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Delivery fees hurt Noodles’ Q3 profits

The fast-casual chain has seen explosive digital growth during the pandemic, but third-party platform commissions are eating into its margins.
Photograph: Shutterstock

Like many restaurants during the pandemic, Noodles & Co. has reported tremendous growth in digital traffic. Its digital sales grew 151% during its third quarter and now account for 61% of total sales.

But, also like others, the fast-casual chain is seeing delivery fees chip away at its margins.

Noodles’ margins fell to 15.4%, a decrease of 170 basis points year-over-year, as the chain’s operational efficiencies were offset by delivery fees as a percentage of sales increasing to 5.5% for the quarter ended September 29, the company reported late Wednesday. The chain’s margins improved slightly during the quarter, coming up flat year-over-year for September at 16.5%.

The Broomfield, Colo.-based chain said it expects its margins to remain hampered by delivery fees through its fourth quarter as well.

During a call with analysts, Noodles CEO Dave Boennighausen said the chain is looking at several ways to push diners into more-profitable ordering models, noting that the company wants to “migrate” customers to Noodles’ own ordering channels “from the time that they discover the brand” through a third-party platform.

Noodles is working to streamline its curbside pickup process. Currently, customers have to call the restaurant to alert them they’ve arrived to pick up a curbside order. In the next several weeks, tech upgrades will make that process unnecessary, Boennighausen said.

The chain has added a 10% menu price increase for orders placed on third-party delivery platforms.

Noodles said it is resuming its plans for unit growth, including the possibility of adding ghost kitchens or virtual brands.

The chain is seeing “some nice benefit” from the availability of restaurant real estate caused by closures during the pandemic, though the very best sites—those well-suited for drive-thrus, for example—remain in high demand, he said.

“One thing we are excited about is the conversations we are having with developers and landlords around some of the disruption in the industry, how properties would be redeveloped to be much more suited for that box, which really just fits in the wheelhouse of where Noodles & Co. does great,” Boennighausen said.

Early this month, the chain pre-reported its Q3 results, noting that it has returned to positive same-store sales in recent weeks though comparable sales for the company’s quarter remained down 3.8%. That decline was made up of a 3.6% fall at company-owned restaurants and a 5% decrease at franchised ones.

For the five weeks ended Sept. 29, Noodles reported a 1.1% same-store sales increase at company-owned restaurants and a 3.2% decline at franchised units.

During Q3, Noodles opened one restaurant and closed three units, ending the quarter with 454 locations. In October, the chain opened two new stores.

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