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For restaurants, price remains a concern

Despite higher costs, chains say the industry must be cautious about raising prices.

Restaurant chains looking to maintain their competitiveness in 2018 should look at one, simple idea: price.

Despite rising costs for labor, including minimum wage increases in 18 states this year, restaurants need to be careful about taking price, given continued challenges in industry traffic—at least according to industry executives who presented at the ICR Conference on Monday morning.

“Restaurants have an affordability problem,” Red Robin CFO Guy Constant said during his company’s presentation at the investors conference on Monday. “The ability to take price is limited.”

Constant noted that restaurant chains that raise prices do so at the expense of industry traffic. He said that Red Robin’s challenge, and the challenge for the industry, is to offer improved value to its customers.

And it’s not just typical casual-dining chains like Red Robin. Executives with higher-end steak chains worry about price, too.

“It’s not inexpensive eating at a steakhouse,” said Michael O’Donnell, CEO of Ruth’s Chris Steak House—a more than 150-unit chain that has an average check of more than $66, according to data from Technomic. “It’s incumbent upon us to continue to drive value.”

Similarly, the higher-end, Brazilian steakhouse chain Fogo de Chao also talked about “being cautious on price.”

CEO Larry Johnson said the company has worked to maintain its pricing as best as it could in the past couple of years.

He believes that’s been a win for the chain, which generated positive traffic of 1.6% in the fourth quarter and a 2.4% increase in U.S. same-store sales in the quarter ended Dec. 31.

Johnson said that the chain’s consumers recognize the gap in pricing between Fogo and its competitors.

“Consumers are smart,” he said. “They look at the value proposition and the service model and the control they have over that dining experience. We’re going to continue to do well with those factors.”

Restaurants have been raising prices to pay for higher labor costs over the past two years, even as grocers have kept their price increases down or even lowered them. That “gap” was 180 basis points in November, according to federal data.

That’s actually lower than it’s been over the past couple of years, but that gap remains. And the inflationary differences between the two major purveyors of food to consumers has been cited as a major factor in weak industry traffic the past two years.

Industry traffic has been generally weak in the past two years, including a 2.5% traffic decline in November, according to Black Box Intelligence.

The challenge, however, is wages. Wage rates for leisure and hospitality workers have increased 4.1% over the past year, according to federal data, far higher than the 2.5% for the typical employee. Those higher wage rates are expected to persist, especially as the minimum wage has gone up in 18 states this year.

To address its labor costs, for instance, Red Robin is eliminating some positions inside of its restaurants.

The company is eliminating an expediter position inside of its restaurants, which should save $8 million a year. The company is also eliminating a busser position that should save a “similar amount,” Constant said.

He promised “a number of additional phases going forward, some supported by technology, some not.”

“This is a big opportunity for us going forward,” he said.

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