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Red Robin shifts from discounts, virtual brands to focus on profitability

Red Robin’s comp sales and total revenues declined in Q3 as the restaurant company shifted away from deep discounts and sunsetted its virtual brands.

Red Robin’s comp sales declined by 3.4% in Q3, while total revenues decreased by $9.2 million versus Q3 2022. Despite the drop, these results were in line with expectations as the company moves away from deep discounting activity that hindered profitability. And it’s all part of CEO G.J. Hart’s “North Star” five-point plan put into place last year shortly after he came out of retirement to lead the brand.

“In the second half of 2022, Red Robin promoted a combo meal deal … for a 30% to 40% discount to retail prices,” Hart said during the company’s earnings call after market on Wednesday. “This promotion drove traffic and sales, but the economics were penalizing to profitability.”

The North Star plan is multifaceted, but one of its major focuses is shifting away from deep discounting to create a “more sustainable and profitable” traffic base. Red Robin’s revenues were also hit by the sunsetting of its virtual brands, created during the throes of the pandemic. Hart said the brands created complexity and distractions.

“The economics of virtual brands also resulted in minimal profit contribution,” he said. “Eliminating these brand offerings was the right change for the long-term success of Red Robin, despite short-term optics of a comparable sales headwind of approximately 200 basis points.”

Dine-in sales now represent nearly 76% of all sales, which is up from 72.4% last year. Off-premises sales declines by 15.1% versus Q3 2022, and approximately half of that was due to the elimination of those virtual brands in July.

“This consumer shift back to dine-in is a broad trend experienced by many and is accentuated for Red Robin as we discounted virtual brands that were only available for off-premise consumption,” CFO Todd Wilson said. “We have launched initiatives to enhance the off-premise guest experience and promote this offering to be more prominent and visible for guests looking for pickup or delivery.”

Despite slowed sales from these shifts, Red Robin’s traffic trends have improved thus far into Q4, while profitability has also increased. In Q3, adjusted EBITDA was $6.8 million, versus $3.9 million last year. On a year-to-date basis, adjusted EBITDA is $58.3 million versus $43.7 million last year, marking a 33% increase.

“We evaluated Q2 trends to Q3 trends and walk away very comfortable with the track we’re on, encouraged with the improvements we’re seeing in guest satisfaction as well as what we interpret as the underlying traffic trend,” Wilson said.

Unpacking the North Star plan

As mentioned, there are several focus areas for the North Star plan and Red Robin has made significant progress toward all of them behind a year-to-date investment of about $16 million. The first point is to make the company more “operations focused,” and Red Robin has put a new market partner compensation program into place for multiunit operators and will launch a similar program for single unit operators in early 2024. Hart said this program has gone “exceedingly well” and has helped with recruitment and retention.

Two, the company is “elevating the guest experience” through new staffing models; for example, adding fewer tables to servers’ schedules so they can focus on hospitality, and adding back bussers and a dedicated expo. Additionally, 250 kitchen managers have been added. These efforts have driven higher guest satisfaction scores across Google, Yelp and TripAdvisor, Hart said.

On the menu side, Red Robin has rolled out new flattop grills systemwide, which is supporting its upgraded burger lineup introduced in October. Red Robin also introduced new entrees, appetizers, beverages and seasonal offerings, with enhancements to 85% of the menu. Hart said the new appetizers are driving incremental incidents of purchase, while the new beverages are driving higher sales. The company is promoting these upgrades with the “Turn Up the YUMMM” tagline – a throwback nod to the chain’s signature jingle. Red Robin is going to test restaurant renovations in Q4 in Washington, California, and Colorado, featuring interior and exterior upgrades to “bring all elements of the guest experience together,” Hart said.

The third point of the plan is to remove costs and complexities and use those savings to fund guest experience efforts. Hart said the company has saved approximately $7 million so far this year and expects about $12 million in savings for the full year. One example of these savings is Red Robin’s switch from a frozen to fresh chicken breast, which Hart says is higher quality, better flavor and will result in about $5 million in annualized savings for the company.

The fourth initiative is to optimize guest experience, which is supported by marketing efforts to target the right consumers, increase efficiency of paid media, and beef up search engine optimization. Since this work began, Red Robin has experienced a 30% increase in organic search traffic, according to Hart. Red Robin is also investing in earned media, social media, and local marketing, and is currently refining its loyalty program, which counts over 13 million members.

“Our strategy is to shift away from heavy discounting in favor of rewarding our most loyal guests,” Hart said, targeting an early 2024 launch date.

The final point of the North Star plan is to drive unit-level profitability and comp store revenues. Hart said the company’s aforementioned work is setting up the company for long-term success.

“We are taking a holistic approach to our decision-making engineering the comeback of Red Robin to create a healthy, sustainable, and growing business for the long term,” he said.

Contact Alicia Kelso at [email protected]

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