First Watch raises prices after resisting last year

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Photo courtesy of First Watch

First Watch did something unusual last year. He chose not to increase menu prices, even as food and labor costs rose dramatically.

Most restaurants have increased their prices in 2021, from an average of almost 8%. But the Bradenton, Fla.-based chain opted to focus on generating traffic above all else, a move that appears to have paid off in recent quarters.

But as costs continue to rise, the chain can no longer afford to meet prices. It took 3.9% on restaurant menu prices in early January, expecting commodity inflation of 10% to 13% this year and labor inflation of 8% to 10 percent, executives said on the company’s fourth-quarter earnings call on Wednesday.

First Watch is also seeing “profound” increases in the costs of packaging and paper goods, said chief financial officer Mel Hope, which is hurting its take-out margins. And the war in Ukraine could further impact commodity prices, he said.

Operating margins at the chain’s restaurants in the fourth quarter, before the price hike, were 18.2%.

Executives said the higher prices have not hurt traffic and they believe the chain has more pricing power to work with in the future. First Watch typically raises prices by 2% or 3% each year and has never seen that impact demand, CEO Chris Tomasso said.

The move comes as consumers grapple with inflation at everything from groceries to gasoline. Some analysts have questioned whether going out for breakfast in particular might be on the chopping block for Americans looking to cut costs.

But executives said First Watch has always done well during tough economic times. The Great Recession of 2008-09 “was one of our best times at the time,” Tomasso said.

“When consumers are diligent, even in tough times, consumers want to eat out,” he said. “So they think about consistency, they think about quality, they think about value, and we’ve always done well when that criteria is applied.”

The 435-unit chain ended 2021 with another strong quarter. Same-store sales increased 20.6% compared to 2019 on a traffic increase of 6.1%. The average check was also higher. And executives said First Watch is experiencing more demand than it can currently meet.

The chain hopes to meet this demand by opening many new restaurants, including eight in the fourth quarter and 31 for the year in 12 states. These restaurants, with a new prototype featuring patios, indoor/outdoor bars and second production lines for take-out orders, were generating annualized AUVs of approximately $2 million, slightly above the benchmark of $1.6 million from the chain, executives said.

This year, the chain plans to open another 30 to 35 company-owned restaurants and 8 to 13 franchise locations.

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