Buffalo Wild Wings to implement new pricing system

Record-high chicken wing prices cut into profit margins for Minneapolis-based Buffalo Wild Wings for much of 2012, but the casual-dining brand expressed optimism that earnings for 2013 could grow as much as 25 percent if new locations, a new menu pricing system and service upgrades pay off as expected.

“We faced challenges last year, but we maintained a disciplined approach to ensure our long-term success,” chief executive Sally Smith said during a fourth-quarter earnings call with analysts. “Even as we dealt with higher-than-expected cost of sales, we continued to invest in our future success.”

For the quarter ended Dec. 30, 2012, Buffalo Wild Wings’ net income grew 22.3 percent to $16.7 million, or 89 cents per share, compared with $13.6 million, or 73 cents per share, a year earlier.

Revenue increased 37.8 percent to $303.8 million, reflecting same-store sales gains of 5.8 percent at company-owned locations and 7.4 percent at franchised units.

Full-year net income grew 13.6 percent to $57.3 million, or $3.06 per share, compared with $50.4 million, or $2.73 per share, in fiscal 2011. Full-year revenue rose 32.6 percent and broke the 10-figure milestone for the first time at $1.04 billion, compared with $784.5 million a year earlier.

Same-store sales rose 6.6 percent at company-owned restaurants and 6.5 percent at franchised locations for the year.

Restaurant margins fell to 17.3 percent of sales on a comparable 13-week basis with the fourth quarter of 2011, when margins were 19.3 percent. Higher costs for food and labor in large part caused the contraction, said chief financial officer Mary Twinem.

Food costs rose 2.6 percent from a year earlier to 32 percent of sales in the fourth quarter, Twinem said, driven by a 70-percent increase in the brand’s cost per wing from a year earlier. Traditional wings cost $2.07 per pound, an increase of 65 cents from the prior year, but larger wings also yielded fewer wings per pound, she said. For the first two months of 2013’s first quarter, wings are averaging $2.13 per pound.

Fourth-quarter labor costs also rose slightly, an increase of 0.3 percent from a year earlier to 30.2 percent of sales, Twinem said.

Managing through menu, pricing

To help manage higher food costs, Buffalo Wild Wings is changing the way it sells wings, which it procures from suppliers by the pound but currently sells in discrete quantities on the menu.

The chain’s test of a new pricing system, which serves wings in variable-size portions based on weight rather than a fixed number of wings, is in place at 64 locations, including both company-owned and franchised units, Smith said. Instead of emphasizing the number of wings in each order, according to Smith, orders might be described as “single, double and triple” or “snack, platter and meal.”

The process of assessing the system is taking slightly longer than anticipated, but Buffalo Wild Wings likely would makes its final decision on the pricing structure some time in the second quarter, ahead of a new menu rollout set for August.

“We just want to get that right,” Smith said. “We haven’t been getting pushback [in test marketing]. I think a lot of it has to do with how we explain to our guests … whether we’re serving five wings for a small order or six wings and making sure that the guest understands.”

The chain did not increase menu prices early last year, when 2012’s record-high wing costs followed record lows from 2011, but by the third quarter, “there was no other way to cover the cost of the product,” Smith said. The brand ended up taking about 6 percent of pricing increases for all of 2012.

For 2013, “we need to be able to highlight [wings] as a premium product” in menu descriptions, Smith said, in order to head off more significant price hikes.

“We’re looking at how we describe it as a fresh product, never frozen, educating the guests on the attributes of a fresh product and highlighting our sauces, so that it’s still seen as a value — but if they’re coming for wings, they’re getting a really great wing,” she said. “So I think we have some opportunity there.”