As labor and commodity pressures continue to hit the restaurant industry, several brands have been forced to pass those rising costs to customers.
The price of food away from home rose 0.8 percent in July compared to June, the largest month-over-month increase since February 1981, according to the Bureau of Labor Statistics. Quick-service meals increased 1 percent in July month-over-month, while full-service menu prices lifted 0.6 percent. In the 12-month period ending in July, prices grew 4.6 percent, including 6.6 percent for limited service and 4.3 percent for casual dining.
The roughly 120-unit BurgerFi isn’t the exception, as the fast casual decided to raise menu prices roughly 4 percent at the end of the second quarter. CFO Michael Rabinovitch noted that when looking at BurgerFi’s competitive set, there have been similar price increases taken in recent periods. One of the more notable examples is Chipotle, which revealed in early June it would raise menu prices 3.5 to 4 percent to cover the cost of raising average wage to $15 per hour.
So far, BurgerFi is pleased with the results from the price hike. The chain is reaping the benefits of a higher average check while the number of transactions, as compared to 2019, remain at the same level they were prior to the move.
“We were very sensitive to whether or not the price increase would have any impact on the number of transactions and we have not seen that,” Rabinovitch said during the brand’s Q2 earnings call.
Before the price increase took full effect, restaurant-level operating margin was 11 percent in Q2, compared to 10.1 percent a year ago. Pricing, in addition to other initiatives, is expected to drive operating margins to 14 to 16 percent in the back half of the year, according to BurgerFi’s 2021 guidance.
The change only applies to company-run stores, but operators nationwide are expected to implement similar measures.
“Our franchisees have the right to price according to their own markets and their own individual strategies,” Rabinovitch said. “What we have done though is we’ve shared the data intelligence that we’ve gathered on each of their trade areas, and our team has been very actively engaged with them, showing them the opportunity that’s available for them. A majority of them have followed suit, and we expect that more will continue.”
As BurgerFi attempts to mitigate macroeconomic headwinds, same-store sales are sequentially improving each month. In Q2, systemwide same-store sales lifted 44 percent year-over-year, including 39 percent at company-run stores and 45 percent at franchises. July preliminary same-store sales are showing continued growth against 2019 levels at both franchise and corporate restaurants.
Rabinovitch noted BurgeFi is seeing different levels of recovery depending on geography, with several parts of the franchise network suffering steeper declines. About a half-dozen franchised and licensed restaurants are still temporarily closed because they’re either in airports or other nontraditional areas that have experienced less traffic. But those outlets are expected to come back online as BurgerFi heads into the fall. In terms of rising COVID cases nationwide, Rabinovitch said it’s a concern, but that the chain hasn’t seen any meaningful change in behavior from customers.
To be cautious, BurgerFi required employees to start wearing masks, CEO Julio Ramirez said.
“We’re dealing with it,” Ramirez said. “Obviously, I just heard in the news this morning that 50 percent of Floridians are vaccinated and that matches the U.S. number, even though Florida gets a lot of attention. But I think of all the tourists that come to Florida, I think that’s also part of what we’re dealing with. But so far, we’re navigating it and obviously it’s a fluid process and we’re dealing with it, working with it closely. So far, we’ve been able to navigate it.”
If things were to shift again, Rabinovitch said BurgerFi has the proper digital infrastructure to handle the change. The chain earned $17.3 million in digital sales in the second quarter, which was a 12 percent increase compared to last year. The channel mixed 39 percent in the quarter.
Customers can not only order pickup and delivery through the chain’s native website and app, but also from the largest third-party delivery providers in the marketplace, whether that’s from brick-and-mortar stores or ghost kitchens. BurgerFi has more than 25 ghost kitchens operating across the U.S. in partnership with REEF Kitchens and Epic Kitchens. BurgerFi expects to open 15 to 20 additional ghost kitchens by the end of the year. About 70 percent of the delivery-only outlets are in markets where BurgerFi already has a streetside store.
“In terms of the revenue projection for ghost kitchens, it’s still very early in our journey on this,” Rabinovitch said. “We do have some initial estimates, but as we open them, we’re seeing some with very, very high volumes and we see others that are in development. And I think our oldest kitchen is just about a year now, so we’re not at the point where we want to guide on what we think those would do by location. They are, obviously, going to be the lower revenue per than a franchise location because it’s a delivery-only kitchen. But we’ll hope that as we get some empirical data that we’d be able to share, we would.”
Overall, BurgerFi remains confident in its outlook to open 25 to 30 company-run and franchise restaurants in 2021. In Q2, the brand opened three new corporate locations and one franchise site, pushing the year-to-date total to eight stores. The brand currently has more than 25 signed leases, 18 of which are under various stages of construction and development. Most of the new restaurants are in existing markets.
Ramirez estimated that BurgerFi will end the year with 14 corporate openings and somewhere in the ballpark of 11 franchise restaurants.
“In my 25 years in the previous company where I ran development, both in Latin America, in the U.S., the best operators that we had, single-unit operators that were growing, great performance was 14 or 15 restaurants a year,” the CEO said. “For this company to go from one restaurant a year ago [company-run] to 14 is an amazing feat. And we’re very focused in this environment with the COVID situation going on, with the challenges you have with labor, with the challenges of construction, we will hit our target of 14, and we’ll open 11 franchise restaurants.”
“And again, every one of those have a name on them, have a team on them,” he added. “And we have a good construction crew here following up on them. We’re using five different construction companies to help us get there.”
The plan is to expand out of the Southeast and up through the Eastern Seaboard, with a goal of connecting the Southeast market with the Mid-Atlantic and Northeast. BurgerFi will also pursue opportunities in the Southwest and Midwest, but only if operators meet rigorous criteria.
When it comes to the design, the brand has opened two drive-thru restaurants in Kentucky and Nevada. Ramirez explained that BurgerFi’s approach is to watch the bigger fast-casual players closely and learn from their successes and failures. The chain has more drive-thru restaurants in the pipeline and is also exploring the idea of a “park-through” type of restaurant and pickup windows for digital orders.
“We’re looking at all those things,” Ramirez said. “And as we see them working and performing in chains that are trying them out, we’ll take the best. I thank God we don’t need to be the first one out of the box. We need to be a fast follower and go with the best strategy and adapt quickly. And I think we do that very well, as we look at second generation buildings for development that we do a lot, so.”
BurgerFi earned $44.2 million in systemwide restaurant sales in Q2, up 63 percent compared to 2020. Adjusted EBITDA in the second quarter was $300,000 versus $500,000 in the year-ago period.