In February, fast-casual chain Noodles & Company took the latest in a series of price increases as the 461-unit chain continued to face higher costs, especially in terms of food. Over the past year or so the chain based in Broomfield, Colo., also increased the premium it charges for off-premises orders, which have a lower margin than in-restaurant purchases.
Since then, food costs, particularly the price of chicken breast, Noodles’ main protein, have come down, and low- and middle-income customers have started to push back against higher prices, especially when it comes to delivery.
In the meantime, the chain has been working to become more efficient, removing some items from the menu, rolling out steamers systemwide, and working with consultants to reduce labor hours. As a result, Noodles & Company is in a position to market its lower-priced items, which also are highly profitable and loved by its customers.
Chief financial officer Carl Lukach recently discussed how the chain has adjusted to its more favorable costs and the changing mood of its customers.
To summarize the first quarter of 2023 for Noodles & Company, you’re getting some pushback from your lower income customers but you've streamlined operations in a way that has improved your margins. Is that right?
That's exactly right. There's a lot of good happening right now from an operations front. We’re fully staffed and we have really strong operating metrics, from cook times to [customer favorability ratings]. And from a margin perspective we have a lot of tailwinds. Our cost of goods sold improved by 280 basis points from last year due to lower food inflation and the pricing actions we took that were necessary at the time to preserve margins.
We're in a different time right now, and it was time for us to reassess what's the appropriate level of price that we should be taking in an industry that's already taken quite a bit of price. Ultimately, we decided that the 5% price we took in February was probably still the right strategy to give us the margin flexibility to take the level of traffic-driving marketing initiatives that we have in place right now — the 7 [entrées] for $7 offerings, and the Mac Meal [mac & cheese, Rice Krispies Treats, and a drink for $10].
As [CEO] Dave Boennighausen said in the earnings call [last Wednesday], those are high-margin items anyway, so you can afford to discount them a bit.
They are high-margin items, and they also are our most craveable items, so we leaned in most heavily on what we are known best for. Our mac & cheese, [and the 7 for $7 entrées: Japanese Pan Noodles, Pesto Cavatappi, Med Salad, Pasta Fresca, Spaghetti, and Butter Noodles], these are the craveable items that have people coming back and driving frequency. It's about continuing to showcase something that we know they're going to have a great experience with.
You cut your menu by around 10%. Why did you do that?
The streamlining of the menu does many things. It helps us showcase what we are known for best and helps drive customers to our most craveable items that we know they're going to come back for. It also helps operations and makes it easier to train team members. So we’re opening new restaurants more efficiently and we're able to execute on the food more quickly.
What menu items have you removed?
Orange Chicken, lemon Parm, which was a sauce that featured linguini — just the sauce was removed — and tomato bisque.
What's interesting is Orange Chicken is in our Asian category, and when we removed that item we actually saw a similar menu mix in the Asian category in totality, meaning by removing that item we actually were able to migrate guests to our other Asian dishes, and that just helps simplify their decision and simplify operations, without losing the guest.
Can you tell me about the consulting firm you hired, Profitality, to streamline operations?
There were really two objectives. The first was to look at our operations process and see what labor savings we could take, and we learned that there's about an hour of labor per restaurant per week that we can take pretty quickly. To put that in perspective, when we did our first “Kitchen of the Future” initiative [also with Profitality], we took nine hours per restaurant per day out of the system, and about two and a half of that was from the investment in steamers [which was completed last year].
The second objective was to see how we can continue to think about smaller square footage and optimize our [new restaurant opening] performance. So the NROs that we're opening now are based on the studies that we did in the first round.
What’s your next equipment initiative?
Digital menu boards. We have about 20% in place today and we expect to roll those out in full by the end of the year, so that's where about $10 million of our capital spend is going.
In the quarterly earnings call you indicated you might be lowering prices. Can you talk about that?
We still are intending on treating pricing thoughtfully and carefully, and it's not going to be quickly. We'll look at pricing and be able to test out pricing strategies and new menu initiatives. We'll use these digital menu boards to optimize placement and how we actually feature things on the menu. There’s a lot of traffic upside to that.
We are implementing marketing initiatives that will have some underlying price reductions in selected areas of the menu — specifically the 7 for $7. That offer was in place before we took the price increase in February, so we had to do some selective price adjustments to those items to be able to relaunch them
In total they represent about 50% of our sales mix.
What do you see as Noodles & Company’s challenges for the rest of the year?
We reiterated our full year guidance, which is contribution margin of 16% to 17% and a full year adjusted EBIDTA of $45 to $50 million.
We know that to hit these objectives we have several levers we can pull in an environment that is more favorable than expected from the expense side. What we’re focused on right now are these traffic driving marketing initiatives. We're carefully watching the traffic incrementality and being able to correctly position the value proposition and feature our best-selling dishes that are craveable and bring [customers] back more frequently.
How are conditions in general for your segment?
The market’s been choppy. Traffic has remained negative in the industry and that's something we're continuing to navigate. Over the past several years pricing has been a key driver of comp sales. Now we're in an environment where, with expenses being more favorable, we need to optimize where the price on the menu needs to be.
Contact Bret Thorn at [email protected]