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We picked a busy time of year to be in Louisville. The National Rifle Association convention was in town and politicians like Republican Presidential Candidate John McCain and former Candidate Governor Mike Huckabee had all come to court votes. We were there for an entirely different reason but one that is certainly central to all of the presidential campaigns: the economy and how one business is adapting.
The ‘high-income blue collar’ customer (Hart’s term) who dines at Texas Roadhouse [TXRH
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] is exactly the same demographic that is bearing the brunt of this economic slowdown. Hart also says that their customer base is expanding during these budget-conscious times. (See video clip at bottom for my one on one with Hart.)
There are “more BMWs, button down shirts, higher income folks” who are looking for affordable restaurants as alternatives. The real challenge for restaurants is to keep prices affordable for those customers while also protecting profit margins. Rising commodity costs (grain, milk, corn, gas, producer, etc.) are making it pricey to do business. That’s why Hart decided to raise menu prices by 2%. That’s not the entire strategy though.
Beef makes up almost half of Roadhouse’s cost of goods. When Hart noticed a spread in the cash and futures prices for beef this past September, he decided to start purchasing 25% of the company’s beef supply from vendors at spot market prices instead of via long-term contracts with vendors.
It is a strategy that higher-end chains like Morton’s [MRT
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] and Ruth’s Chris [RUTH
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] already practiced. So, how much has it saved Texas Roadhouse? Hart says since the restaurant buys beef on a weekly basis it saves “anything to nothing or in some cases a buck a pound.”
Of course, buying off the spot market also brings risk and may be more of a short term play. While the price of beef is currently down on the year, it is projected to increase substantially over the next few months.
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Still in times like these, the restaurant industry has to get creative to keep customers dining out and keep profits rolling in. Investors are showing real doubt about the health of the food industry. Currently short interest in Texas Roadhouse is at 21%, it is at 45% at Red Robin, 13% at Ruth’s Chris and at 5% at Mortons.
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