First Watch's management trades high-fives over a drop in third-party deliveries

The drop-off pushed traffic into negative territory, but executives say a simultaneous rise in on-site business is better for the concept.
The breakfast-and-lunch chain would rather see customers eating here than at home. | Photo: Shutterstock

Third-party delivery orders are tanking for the First Watch breakfast-and-lunch chain, and management says it’s heartened to see it.

“During the time of necessity, we were pleased to accommodate the consumer for their off-prem occasion,” said CEO Chris Tomasso, referring to the pandemic, “and we will continue to do so. But we are even more pleased with the ongoing pivot back to our dining rooms.”

He explained to financial analysts that a dine-in patron is more likely than a delivery customer to become a hardcore fan of the concept. “Simply put, the totality of our in-restaurant service touch points generates a significantly better customer impression compared with that of off-prem,” said Tomasso.

Plus, he continued, there’s no danger of sticker shock. He attributed the decline in delivery orders to the premium price patrons pay for an order that’s brought to them by services like DoorDash and Uber Eats. First Watch isn’t seeing any of that resistance with customers dining on-site.

“We have seen no indications of check management,” Tomasso continued. Indeed, he said, instances of customers tacking on a beverage, dessert or shareable starter have been on the rise.

All told, dine-in guest counts rose during the second quarter ended June 25, but the drop in delivery orders dragged down the total ticket count by 1.2%.  

Still, same-store sales for the quarter rose 7.8%. Even with fewer orders coming through third parties, off-premise business accounted for 18% of a typical unit’s Q2 sales, said CFO Henry “Mel” Hope.

During the quarterly earnings call with analysts, Tomasso and Hope provided an update on First Watch’s contrarian strategy of decreasing how much of the 492-unit chain is run by franchisees. The franchisor acquired six stores from franchisees during the three-month period, raising the number of company-run units to 381.

It acquired five more after the quarter ended and inked a deal to buy seven more over the next month.

That transaction will lower the number of First Watch franchisees to 12, who will collectively run about 100 stores. The company has options to purchase about 51 of those, according to Tomasso.

He projected that the chain will ultimately extend to about 2,200 locations in the United States, and mentioned that the chain has a bench of about 120 employees who are ready to move up to unit manager.

First Watch had a Q2 net income of about $8 million, a 194% jump from the 2022 figure, on revenues of $216.3 million, up 17.3%.

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