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Red Robin’s downturn: 4 lessons for restaurants

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With 572 restaurants, Red Robin doesn’t have the game-changing heft of an Applebee’s (1,900 units) or a Chili’s (1,634 branches). But other casual-dining operations might learn a thing or two from the smaller operation’s troublesome experiences during the quarter ended July 15.

Here are some lessons that could apply to brands large, small and in between.

1. Off-premise business isn’t a silver bullet

Takeout, delivery and catering orders increased in number by 26.8% during the quarter, but that wasn’t enough to offset the effects of Red Robin’s 3.2% decline in dine-in traffic; same-store sales slipped 2.6% year over year on a 0.7% ebb in guest counts overall. CEO Denny Post stressed that on-premise dining is the brand’s most serious concern.

2. Technology isn’t a miracle cure for labor problems

New back-of-house technology enabled Red Robin to trim two unit-level staff positions that had minimal interaction with guests, theoretically tempering a surge in wages without a decline in service. But as the chain learned during its Q2, the benefits came with some unforeseen side effects.

The new Maestro system enabled Red Robin to adopt a new team service setup, where servers were expected to bus the tables in place of the two employees who were eliminated.  But apparently the waiters and waitresses didn’t (or chose not to) grasp the importance of that task. Complaints from guests soared, table turns slowed, and impatient guests bolted on busy nights rather than wait for a table to be cleared and set.

Red Robin isn’t ripping out the new technology, but it’s looking to fix the problem with some good ol’ training and heightened attention to service levels.

3. Be careful about how many bargains you offer

Red Robin’s leadership has repeatedly voiced fears that casual dining is pricing itself out of consideration as an everyday dining option. Roughly half of the segment’s targeted customers have a household income that falls between $42,000 and $125,000 per year, Post has stressed. “We believe that building out on affordability will make it possible for our core middle-income guests to dine with us more frequently,” she explained last week to Wall Street.

Red Robin’s bid to remain a Monday-through-Friday consideration is the Tavern Double menu, an array of five burgers each served with unlimited servings of fries for $6.99. The lure has been so effective, said Post, that the bargain menu now generates 15% of sales.

Unfortunately, much of that business is coming from customers who otherwise might have popped for premium burgers priced above $10; offering five of the Tavern Double burgers is just too much, explained Post. Red Robin’s per-person average check fell 1.9% during the quarter.

Post hinted the chain may cut the discount roster in hopes customers will opt for pricier selections. Certainly the array won’t be expanded, she emphasized.

4. Candor is dicey

Restaurant chain executives have blamed everything from weather to NFL protests to millennial apathy for their charges’ weak performances. Contrast that scapegoating with Red Robin’s unadulterated mea culpa. The chain’s leadership released preliminary Q2 results three weeks before the scheduled date and just two weeks after the quarter ended because it discovered sales had significantly undershot expectations; comps were down 2.6%. Contrast that with the same-store results for Del Frisco’s-owned Sullivan’s Steakhouse (down 6%) and Buffalo Wild Wings franchisee Diversified Restaurant Holdings (a 6.4% decline), to name just a few of the casual operations who had a tougher time. Yet Red Robin was the lone brand to brace investors for an unpleasant surprise.

Red Robin was also forthcoming about the reasons for its problems: “We simply didn’t execute as well as we should have,” said Post.

Wall Street reacted to the honesty by holding its nose and hitting the “sell” button; Red Robin’s market value fell by more than 25% in the hours after the preliminary poor results and admittance of culpability were aired. The stock’s price has since climbed, but has yet to reach its prerelease trading levels.

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