Red Robin CEO: Labor Fight Will be 'Put to Bed' Quickly

The brand said its situation isn't as 'dire' as other brands.

May 27, 2021 Ben Coley

Operators across the quick-service and full-service industry have repeatedly lamented the ongoing labor challenge.

The shortage appears to be affecting almost everyone in a significant way—"almost" being the operative word. Red Robin CEO Paul Murphy said Tuesday the situation is “not as dire as maybe you’re hearing from some other brands in any form or fashion.” For Red Robin, restaurant management is staffed at 99 percent, and team member turnover rates are approaching “industry best-in-class levels,” Murphy noted. On average, the company is looking to add about six employees per store.

The 543-unit chain adjusted its “Ready, Set, Reopen” playbook to account for staffing headwinds. Measures include technology enhancements to streamline the application process, and a further modularized kitchen training program to assess new employees. Over the course of a few weeks, these new workers are certified in additional positions—one back-of-the-house station at a time. Additionally, Red Robin recently implemented a wage progression program to improve retention in the first six months of employment. As part of the program, employees see an automatic wage increase in the first two years.

Because of these initiatives, Murphy believes Red Robin is on track to be fully staffed by summer.

“I feel very confident that in short order, we're going to get the staffing put to bed, get it stabilized,” Murphy said during Red Robin’s Q1 earnings call. “The things that we've done, the technology enhancements to really get the onboarding on quicker, getting people trained and productive inside of two or three days, and then the wage progression are all things that we're seeing already beginning to have an impact on our ability to staff the restaurants.”

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The optimistic view comes amid a choppy sales environment. Red Robin saw same-store sales dip 8.5 percent in March compared to 2019, and experienced flat sales in April. But in May, comps dropped 3.3 percent. In terms of average weekly sales per restaurant, it was $53,240 in March, $55,600 in April, and $52,731 in May.

Murphy attributed the slip in May partly to staffing issues, but also an uptick in COVID restrictions. Still though, 55 percent of company-run stores had positive comps compared to 2019 by the end of Q1. And as of now, all company-owned restaurants have reopened indoor dining with varying levels of capacity—something Red Robin hasn’t had since the onset of the pandemic. Average capacity is around 65 percent.

That’s why the CEO expects sales to slope upward heading into June, and there’s good reason to believe that will happen as more jurisdictions lift restrictions. In the final four weeks of Q1, 85 comp stores that didn’t have any capacity or social distancing requirements grew same-store sales 5.2 percent versus 2019. These stores also realized restaurant margins of 21.1 percent, or a 1.5 percent bump.

California and Washington—Red Robin’s largest markets that are operating at 50 percent capacity or less—generated positive restaurant revenue compared to 2019 in the four weeks ending May 16.

“Our West Coast markets are performing incredibly strong,” said CFO Lynn Schweinfurth. “And as we're able to increase capacities in California, as we're staffing up, also in Washington, some of the other states, there is really going to be an upward trajectory in our sales as we move forward. And while we're focused on the staffing challenges currently, it's a priority, but we do believe they're temporary in nature.”

Donatos Pizza

Restaurants with Donatos Pizza outperform other locations by roughly 300 basis points.

Even as dine-in sales return, off-premises remains highly incremental. Average weekly off-premises sales per restaurant are more than double pre-pandemic sales levels at company-run restaurants that are operating at 100 percent. At the end of Q1, the channel mixed 29.9 percent at those particular locations. Much of that digital strength comes from the loyalty program. It’s not only brought back lapsed guests, but increased frequency of the most loyal guests by more than 10 percent in Q1 compared to pre-pandemic. There are 9.7 million members, an increase of 300,000 since Q4 2020.

Adding even more incrementality are three new virtual brands that were launched back in March—The Wing Dept., Fresh Set, and Chicken Sammies. The emerging delivery-only concepts feature a mix of Red Robin menu items for which the brand is typically not known for, as well as new products that are variations on core items. Each virtual concept is served through DoorDash, as well as additional national and regional partners. Early results show 70 percent of customers have never ordered online at Red Robin before.

“Something that we find fairly interesting, at least in our data, is that dine-in guests are actually fairly loyal to dine-in,” Murphy said. “They don't really cross-pollinate too much to off-premise. However, off-premise guests utilize both dine-in and off-premise. And what we have seen is a higher visitation frequency out of our off-premise guests. So that, at least from my perspective, it indicates that the off-premise occasion is an incremental occasion to the dine-in visit. And as capacity in the dine-in arena continues to accelerate for Red Robin, we think it just has a multiplier effect for us.”

Another ongoing growth driver is the rollout of Donatos Pizza, which helps restaurants outperform their peers by roughly 300 basis points. In Q4 2020, Red Robin added Donatos to 31 stores in the Pacific Northwest, back when restaurants reverted to off-premises only. Because of the circumstances, the chain pulled back related marketing plans, but that’s expected to resume in Q2, Murphy said. Red Robin is still on pace to bring Donatos to 120 stores in 2021, with 40 coming in Q2 and 80 coming across Q3 and Q4.

If successful, roughly 200 Red Robin locations will have Donatos by the end of the year. The end goal is to place Donatos in 400 company-run units by 2023, which would translate to more than $60 million in annual pizza sales and more than $25 million in profitability.

“We believe that our brand promise to create memorable moments connecting family, friends, and fun positions us well to be a leading choice as guests return to restaurants,” Murphy said. “The combination of pent-up demand and the meaningful contraction of the number of restaurants in the industry over the past year provides us with an opportunity to increase our market share and bring guests back to Red Robin with increased frequency.”

Total Q1 revenue was $326.3 million, or a 20.4 percent decline from 2019. The chain swung a net loss of $8.7 million compared to net income of $600,000 two years ago. Adjusted EBITDA in the first quarter was $27.4 million, or a 20.2 percent drop from 2019.