Same-store sales rose 3% in the first quarter at Noodles & Co., a higher-than-expected result that led the company to raise its earnings and sales expectations for the full year and generated enthusiasm on Wall Street to the tune of a 14% increase in its stock price.
Much of that sales growth came from more digital orders, including third-party delivery, which now accounts for 5% of the company’s sales.
That was up from 3.1% in the fourth quarter of last year—a 61% increase.
Yet those sales come at a price. Fees from third-party delivery now account for 1.1% of sales and hurt the chain’s profit margins in the quarter by 30 basis points, executives said on Thursday.
As a result, the company is looking at raising prices on such orders to offset those costs. “While we feel that delivery as a whole is incremental and accretive to earnings, we are currently testing different approaches to delivery pricing to mitigate the impact that delivery has on margins,” CFO Ken Kuick said on Noodles’ first-quarter earnings call.
Noodles would certainly not be the only restaurant chain to consider new pricing strategies for delivery services.
Earlier this month, the fast-casual burger chain Shake Shack said it is “open” to considering new delivery pricing. Habit Burger CEO Russ Bendel told the RB podcast A Deeper Dive that it raised prices on delivery orders. Other chains, including the fast-casual Noodle chain Fazoli’s, have done the same thing.
Delivery profitability has been a growing concern for operators. While many chains insist the service is incremental, as Noodles does, the fees for such services can approach 30% of the price of an order.
As such, the increase in orders does not translate into an increase in profits.
“As everybody knows with the delivery fees, there does come some flow-through pressures,” CEO Dave Boennighausen said on the earnings call. “From a margin perspective, the flow-through on delivery isn’t quite as high as you see in other areas.”
He said the company only started testing new delivery pricing strategies in the past four to five weeks and noted “it’s a bit too early” to incorporate those efforts into its expectations for sales and profits this year.
Still, Noodles executives remain bullish on delivery, as well as digital orders in general, and their impact on the chain’s sales.
Total digital sales, including delivery, rose 63% over last year and now account for 22% of sales. Off-premise business is now 56% of sales at the Broomfield, Colo.-based fast-casual chain. The company believes that off-premise and digital remain a competitive advantage because noodles tend to travel well.
Noodles is now working on efforts to improve it even further. The company plans to relaunch its digital platform later this year to reduce friction and improve its ability to communicate with customers.
The chain is also planning to expand catering, which currently accounts for 2% of sales. The company plans to relaunch its catering program next year.
Noodles also plans to double-down on its healthier options. The chain a year ago introduced Zoodles, its zucchini noodles option, to great success—sales have been strong ever since, and the company raised sales projections for the year even as it laps those difficult comparisons.
Noodles recently introduced a trio of new menu items, including a new gluten-friendly Pipette Mac, which customers can substitute for noodles in any dish.
The company also has a new website map enabling customers to create dishes that meet dietary lifestyles. And Noodles is planning new menu boards that will highlight its “better-for-you platform.”
Boennighausen also said the company expects “further innovation around plant-based noodle alternatives” to be introduced later this year. For instance, the company is testing items around cauliflower.
“We certainly think there is potential,” Boennighausen. Customers “do like plant-based alternatives.”
“The zucchini really addressed the major elephant in the room in terms of low-carb,” he said. “I think you’ll continue to see us innovate around that plant-based side of the menu.”