises, which has become a $60,000 per week business for the company—nearly double the level seen at the same point in fiscal 2019. Pulled across a year, without dine-in, it’s a $3.12 million, annual per restaurant take, or more than Red Robin, Buffalo Wild Wings, and California Pizza Kitchen’s AUVs in 2019.
Notably, Cheesecake Factory saw new guests enter its “frequent cohort,” which “further reinforces our belief that a meaningful increase in off-premises sales could be a longer-term sales driver for the Cheesecake Factory as we emerge from the pandemic,” Gordon said.
That “frequent cohort” for Cheesecake Factory, or its core guests, have bumped their usage in general, up to 20 trips a year from 14 pre-COVID. Some of that can be tied to marketing and the chain’s message of reminding guests to return, which, naturally, is a unique marketing angle against a coronavirus backdrop. Yet a third of Cheesecake Factory’s “frequents” are new guests, and they’ve come back even when the brand turned the dial down in Q2, Gordon noted. The same was true in early Q3.
The reason, he believes, emerged from the same study. Even with prices up 3 percent to combat inflationary pressures (this could lift another 1.5–2 percent next year if commodities remain at current spot-pricing levels), Cheesecake Factory’s value proposition proved a powerful draw. And that’s a reflection of the brand’s breadth of menu and ability to present multiple tiers to appeal to everyone from value seekers to celebratory drop-ins. “We see that particularly with the frequent and the moderate cohorts,” Gordon said.
Another part dovetails into off-premises growth. Before COVID, would Cheesecake Factory have used the phrase “omnichannel” four times on an earnings call? Frequent guests today, CFO Matt Clark said, come to Cheesecake Factory for delivery, pickup, and on-premises. Again, the sheer number of menu options spreads the occasion set and value premise, as it did pre-COVID. Only the funnel is now wide open thanks to lockdowns sparking digital adoption at a scale that would have taken years barring a pandemic. Cheesecake Factory boasts single-digit pricing for delivery to be “as competitive as possible,” Clark says. Also, to court that new-guest, long-game journey—something that’s panned out as the brand managed to turn a strong portion of first-time consumers into loyal diners. One thing the brand has in its off-premises arsenal to serve as an introductory offer as well: arguably the restaurant world’s most recognizable and brand-related dessert line.
Grounded in the overall approach, Cheesecake Factory was no stranger to targeted off-premises marketing in recent quarters. Just last week, it rolled a “Treat or Treat” promotion to celebrate Halloween (free cheesecake slices with an online pickup or delivery order of $40 or more) and continues to execute brand-based messaging “to raise the profile of The Cheesecake Factory,” Gordon said. Social and digital channels being the main focus, and Gen Z being the top objective.
Recently, the company launched on TikTok and has generated more than 31 million views of owned content, with each video averaging north of a million hits. In September, it introduced augmented reality cheesecake theme filters on Snapchat, a campaign that reached more than 5 million unique users.
In Q4 quarter-to-date through November 2, Cheesecake Factory stores averaged weekly sales of roughly $213,000, which is 10.5 percent higher than 2019 marks. Q3 comps increased 41.1 percent against last year’s COVID depths (up 8.3 percent versus 2019). Off-premises represented just under 30 percent of total sales all quarter.
Clark was asked Thursday whether the brand feels dine-in guests are shifting toward off-premises in light of competitors struggling to stay open due to staffing or other issues. In other terms, if the strength is due in part to sales throttling in the restaurant.
On the fringe, Clark said, it’s difficult to figure. “But the thing that we've known most of the time is that the guests are choosing based on what their occasion is, not necessarily that they are going to go to the restaurant next to us, and that restaurant was closed when they got taken out,” he said. “They are going to-go, dine on-premises, and they're going to wait.” Cheesecake Factory’s Saturday wait times “are back up to what they were historically,” Clark added.
“So, I think it's not so much that,” he said. “I think it's just the occasion base that you're choosing just to go to.”
The brand has seen business pick up a bit early mid-week, which could be a result of chains closing Monday or Tuesday, although there’s no concrete data to back that up.
For Cheesecake Factory, Gordon said, the brand continues to encounter “some pockets of staffing challenges.” However, it hasn’t meaningfully stifled sales. In fact, although the market remains tight, some green shoots are surfacing, he said.
For instance, hourly staff turnover moderated throughout Q3 and the brand received solid application flow at a recent Huntsville, Alabama, opening, Gordon said. That store was fully staffed ahead of debut. “You’re talking over 200 staff members—it’s very promising—in a market that has 2 percent unemployment,” he said. “That gives us a bit of hope.”
Clark added Cheesecake Factory, from an applicant flow perspective, observed the same number of resumes as it did mid-summer. “That's a positive relative to a slower period that October is. And the wage rate inflation that I think peaked kind of mid-summer is sort of back to our norm anyway,” he said. “And so, I think you're just seeing, a little bit of moderation back to the mean, over the past two months.”
Clark said the brand is “within a percent or two” of 2019 staffing levels. Like Texas Roadhouse mentioned last week, though, it’s still under where the brand would like to be given sales levels are actually higher than they were. “That's why we still run a little bit higher and overtime,” Clark said. “And we're still running a little bit higher in recruiting costs because we need to continue to bring people in. It seems like we've been very stable. We've kept the staffing levels about the same as they were from the busy summer months. So, I think that's pretty positive in the fall here. But, I do think there needs to be probably some continuous moderate improvement in the overall environment for all restaurant operators.”
Cheesecake Factory spent about $800,000 more than anticipated in Q3 in sick pay, largely associated with the Delta variant surge. It also paid roughly $900,000 more than usual for training costs. Combined, margins took a hit of about 70 basis points.
“Our strategic decision to keep all of our managers in place throughout COVID has really helped us as sales pick back up. We didn't skip a beat operationally,” Gordon said.
CEO David Overton added getting new applicants through the hiring process quickly has been essential. “It’s one of the keys today to get somebody hired,” he said. “Just to make sure that you don’t leave them out there for a day or two.”
The brand anticipates Q4 cost of sales inflation to be about 3 percent higher than Q3, or 6 percent versus prior year. In addition to elevated training costs and wages, Cheesecake Factory projects to have to purchase even more ingredients in the elevated spot market to meet volume needs, which it sees surpassing contracted levels. That’s where the price hikes could manifest in 2020. “The labor market is also dynamic and inclusive of known minimum wage increases, we are currently anticipating inflation could be around the 5 percent level we are experiencing at our restaurants this year so far,” Clark added.
As Gordon put it simply,” It is not easy to run a great restaurant today.”
All said, though, Cheesecake Factory has been as consistent as any chain in the sector over the past six months, Clark pointed out.
“I think, execution is what always drives outperformance versus the market. And we certainly are doing that,” he said. “And I think that the operations teams have been amazing to weather the storm that everybody saw in the summertime. To keep our staffing levels at or about the same level so that we can manage the business is incredibly important. I mean, obviously, you hear about restaurants that are closing shifts or closing days or limiting service. And I think for the most part, we've been able to accommodate all of our guests. I think that that's a part of it. I think all of the things that we have done to drive the value and to be accessible in all of the channels, supports that as well.”
Cheesecake Factory opened four stores in Q3, including a North Italia and Flower Child in Gilbert, Arizona, and another North Italia in the Nashville, Tennessee, area of Franklin. Thanks to three more openings subsequent to the quarter’s close, the company met its development goal of opening 14 new units across the portfolio this year. Looking ahead, it’s aiming at 7 percent unit growth, or as many as 20 restaurants, including five Cheesecake Factorys, seven North Italias, four fast casual Flower Childs, and four other Fox Restaurant Concept locations. That should run the company $150 million in CapEx to support unit development.
North Italia, which the brand bought along with FRC in October 2019, turned in Q3 same-store sales growth of 8 percent over 2019.