See Correction & Amplification below.
Franchise restaurants, hit by higher commodities prices and a cutback in consumer spending, are aggressively searching for ways to slash costs.
Many of these businesses can’t pass on the higher costs to customers without losing even more business. So, they’re trying to find alternative ways to save — including changing vendors and packaging, altering delivery schedules, cutting serving portions and even prolonging the life of fryer oil.
Restaurants feel they have no choice, as some chains are posting some of their worst monthly sales declines. Ruth’s Hospitality Group Inc.’s
same-store sales at its company-owned Ruth’s Chris Steak House locations fell 15% in October. Ruby Tuesday Inc.
experienced a 10.8% drop in same-store sales; California Pizza Kitchen Inc. had a decline of 7.3%; and Red Robin Gourmet Burger Inc.
posted an 8% drop.
“These restaurant operators are really operating under a perfect storm, dealing with record [high] commodity prices, higher labor costs with the minimum wage increasing and falling consumer demand,” says Robert Marzo, senior analyst of food service for F&D Reports, a retail consulting firm in Great Neck, N.Y. “Many of [them] can no longer offer the same quality ingredients that they have in years past, so they’re downgrading in any way that they can.”
They’re getting “creative with their recipes, using cheaper ingredients and offering smaller portions in an effort to stay afloat,” he adds.
Here’s a look at a few efforts by chains and their franchisees to save money and draw in customers:
Ruth’s Chris Steak House
Big Steaks Management LLC, a franchisee in Pikesville, Md., operates several Ruth’s Chris Steak Houses in Maryland, North Carolina and New Jersey, and has seen 5% to 10% declines in revenue for the past six months.
So the company recently looked to reduce freight costs for the first time by buying meat from one vendor — and getting just one delivery per week from that vendor — instead of using multiple vendors with various deliveries throughout the week.
In North Carolina alone, Big Steaks’ three Ruth’s Chris Steak House locations will save $22,000 a year on its weekly purchase of 3,500 pounds of meat, says David Sadeghi, chief operating officer of Big Steaks Management.
Meantime, the franchisee hopes to get more business by offering fixed-price holiday-party packages for the first time. “We need to have the holiday parties to keep our employees employed,” Mr. Sadeghi says. Customers “had an open check last year or the year before, [but now] they can’t afford to go up a couple thousand dollars. They need to keep in the budgeted numbers.” He says holiday bookings are up 10% so far from the same period last year.
Church’s Chicken, owned by Cajun Operating Co., is looking to squeeze out savings from the ingredients and other products it uses. For instance, the Atlanta-based franchiser is testing the idea of filtering the shortening for frying in order to stretch a batch’s use to 14 days from the current 10 days. That would save the company $1 million next year. It also is shrinking the scoop size of its biscuits to 2 tablespoons from 3 tablespoons, for a saving of $1.8 million a year.
Another cost-cutting move: It has eliminated the chicken diaper, which is used to absorb some of the liquid in raw-chicken cases — for a savings of $800,000 a year. The company also plans to change its french-fry packaging from cardboard sleeve to paper, which will generate $700,000 in annual savings.
The franchiser says there have been minimal customer complaints about the changes.
IHOP and Applebee’s
the Glendale, Calif., parent company of IHOP and Applebee’s restaurants, is consolidating the vendors the two restaurant chains use — and, in the process, is getting a discount by buying more from the vendors it does keep. DineEquity purchased Applebee’s a year ago and found that there was 75% overlap among IHOP’s and Applebee’s vendors.
The company says the new purchasing plan, which it hopes to have in place by January, would save the company millions of dollars each year. “That’s the biggest opportunity to assist [franchisees] in the cost of goods,” a DineEquity spokesman says.
At Marco’s Pizza, owned by Marco’s Franchising LLC of Toledo, Ohio, restaurants are looking to save money on their purchasing process.
They are ordering larger amounts less frequently, are working with vendors to lock in transportation costs and are choosing manufacturers that are closer to distribution centers to help reduce freight costs. Marco’s expects these and other changes to save the company a total of $2 million a year.
For example, scaling down to once-a-week deliveries will save a Marco’s franchisee with five stores more than $3,500 per year overall.
The company also is trimming packaging costs. It has eliminated its small pizza boxes at more than 170 stores in 14 states. Instead, it’s now using the box for CheezyBread for both products. That will result in a saving of $164,000 a year.
Tumbleweed Restaurants Inc., a grill chain based in Louisville, Ky., is showcasing its lower-priced fare. The company has moved higher-priced food, such as red-meat grilled items, to the back of its four-panel menu, while putting lower-cost, more-profitable items, like tacos and burritos, front and center.
The result: Less-expensive items are being ordered more often. So food costs as a percentage of total operating costs have fallen to 33.2% from 34.2% since January at 44 full-service restaurants — a savings of $500,000.
Write to Raymund Flandez at firstname.lastname@example.org
Correction & Amplification
Same-store sales rose in the third quarter at the Church’s Chicken, IHOP and Marco’s Pizza chains. This article and headline about cost-cutting strategies at franchise restaurants suggested that the chains’ same-store sales were falling.