First Watch did something unusual last year. It elected not to raise menu prices, even as the costs of food and labor rose dramatically.
Most restaurants did raise prices in 2021, by an average of almost 8%. But the Bradenton, Fla.-based chain chose to focus on driving traffic above all else, a move that appears to have paid off in recent quarters.
But as costs continue to rise, the chain could no longer afford to stand pat on pricing. It took 3.9% on in-restaurant menu pricing in early January, expecting commodity inflation of 10% to 13% this year and labor inflation of 8% to 10%, executives said on the company’s fourth quarter earnings call Wednesday.
First Watch is also seeing “profound” increases in the costs of packaging and paper goods, said CFO Mel Hope, which is affecting its to-go margins. And the war in Ukraine could have a further impact on commodity costs, he said.
The chain’s restaurant-level operating margins in the fourth quarter, before the price increase, were 18.2%.
Executives said the higher prices have not hurt traffic and that they believe the chain has more pricing power to work with going forward. First Watch typically raises prices by 2% or 3% every year, and has never seen it impact demand, said CEO Chris Tomasso.
The move comes as consumers are dealing with inflation across the board, from groceries to gas. Some analysts wondered if going out for breakfast in particular could be on the chopping block for Americans looking to cut costs.
But executives said First Watch has historically done well during hard economic times. The Great Recession of 2008-09 “was one of our best periods ever, back then,” Tomasso said.
“When consumers are being diligent, even in tough times, consumers want to eat out,” he said. “So they think about consistency, they think about quality, they think about value, and we’ve always shown up well when that criteria is applied.”
The 435-unit chain finished 2021 with another strong quarter. Same-store sales were up 20.6% compared to 2019 on a traffic increase of 6.1%. Average check was also higher. And executives said First Watch is experiencing more demand than it can currently fulfill.
The chain is hoping to address that demand by opening a lot of new restaurants, including eight in the fourth quarter and 31 for the year across 12 states. Those restaurants, featuring a new prototype that includes patios, indoor/outdoor bars and second makelines for to-go orders, were generating annualized AUVs of about $2 million—a bit higher than the chain’s $1.6 million benchmark—executives said.
This year, the chain plans to open another 30 to 35 company-owned restaurants and eight to 13 franchise-owned locations.
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