Red Robin details its turnaround plan

Company looks to build bar sales, raise prices and cut corporate costs

Executives at Red Robin Gourmet Burgers Inc. sought to answer recent criticism from shareholders by detailing traffic-driving and cost-cutting initiatives during a conference call with investors.

A renewed focus on the bar, price increases and corporate workforce reductions were among the strategies the company discussed Thursday during the call after reporting a 37-percent increase in fourth-quarter profit. (EARLIER: Red Robin posts 37% rise in 4Q profit [3])

The initiatives are part of the company’s Project RED plan, which aims to drive traffic, improve sales, reduce expenses and improve margins.

RED is an acronym for “revenue growth, expense management and deployment of capital,” said Steven Carley, who was appointed chief executive of the Greenwood Village, Colo.-based casual dining chain about five months ago.

Red Robin has faced increasing pressure from investors [4] to make strategic changes, including from some who argue a turnaround would be better accomplished as a private company.

Investor group Oak Street Capital Management LLC, which owns about 13.3 percent of the company’s outstanding shares, sent a letter to Red Robin’s management that questioned its “sense of urgency” and called the Project RED plan “nothing more than a series of general statements that read like a ‘cookie cutter’ list that could be applied to almost any restaurant concept.”

This week’s conference call was the first time the company offered details on the plan, which Carley defended as part of ongoing fundamental changes in the way the chain operates.

“To label these initiatives as generic, cookie cutter, lazy or uncreative is like the high school basketball player who levels the same allegations at her coach when he simply suggests that, when she wants to get better at her free throws, she should stay after practice and shoot 100 extra free throws every day,” Carley said. “It’s hardly breakthrough. But it’s fundamental to improving performance.”

Highlights from the conference call:

Customer loyalty

On Jan. 24, Red Robin rolled out a loyalty program called “Red Royalty,” which had been tested for about a year. Customers who sign up for the program online receive a free appetizer and birthday burger, and members can earn a free entrée after the purchase of nine meals.

Carley said the program is building a database that allows the company to learn from individual customers’ visit frequency and ordering behaviors so it can create more targeted marketing.

“We can microtarget the once-per-quarter visitor much differently than we would the once a week guest,” he said.

During the pilot, the company saw a 2-percent lift in guest traffic among the 45 restaurants that tested the Red Royalty program. Carley said similar results are expected nationally with the rollout.

He added that the chain has issued about 500,000 cards in the first few weeks of the program.

Taking back the bar

Carley said Red Robin is aggressively working to increase its bar business, which 10 years ago represented 11 percent of sales. Currently, it’s about 6 percent of sales — much lower than the 14 percent average for casual dining and even further below “best-of-class” casual-dining operators like BJ’s Restaurants Inc., which attributes about 20 percent of sales to its bar.

In the past two months, Red Robin has debuted drink and appetizer specials during off-peak dayparts. The chain also launched an early and late-night happy hour, as well as redesigned menus and point-of-purchase materials to highlight both alcohol and non-alcoholic beverages and promotions.

For every 1-percent increase in the alcohol sales mix, the chain would expect to see a $6 million increase in profit, Carley said.

Arguing that having a vibrant bar is “part of our DNA,” he added that the emphasis would not detract from the chain’s reputation as a destination for families.

Limited-time offers

Red Robin is planning a series of limited-time promotions that begin Monday with the launch of a Prime Chophouse Burger with horseradish-sauteed mushrooms, crispy onion straws and melted provolone for $6.99.

The burger promotion will be coupled with the promotion of a “full margin” spicy avocado chicken wrap that will appeal to women and demonstrate the chain’s menu variety. The promotions also will mention new Cheesecake Bites desserts, served with strawberry or chocolate dipping sauces, which aim to build incremental sales, the company said.

Carley said television advertising for the LTOs would be front-loaded to spike awareness as early as possible, and the availability of the products will be tied more closely to the TV ad schedule.

Pricing

Red Robin will raise its menu prices about 1.5 percent in April to offset rising commodity costs — the first price increase the chain has taken in almost three years. Ground beef and cheese commodity costs, in particular, are expected to be challenging in 2011, the company said.

Cost cutting

In January, Red Robin eliminated 32 positions in its head office, representing about 16.8 percent of its corporate team. The move is expected to result in about $3 million in annualize savings, Carley said.

In addition, the operations team has been charged with finding ways to cut costs that will result in another $16 million to $18 million in annualized savings.

So far, efficiencies have included reducing the number of distribution centers from 36 to 13, which Carley said would result in savings of about $2 million over the next 12 to 24 months. Smaller efforts include the elimination of unused phone lines in each restaurant, which will save about $150,000, he said.

Such cost-cutting measures will allow the company to make investments, such as upgrading the chain’s information technology infrastructure.

Carley said the company would also revamp its employee incentive program, shifting to a pay-for-performance model based on hitting financial targets.

Restaurant openings

Red Robin said it plans to open 10 restaurants in 2011, but that opening rate is likely to be reduced to five in 2012. Carley said that plan may be revisited as traction is achieved on the turnaround efforts.

Though corporate growth has been emphasized in recent years, Red Robin will be examining strategies to revitalize franchisee growth, including the reduction of franchise fees, Carley said.

“It will not be business as usual at Red Robin,” he said.

Contact Lisa Jennings at [email protected]