Noodles & Co. guests during the first quarter began to indicate they have had enough of menu price increases, the company said Wednesday.
That was true at least for mid- to lower-income guests. Roughly 45% of Noodles’ diners have household incomes less than $100,000 per year.
But it was especially true for those ordering delivery, a channel representing about 30% of sales that had been relatively stable until the second half of the April 4-ended quarter, when delivery sales saw what the company described as a “meaningful decline.”
“Although we believe the trend in reduced delivery sales is consistent with others in the industry, seeing the shift from delivery to on-premise ordering, we additionally believe we are seeing resistance to our prior price increases, presenting themselves in our overall traffic trends,” said CEO Dave Boennighausen.
As at many chains, Noodles’ menu prices are higher through third-party delivery channels—roughly 25% higher—which is designed to help cover the fees charged by third-party players like DoorDash and Uber Eats. And as the in-store menu prices increase, delivery prices climb even higher.
For Noodles & Co.—and most restaurant chains—the menu price hikes of the last year were deemed a necessity as they struggled to maintain margins amid soaring commodity and labor costs. During the quarter, menu prices at Noodles were up 13% year over year at their highest point, following a 5% increase in February.
Now, happily for Noodles, however, the inflationary climate that was such a challenge to margins last year has vastly improved. And that has allowed the fast-casual chain to return to value positioning to drive traffic.
In early May, Noodles brought back a value promotion, offering 7 dishes for $7, including popular favorites like Wisconsin Mac & Cheese, Japanese Pan Noodles, Pesto Cavatappi and more. Another $10 Mac & Cheese deal includes a fountain drink and Crispy dessert as a bundled meal.
When the promotion launched, the company said they saw an immediate pickup in traffic and sales, which is expected to offset the declines seen in the first quarter.
For Noodles, the 7 for $7 deal is actually a menu price decrease, though possibly temporary, which is rare in the industry.
The company first introduced the promotion last year in August, when many of the dishes were priced around $7 on average. At the time, it drove traffic and boosted value perception, said CFO Carl Lukach.
Since then, however, price increases pushed those popular dishes above that $7 mark, so now offering them at $7 is a discount.
But, said Lukach, “We feel that will be a very attractive price point for what the guest is looking for today.”
Boennighausen expects commodity deflation trends to continue, with decreases in the low-single-digit range for the full year, which will help boost the chain’s margins. And Noodles’ other margin-saving initiatives are paying off, he said.
The chain is rolling out digital menu boards, which has enabled Noodles to “execute real-time marketing and pricing strategies,” Boennighausen said.
The chain has simplified its menu, taking off about 10% of menu items, including operationally difficult dishes like the Orange Chicken, with no negative result, Boennighausen said.
And the company engaged “a third party,” which was not named, to help identify opportunities to streamline operations in existing restaurants while further reducing footprint needs for future builds.
During the quarter, the brand grew its rewards program by 14% to 4.7 million members, and those loyal fans are increasing their frequency, he added.
Restaurants are fully staffed and turnover has reduced, leading to better unit performance. Average unit volumes increased 7.5% during the quarter to $1.3 million.
Same-store sales increased 6.4% systemwide, including a 6.9% increase at company-operated units and a 4.1% increase at franchised locations.
Revenues increased 12% to $126.1 million. The company narrowed its net loss, reporting a loss of $3.1 million, compared with a loss of $6.4 million a year ago.
Noodles ended the quarter with 461 restaurants, including 92 that are franchisee-owned.
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