Financing

Focus on traffic pays off for First Watch

A couple of unconventional moves have helped the chain generate some of its best traffic ever.
First Watch exterior
Photograph courtesy of First Watch

Coming out of the pandemic, breakfast-and-lunch chain First Watch focused on getting customers back into its restaurants above all else.

To do that, it made some moves that defy conventional wisdom these days.

Unlike many of its full-service peers, for instance, First Watch offered its full menu throughout the pandemic, not wanting to risk losing a customer because their favorite dish wasn’t available. 

And despite higher food costs, the chain chose not to raise menu prices in 2021, even though it typically takes 2% or 3% in price each year.

Those moves, plus a new alcohol program and strong off-premise sales, paid off in the third quarter for the Bradenton, Fla.-based chain.

Traffic rose nearly 5% compared to two years ago for the period ended Sept. 26. That contributed to a same-store sales increase of 19.7% vs. 2019 and a restaurant-level operating margin of 19.5%.

It was one of the chain’s strongest traffic quarters in its nearly 40-year history, CEO Chris Tomasso told investors on the company’s first earnings call since going public in September.

The chain has historically used traffic growth to drive sales growth, a strategy that became more difficult with dining rooms closed or limited to slow the spread of the coronavirus.

“We just felt like coming out of the pandemic, our focus should be on getting people back in the restaurants,” Tomasso said.

The chain’s decision not to raise prices was made easier by customers ordering more food and drinks. Add-ons like shareables, juice and alcohol helped increase average check and underscore the chain’s pricing power, Tomasso said.

“We are a very conservative pricing organization. Thankfully we’re pricing into positive traffic and we also know that we’re pricing into unmet demand,” he said. “We could be bolder than we are … but with our focus on driving customer counts, we think [not raising prices] is the right thing for us.”

The chain will likely get back to its annual price hikes in 2022, the CEO said, but he did not reveal specifics. It is predicting food cost inflation of 4% to 7% over the next several quarters and also expects labor costs to rise by 100 to 150 basis points.

Labor costs for the chain were actually down in the quarter compared to the past two years because of lower staffing levels, and the chain hopes to see them rise.

“We desire to move it up,” said CFO Mel Hope. “We want to be sure that we’re completely staffed and that we’re not overtaxing the crews that are in the restaurants today.”

First Watch has returned to its pre-COVID benchmark of 2.7 managers per restaurant systemwide, and is turning its attention to staffing up for its ambitious growth plans. It has opened 17 new restaurants so far this year, including five in the third quarter, for a total of 428. Its goal is to one day have 2,200 U.S. locations

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