Texas Roadhouse Responds to Rising Costs

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on Apr 2, 2019 9:00:00 AM
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Texas Roadhouse is undergoing their second price increase in four months in order to maintain their margins in the face of rising labor and operating costs. Their plan in motion is to roll out a 3.2 percent price increase over a four-month period. BizJournal spoke with Texas Roadhouse President, Scott Colosi, who said that the price increases are due to “unprecedented labor pressure” and commodity inflation. The fourth quarter saw their restaurant margins falling to nearly 16 percent of total sales. Most of this decline was due to the big increase in labor costs, some of which were generated by Texas Roadhouse’s commitment to ensure a quality guest experience. To this end, they have added both managers and hourly employees to their establishments.

How is this iconic brand able to make this work while the rest of the industry continues to push against price hikes and lean on service fees?

It could very well be because of their steadfast resolve to ensure guest’s the legendary experience and service that they have come to expect from this chain that was established in 1993. I know that every time I drive by our local Texas Roadhouse, the parking lot is full, despite price hikes. Guests know that they can count on hand-cut steaks, fall-off-the-bone ribs, fresh-baked bread, and friendly, proficient service when they enter this restaurant with wooden walls and servers that breakout in a line dance every now and then. The key word for Texas Roadhouse and those that wish to emulate its success is “consistency.”

Sales

Texas Roadhouse saw fourth-quarter sales beating analysts’ expectations. Net income increased by 6 percent for the quarter and 20 percent for the fiscal year. Yahoo Finance analyst’s average revenue expectations came in at $598.3 million, $7.6 million less than the company’s actual $605.9 million fourth-quarter earnings. Last year saw 28 additional company restaurants entering the market, including five Bubba’s 33, and five international franchise restaurants. Average unit volumes are over $5 million with an ultimate goal of $6 million in place. Not bad.

Labor

As unemployment continues to drop and minimum wage rises, labor remains a challenge for the restaurant industry. These challenges include finding people and then keeping them. Rising costs and a scarce labor pool have left other establishments turning to kiosks and tablets in order to lessen the burden. Texas Roadhouse, on the other hand, is increasing staff, not only to ensure their guest’s experience, but also to enable them to offer employees more flexibility in their schedules, with a goal of increasing their quality of life. They have seen their labor costs rise from 32 percent of total sales the second quarter of 2018 to 33.5 percent in the third quarter.

Food News Feed reported that Scott Colosi made this comparative: “For every percent of pricing Texas Roadhouse doesn’t take, it needs 2 to 4 percent traffic growth to make it up.” Thus far, it looks like they’re well within their numbers. Same-store sales climbed 5.4 percent for company-owned locations in 2018 and they achieved 36 consecutive quarters of comps growth—very impressive in today’s current market.

The Future

One thing restaurants count on when costs have led to price increases is brand loyal customers. In this area, Texas Roadhouse thrives. I decided to stop by our local establishment to ask a few guests what keeps them coming back despite the fact that their steaks are costing them a bit more. The four separate parties I asked the question to all had the same response, “What price increase?”

Really? It just goes to show you that when your customers are in love with your brand and concept, they’ll look past the few extra dollars they are paying for the experience.

Texas Roadhouse is now 555 units strong with another 25 to 30 expected to open this year.

 Download Now: 10 Strategies to Make Commodity Pricing Work for Your Restaurant

Topics: Capital, Food Cost, Restaurant Experience, Customer

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