Noodles & Company hasn’t been alone in raising prices, but it has been more aggressive than most of its peers. The fast casual was running 13 percent year-over-year pricing and nearly 20 percent two-year pricing at its peak this spring.
CEO Dave Boenninghausen told investors in May that while the increases were necessary in the face of soaring commodity and labor costs, customers started to push back against the higher menu prices toward the back half of Q1. That opposition emerged in full force heading into Q2, leading to what he called a “sudden and significant” double-digit decline in traffic during the first half of the quarter. Systemwide sales were down 5.5 percent, including a 5.9 percent decrease at company-owned restaurants and a 3.4 percent decline at franchised restaurants. Revenue fell 4.5 percent and adjusted EBITDA dropped 17 percent.
The chain moved to more prominent value messaging part way through the quarter. It reintroduced its 7 for $7 menu and launched a $10 Mac & Cheese Meal Deal. It also took a 3 percent decrease in menu pricing in May and lapped pricing from 2022. With that pivot, traffic improved from a 14 percent decline in April to a 5.8 percent decline in July.
Noodles & Company is currently in the process of completing third-party research to further enhance its overall pricing strategy. That’s one component of a five-point plan the chain is pursuing to improve its competitive position following a challenging first half of the year.
“Our run rate, as we sit today, is approximately 3 percent,” CFO Mike Hynes said during the company’s Q2 earnings call earlier this month. “We’ve gained some traction and are winning guests back from a value perspective, but it’s going to take some time.”
The five-point plan encompasses several initiatives aimed at driving sales through menu enhancements, including the launch of a new Chicken Parmesan entrée this fall that Boenninghausen said will benefit from broad appeal and guest familiarity. As it gears up to introduce that dish, the company is working with a third-party consulting firm to reevaluate all of its current offerings and improve the way the menu is presented to guests both online and in-store.
“Our internal analysis research gives us a lot of confidence in the potential of Chicken Parmesan as well as other optimization opportunities,” Boenninghausen said. “That said, we think it's an appropriate time for us to take a comprehensive fresh look at the overall menu and culinary strategy because we know the upside AUV potential of this brand is much higher than where we are today.”
Noodles & Company also is zeroing in on its catering business to drive performance well above the decrease in revenue it saw in Q2. Boenninghausen said the variety and portability inherent in the menu provide an opportunity to substantially grow that part of the business, and new catering offerings are being incorporated into the work the company is doing with its culinary consultant. Catering accounted for 1.4 percent of sales in Q2. While that’s a 40 percent increase from the same period a year ago, he believes the opportunity is much larger. Notably, the top 10 percent of restaurants drive around 4 percent of their sales through the channel.
“Our catering program is easy for our restaurant teams to incorporate into their operations,” Boenninghausen said. “With staffing and turnover now at levels better than pre-COVID, we feel it's the appropriate time for our teams to be more focused on building catering sales.”
The final component of the five-part plan centers around advancing technology platforms to increase guest engagement and analytics. That encompasses a range of initiatives. There’s the ongoing rollout of digital menu boards, which are expected to be installed in three-quarters of company-owned locations by the end of Q3. There’s a newly implemented customer data platform (CDP) that is unlocking a deeper understanding of guests. There’s also an enhanced online app and ordering system equipped with a product recommendation engine driven by machine learning.
All of those tech investments are aimed at increasing flexibility and bolstering Noodles & Company’s ability to target guests. The digital menu boards will make it easier to incorporate findings from research initiatives, allowing for quick updates relating to menu layout, pricing structures, new culinary items, value messaging, and more. Similarly, the company’s loyalty program, CDP, and recommendation engine all enable more personalized and effective communication.
Boenninghausen said the company quickly moved to access rewards members and give them specific promotions when it first started to diagnose the degradation of its value proposition. As a result, frequency among members increased 2 percent in Q2 while overall membership grew 14 percent.
“We’ve been able to maintain and retain that guest, partially because we’ve been able to act quickly against them,” Boenninghausen said. “Now, you incorporate the CDP. Our team has already made tremendous strides in being more targeted with how we approach our guests. This allows us to have a significantly more surgical approach to segmentation and to messaging.”
The recommendation engine adds a layer and is expected to provide another tailwind, he added. During its initial test run, the tool delivered a 50 percent increase in sales of recommended items.
“The overall infrastructure from a rewards program perspective, as well as the technology that drives our digital programs, continues to improve and become best-in-class,” Boenninghausen said. “As we go forward from here, we feel that we have an extremely strong foundation that's just going to continue to strengthen.”
Noodles & Company is taking action to improve its financial position as it executes those five sales-driving initiatives. It recently implemented a corporate restructuring program that is expected to yield approximately $2 million in annualized savings. The company also revised its annual growth rate target for 2023 and subsequent years, given ongoing delays in development and permitting processes as well as continued construction inflation.
The company now anticipates it will end the year with 5 percent unit growth, or roughly 20 openings, down from its previous guidance of 7.5 percent unit growth. One corporate restaurant opened in Q2 alongside one franchised restaurant closure, bringing the total footprint to 369 company-owned units and 92 franchised units.