Pollo Tropical Feels Pressure from Labor, Commodity Inflation

    Companywide staffing levels were not 'adequate' until September.

    Fast Casual | November 15, 2021 | Trevor Griner
    Pollo Tropical chicken platter with sides.
    Pollo Tropical
    Pollo Tropical expects to see higher food costs in 2022 compared to 2021.

    Fiesta Restaurant Group’s Pollo Tropical saw labor shortages weigh heavily on results in the third quarter.

    Companywide staffing levels were not “adequate” until September and continue to lag in some areas, such as Miami. Comp restaurant sales in the third quarter were much stronger in markets that had adequate labor, CEO Richard Stockinger said. Markets with sufficient levels saw comps grow 16.7 percent compared to last year and rise 4.3 percent versus 2019, including double-digit acceleration in noncore markets like Tampa and Southwest Florida.

    Overall, same-store sales increased 13.8 percent versus 2020 and lifted 0.9 percent over 2019. This was an improvement from Q2, when comps dropped 1.8 percent against two years ago.

    Our positive comparable restaurant sales growth versus 2020 and 2019 continued in October, and we are optimistic about accelerating sales momentum as we continue to achieve increased staffing levels,” Stockinger said during the brand’s Q3 earnings call.

    While comp sales were a positive note for Pollo, restaurant level adjusted EBITDA margins declined in the third quarter, something Stockinger attributed to wage rate increases and hiring incentives. Q3 restaurant level adjusted EBITDA was 14.8 percent in 2021 compared to 21.2 percent in 2020 and 20.1 percent in 2019. Continuing operations adjusted EBITDA decreased from $8.2 million in 2020 to $3.7 million in 2021.

    Restaurant wages increased from 23.3 percent last year to 28 percent in Q3.

    Additional labor costs came from initiatives related to improving staffing levels. This includes offering higher pay rates, incentives for weekends, increased training and recruiting resources, and better sign-on and referral bonuses. Pollo is also offering enhanced benefit packages, including more comprehensive and affordable medical plans, child care, family leave, and company-paid educational programs.

    To help recover lost margins, Pollo will take a phased approach to price increases. A 3.7 percent price hike was introduced in August and additional price lifts of approximately 4 to 6 percent are expected in Q4. The pricing trails wage rate increases that “resulted in a short-term reduction in margins that we anticipate will be recovered in the first half of 2022 as we implement additional pricing action and continue our enhanced and ongoing labor optimization efforts,” Stockinger said.

    READ MORE: Pollo Tropical's Digital Transformation is Underway

    One of Pollo's main strategic priorities is to accelerate growth in non-dine-in channels, and they were able to achieve that goal in Q3. Delivery grew 33 percent year-over-year and online same-store sales increased 42 percent. Average check for app users in Q3 was 18 percent higher than non-app users. 

    Anticipating staffing levels to be more stable in Q4, Pollo will launch a curbside ordering option in 77 fully staffed locations and leverage a QR code option.

    We continue to make investments to enhance our digital platform and improve the customer experience,” he said. “We completed a number of mobile app enhancements and made good progress on the design of our digital drive-thru platform, which we will be piloting in the fourth quarter.”

    Along with increasing non-dine-in channels, Pollo plans to overhaul its kitchen design, with help from industrial engineering firm TPA.  The brand will test the redesign in a mock restaurant during Q4.

    Pollo’s remodel program is also advancing, with an additional six to eight units scheduled to finish before the end of 2021.

    The CFO said a combination of labor optimization and pricing actions contributed to improved margins in October, or the start of Q4. Pollo saw a 200-basis-point reduction in restaurant wages on a run rate basis during the month compared to Q3.

    To further improve margins, we intend to take additional pricing action in December,” Montgomery said. “Our historic pricing in 2019 and 2020 was low in comparison to our competitors, which should allow us to take additional pricing while maintaining attractive value perceptions with our customers.”

    Montgomery said he expects to see higher food costs in 2022 compared to 2021. The brand has yet to finalize key commodity negotiations.

    We intend to offset any food cost increases with additional pricing action and we are confident that we can recover margins without significant traffic risk given our low level of relative historical pricing actions,” he said. 

    There are currently 144 Pollo Tropical locations throughout Florida. Total continuing operations revenues increased 13.7 percent to $88.6 million in Q3 from $77.9 million in 2020, driven by increases in same-store sales.

    Fiesta sold Taco Cabana for $85 million earlier this year, which allowed the company to fully pay off its outstanding term loan balance. That left the company debt free with a cash balance of $55.8 million as of October 3.