Texas Roadhouse is a fast growing casual dining chain that specializes in affordable steaks. Over the past 22 years Texas Roadhouse has grown from one location to 392 owned and 81 franchised restaurants and approximately $1.6 billion in sales. Texas Roadhouse has managed this growth in a competitive landscape with considerable margin pressure from rising beef prices. While similar concepts, such as Outback Steakhouse, Logan’s Roadhouse, and LongHorn have struggled to maintain customer traffic, Texas Roadhouse has managed its impressive growth and better-than-sector margins by aligning its business model with its operating model. Specifically, Texas Roadhouse’s employee incentive program, menu-pricing strategy, and commodity hedging allow the restaurant to draw more traffic and capture more profits than its casual dining competitors. Texas Roadhouse demonstrates the success a business can have in an exceedingly competitive market by allying its operating and business models.
Texas Roadhouse’s business model is to draw traffic and sell affordable steaks, drinks, and bar food. A 6oz USDA sirloin at Texas Roadhouse sells for $9.99 compared to $10.99 at Logan’s Roadhouse and $9.99 at Outback Steakhouse. At these prices, Texas Roadhouse margins are thin – according to ers.usda.gov, October 2015 sirloin prices average $8.8 per lb wholesale. This means a 6oz strip costs Texas Roadhouse $3.3 before transportation, employee salaries, and overhead costs. Moreover, sirloin prices continue to rise (+5-8% each year for the past 4 years). Texas Roadhouse model therefore rests on managing beef prices, driving traffic and drawing in customers for high value steak offerings, and then selling these customers on higher margin products like alcoholic beverages and bar foods.
Operating Model – Strengths of Texas Roadhouse
Texas Roadhouse is able to successfully drive same store sales growth even as competitors have struggled. Texas Roadhouse has 23 straight quarters of positive Same Store Sales.
Texas Roadhouse also realizes higher sales per square foot than its competitors.
Texas Roadhouse’s relatively better metrics can be attributed to its excellent service.
Whereas Texas Roadhouse’s company owned competitors (that is, non-franchise) are serviced by hourly wage workers, Texas Roadhouse works to supplement its employee and management compensation with incentives.
When a Texas Roadhouse staffer is promoted to General Manager at one of Texas Roadhouse’s 392 owned locations, they are asked to pay a $25,000 buy-in fee which is available in the form of a loan and available for forgiveness after five years of service. In return for the fee, each new General Manager receives a base salary of $45,000 per year as well as 10% of the net income of their restaurant. All in average annual compensation for a Texas Roadhouse General Manager exceeds $100,000. This is in contrast to GMs at competitors who typically earn $65,000-85,000 per year. The benefit of this incentive is tangible. When one sits down Texas Roadhouse, the General Manager frequently comes to their table to check on refills, question food preparation, and promote specials. General Managers have a direct and measurable incentive to boost profitability and as a result they manage with ownership. This in turn drives customer service, as evidenced by the fact that 70% of Texas Roadhouse diners are repeat customers.
Each General Manager reports to a Market Partner. Texas Roadhouse Market Partners provide supervisory services for 10-15 General Managers and their respective teams. Market Partners also assist with site selection and the recruitment of new management teams. Having local Market Partners helps Texas Roadhouse with better site selection and hiring than managing these processes remotely, as is common with Texas Roadhouse’s competitors. Market Partners are required to post buy-ins of $50,000-120,000 depending on the maturity of the respective market. In return, Market Partners receive 7-9% of the net income at the restaurants under their supervision. Market Partners are required to sign multi-year employment agreements which ensures the stability of Texas Roadhouse local management which also drives service.
Hedging and Pricing
Beef makes up ~45% of cost-of-goods-sold at Texas Roadhouse compared to ~33% at competitors. Given the escalation of beef prices over the past half-decade, a product of growing demand and drought, Texas Roadhouse is extremely sensitive to rising beef costs. Texas Roadhouse notably signs 24 month term beef contracts with its suppliers. This compares to Logan’s Roadhouse, which signs 6-12 month contracts with its suppliers. Although this means that Texas Roadhouse generally pays higher beef prices at the time of its contract execution than Logan’s Roadhouse, given the steady upward movement of beef costs, these longer term contracts have actually benefitted Texas Roadhouse. Additionally, Texas Roadhouse prices its menu by region, pushing slightly higher prices onto more expensive geographies. This is a practice common at Outback Steakhouse, but not shared by all of Texas Roadhouse’s competitors. Finally, unlike competitors, Texas Roadhouse maintains a barbell menu pricing strategy with below market prices on high margin offerings and higher prices on premium end items. This allows them to drive traffic with inexpensive bar food and to somewhat mitigate inflation in higher grade protein offerings.
Texas Roadhouse operates in the highly competitive casual dining steakhouse segment of the restaurant industry. Texas Roadhouse is able to use incentive programs to provide better service than its competitors which in turn drives traffic, spreading fixed costs and generating higher margins. Texas Roadhouse is also skilled in using commodity hedging and menu pricing strategies which has protected the business in an environment of rising beef prices. As a result, Texas Roadhouse has historically realized ~12% EBITDA margins while Logan’s Roadhouse has 5-8% EBITDA margins and Outback Steakhouse margins are in the 8-10% range.