E 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.

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

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