Donatos pepperoni pizza.
Donatos Pizza

Restaurants with Donatos Pizza and without supply chain issues saw same-store sales grow 8.1 percent in the fourth quarter. 

Understaffed, Red Robin Slows Donatos Rollout

In 2022, 200 stores were supposed to come online with the pizza menu. That's been cut to 50. 

To better stabilize restaurants with labor struggles, Red Robin prefers to focus on hiring and training new workers before adding menu complexity. For this reason, the casual-dining concept is significantly decreasing the pace of its Donatos Pizza rollout.

Red Robin planned to complete the launch in 2022 by adding pizza to roughly 200 more restaurants, but that projection has been sliced to 50. The remaining 150 stores will come online in 2023.

“We view Donatos as a long-term success vehicle, and nothing is more important than getting it right on day one at every restaurant where it is implemented,” CEO Paul Murphy said during Red Robin’s Q4 and 2021 earnings call.

In 2021, 120 stores onboarded Donatos—including 41 in the fourth quarter—pushing the total to 198 locations by year’s end. The pizza menu generated $4.8 million in sales during Q4, thanks to increases in marketing at some restaurants, and finished 2021 with $14.4 million in sales.

Checks that included Donatos were $10 higher on average. And at Red Robin units that featured pizza and didn’t experience supply chain issues, same-store sales grew 8.1 percent in Q4 compared to 2019. For perspective, overall comps decreased 0.7 percent in the quarter. 

At full implementation, which would be 400 restaurants, Donatos should account for more than $60 million in sales and profitability of more than $25 million.

“This remains our goal, but it will now be a 2024 event as the rollout will not be completed until sometime in 2023,” Murphy said.

This isn’t the first time Red Robin has been forced to rethink its Donatos strategy. When COVID first impacted the U.S. in March 2020, the chain postponed the launch to create financial flexibility. Prior to that decision, the goal was to add Donatos to 100 stores in 2020 and 150 each in 2021 and 2022.

To ensure the Donatos program isn’t disrupted a third time, Red Robin is making staffing its No. 1 priority. In May 2021, Murphy told investors, "I feel very confident that in short order, we're going to get the staffing put to bed, get it stabilized,” but issues lingered throughout the year.

However, matters are improving; at the end of 2021, Red Robin was 93 percent staffed in salaried manager positions, 96 percent in general manager roles, and 85 percent overall. So far in 2022, the chain is onboarding roughly 15 management team members per week.

Sales reflect the improving trends. In January, same-store sales declined 1.1 percent due to Omicron surges, but as COVID exclusions decreased, comps rose 5.3 percent in February. That momentum has been carried into March, as well.

Restaurants that were at or above 2019 staffing levels in the fourth quarter saw comps grow 6.1 percent versus 2019.  

“The ongoing demand for Red Robin is very strong,” Murphy said. “What we are solving is a staffing issue, which is limiting our throughput, not a brand issue. Our period two sales trends demonstrate that margin will continue to improve as we improve our staffing, and restrictions having receded with the trajectory of Omicron in our most significant markets, enabling us to provide the occasion our guests expect from their visit to our restaurants.”

Red Robin

For 2022, Red Robin expects mid-to-high single-digit commodity and restaurant labor cost inflation and pricing in the mid-single digits.

In November, Red Robin hired Chief People Officer Wayne Davis, who is leading strategies to drive application flow and working with a third party to elevate recruitment. In addition to constantly monitoring compensation policies, the chain completed a discovery initiative to understand what matters to employees and how it can improve their quality of life.

The brand incurred $3.2 million in transitory labor and other operating expenses in Q4, including hiring and training costs, substitute products, temporarily outsourced janitorial costs, and one-time bonuses and overtime pay. Hourly wage increases were in the high-single digits.

“Staffing remains our No. 1 priority, and it goes hand in hand with creating a compelling team member value proposition,” Murphy said. “Having properly-staffed restaurants in turn enables us to deliver a quality guest experience, which leads both to higher sales and supports our team members in a manner that prioritizes their satisfaction and retention.”

In tandem with labor, commodities continue to pressure Red Robin, with inflation rising 9 percent year-over-year in the fourth quarter. To mitigate costs, the chain took 3.6 percent pricing in 2021.

For 2022, Red Robin expects mid-to-high single-digit commodity and restaurant labor cost inflation and pricing in the mid-single digits. Margin pressures should continue through 2022, but eventually change trajectory as dine-in sales and staffing increase and transitory costs decline. The brand believes it will achieve 2019’s restaurant-level operating profit margin in 2023.

Along with staffing, Red Robin is investing heavily in digital. In the fourth quarter, the company soft launched its new iOS and Android mobile apps and integrated them into its Royalty program, which includes more than 10 million members. The program was enhanced with segmentation and personalized messaging that have resulted in “all-time-high levels of engagement,” Murphy said.

Almost 250,000 customers joined in Q4, and Royalty’s sales mix grew 2.4 percent against 2019 to roughly $41.7 million. Average check is about $3.90 higher than a non-Royalty member. For a year, Red Robin sees $134 in sales per guest from Royalty members and in the mid-$40 range for non-Royalty users.

“It is a real driver for the brand,” Murphy said. “I think what both the app and the Royalty program do is allow us to better communicate with that Royalty member to get to know them better. And in the new app, the Royalty program is live on that app, so it just gives them another reason to be a part of the Royalty program.”

“It was a soft launch,” he added. “It’s really in this month moving forward, that we’re going to begin to be more aggressive in introducing it to the marketplace. Very happy with the impact, both top line and bottom line so far, but we think that much more to come as we get aggressive about, frankly, marketing it and doing a lot of our initiatives through the app and the loyalty program.”

In the fourth quarter, off-premises mixed 31.4 percent, meaning Red Robin more than doubled pre-pandemic levels for the seventh consecutive quarter. The company opened a new prototype in Q4 that increases space for off-premises orders through building modifications. The restaurant is seeing more than $80,000 in average weekly sales, remaining on track for a $4 million AUV. The system average is $2 million.

Red Robin finished 2021 with 531 stores systemwide, including 430 company-owned and 101 franchised.