Is Selling Pizza the Answer for Red Robin?

Red Robin’s off-premises business, including catering, jumped 26.9 percent in Q4. It mixed 13.9 percent of the company’s total food and beverage sales—a pretty consistent theme over the past two years (the segment boosted 37.3 percent, year-over-year, in Q3).

For all of fiscal 2018, off-premises hiked 31.5 percent versus 2017 and stood at 9.9 percent of sales. This past year, it rose another 28 percent to 12.4 percent, or $163 million. In 2016, off-premises represented just 5.7 percent of Red Robin’s business.

Delivery, thanks to three major aggregators, currently accounts for more than 5 percent of sales.

Red Robin also plans to launch last-mile delivery in early 2020 where guests can order directly from the site, with delivery outsourced. The move promises favorable economics versus third-party, as well as retention of guest data and customers’ ability to use Red Robin’s loyalty program.

So, while some parts of the burger chain’s business have struggled recently—dine-in sales declined 2 percent in Q3—its away-from restaurant category has not.

Donatos instantly adds a highly incremental delivery channel to Red Robin. Jason Rusk, the chain’s VP of business transformation, previously told Columbus Business First Red Robin wanted to encourage additional occasions with the move. And it looked at concepts with delivery experience and a history rooted in quality. Donatos, which recently signed three franchise deals in Florida, was founded in 1963 when Ohio State sophomore Jim Grote bought a small pizza shop in Columbus, Ohio, from a young seminarian for $1,300.

Donatos has worked under a national umbrella as well. It was acquired by McDonald’s Corporation in 1999 before being sold back to Grote and his daughter, Jane Abell, in 2003.

So far, Donatos has kept its footprint tight to its Midwest base to alleviate supply chain concerns.

Red Robin said Donatos aligns with its customer base—another critical element in play. It fulfills a guest need and is brand appropriate, the company said. Red Robin’s tagline, “Gourmet Burgers and Brews,” isn’t a branding canyon away from pizza

In tests, the brand said, Donatos improved overall menu appeal and value perception, and aided incremental check and visits among current users. In other terms, it’s helping dine-in business at Red Robin as well as delivery.

There is some cost involved, however. Naturally, even though pizza and burgers are food cousins, Red Robin’s base isn’t accustomed to it. The frequency of people walking in and ordering something they didn’t plan on but were surprised to—pizza—isn’t a strategy that supports itself long-term.

Red Robin said Donatos restaurants would require $30,000 in incremental marketing spend per unit in the first year. Also, a capital cost to the company of $145,000 and pre-opening expense of $20,000 per restaurant.

Red Robin added second year and beyond, there will be about $45,000 yearly, per restaurant incremental gross margin.

It’s clearly an investment Red Robin feels is worth fronting, even listing Donatos as one of its six comeback anchors in 2020. A new service model, menu rationalization, investment in technology, off-premises growth, and portfolio optimization were the others.

From the other side, the deal opens Donatos to a national audience and could perhaps ignite growth.

Red Robin’s evolution with turnover

When 2019 began, Red Robin said it was short 100-plus managers. The brand admitted on several occasions that labor missteps throughout 2018 led to serious issues. The chain cut back positions to save costs, putting table-clearing duties on servers’ plates and asking hosts to handle carryout orders—a recipe for walkway disaster when coupled with off-premises growth.

The company said in Q3, however, it was essentially fully staffed the manager level. Red Robin elaborated at ICR, putting the figure at 98 percent. And you can see below how these trends are moving in the right direction.

And, not surprisingly, Red Robin witnessed guest satisfaction growth parallel to improving turnover rates.

The brand said GM tenure and employee retention drove compelling results.

Looking at traffic, Red Robin’s top 33 percent of performing restaurants reported manager turnover of 21 percent, hourly turnover of 99 percent, with in-restaurant GMs working three years and two months on the job. Sales were also up 7.2 percent. Traffic 2.4 percent.

Here’s how that measures up:

Red Robin’s middle (34 percent): Manager turnover: 24 percent. Hourly turnover: 109 percent. GM time in restaurant: Three years, one month. Sales: Up 1.4 percent. Traffic: Down 3.3 percent.

Red Robin’s bottom (33 percent): Manger turnover: 33 percent. Hourly turnover: 132 percent. GM time in restaurant: Two years, one month. Sales: negative 5.2 percent. Traffic: negative 9.8 percent.

While the notion that retention equals better-run restaurants isn’t a new one, this is a vivid, from-the-floor example.

Additionally, Red Robin’s average wait time in Q4 was 1:58, a decrease of 44 seconds compared to the year-ago period. Guest walk-aways were down 1.5 percent, year-over-year.

For ticket times, Red Robin averaged 11:51 last quarter, 48 seconds better than Q4 2018.

The soul of Red Robin

Despite Red Robin’s lagging trends across 2018 and much of 2019, the company said, through customer surveys, there was reason for optimism. Guests commented they would reengage with Red Robin if the brand drift/service model issues were fixed. And this was something Red Robin had intimate control over—454 of its restaurants (80 percent) are company-owned.

Additionally, the affinity and equity are clearly there for the 1969-founded chain. Two signs say so: There are nine million members in Red Robin’s loyalty program, and about 66 percent of the chain’s sales are its most recognizable item—burgers. Meaning a directional shift wasn’t in the cards necessarily. Red Robin’s comeback is more of a return-to-the-core initiative than a reinvention, which is often an easier and quicker place to start.

One note on the loyalty program. Red Robin said, if just 3 percent of all registered members visit one more time per year, it would generate roughly $4 million in additional revenue this year. Red Robin’s new digital platform, targeted at improving guest ordering experience and order completion rates, would tack on $8 million more, if mobile web order conversions reach desktop levels.

Red Robin also wedges into an interesting value spot. Fast casual averages $12.88 per-person checks while casual-dining is north of $15. Red Robin reports $13.45 (per person, including tip).

But even with all of these platforms to build on, there’s no question Red Robin was getting in its own way from an operations perspective. Mixed messaging was part of that, too.

To crystalized its purpose, Red Robin said, it has targeted “memorable moments of connection.” That splits four ways: Flavor of Americana through gourmet burgers; Family friendly and playful atmosphere; Shareable foods (bottomless steak fries); and Engaged service that “offers the gift of time.”

Red Robin has a few things going on. It introduced headsets in Q2 2019, sticky media in Q3, server point-of-sale handhelds in Q4, and continues a menu rationalization initiative. Red Robin didn’t provide much information regarding a new service model it said will begin to roll nationwide in Q2 2020. It’s currently beta testing at 20 stores. A fresh prototype is in the works as well.

Returning to the messaging angle, though, Red Robin’s “All the Fulls” creative campaign is part of a refreshed omni-channel strategy that leans on targeted marketing. And it’s all about emotional connection. The company said its 30-second sport was one of the top-five strongest performers of Red Robin ads ever tested. Social engagement doubled, year-over-year. Consequently, the chain said it plans to allocate more resources to social and digital channels.

At the end of the day, Red Robin’s goal is to separate by being brand, not price driven. It’s not an overnight fix, but it’s one the chain is clearly—and actively—chasing.