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Red Robin’s lesson: Cut labor at your own risk

Overreactions to profit challenges can sometimes cause more problems than they're worth, says RB’s The Bottom Line.
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A year ago, Red Robin cut back on labor inside of its restaurants, using what it called a team service model designed to improve labor productivity.

It worked. Labor costs as a percentage of sales in the company’s first quarter fell by 70 basis points, and the company had strong labor productivity last year. At a time when wage costs are skyrocketing because of higher minimum wages and demand for workers, that kind of improvement was impressive.

But things aren’t so simple—not these days.

In the quarters since, Red Robin’s same-store sales have deteriorated. They fell by an increasing amount each quarter last year, bottoming out at a 4.5% decline. They’ve improved only modestly so far this year, down 3.6%. And on Wednesday, the chain’s CEO, Denny Marie Post, retired. Board Chair Pattye Moore has replaced her on an interim basis.

John Zolidis, president of Quovadis Capital, in a note Thursday blamed the deterioration on those cuts to labor.

“We attribute the weakness to the competitive environment but also the company’s decision, starting in the first quarter last year, to significantly reduce labor hours in the stores, which we believe directly impacted service and, subsequently, traffic,” he wrote.

This is the lesson of Red Robin’s past year: Staffing cuts at a time when the industry is ultracompetitive can backfire.

We have heard, over and over again, stories of executives that focus too heavily on the bottom line at the expense of the top. While it’s important for restaurant chains to make a profit, and certainly there are plenty of profit challenges in the current environment, often operators have to swallow hard and accept lower margins to compete.

That’s because the industry is loaded with competitors. When you don’t do your job, some customers will simply go somewhere else because there are many other restaurants out there. My nearest Red Robin, for instance, is just across the highway from a fast-casual burger chain, Five Guys.

Last year, we interviewed megafranchisee Greg Flynn, Applebee’s largest operator. He said that fellow franchisee RMH Franchise lost faith during a tough period for the brand, cut costs too much, and wound up in bankruptcy.

Flynn’s own stores did not cut back on service, even as same-store sales plunged, and as the brand improved last year, his restaurants performed even better.

Olive Garden owner Darden Restaurants has performed better than its competitors, in part because of its focus on service standards at all of its concepts. My esteemed colleague Peter Romeo listed some of the reasons Darden keeps performing—many of them boil down to the idea that it focuses on quality.

Saving on labor is a worthy goal, especially in an industry that is so worker dependent. The industry has to find efficiencies eventually.

It’s a challenge for casual-dining chains that have to work hard to cater to growing demand for takeout and delivery while maintaining service standards.

Yet operators eager to cut back on labor in their restaurants have to tread carefully, lest they risk alienating customers that have all sorts of choices.

Red Robin’s sales challenges may or may not be a direct result of those labor cuts—the company has, to its credit, listed several problems that could have caused its sales challenges.

Yet there is a direct correlation between the focus on labor productivity and its falling same-store sales. In February, the company noted that its dine-in business declined 4% last year.

Guy Constant, Red Robin’s chief operating officer, said that as the company made numerous changes last year, it sometimes forced operators to “get creative to try and deliver on our promise to the guests.”

“By putting them in this position, we drifted away from the consistency and standards that are the hallmark of high-performing organizations,” he said, according to a transcript of the earnings call on financial services site Sentieo.

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