1 Thing Buffalo Wild Wings Absolutely Has to Fix

Buffalo Wild Wings (NASDAQ: BWLD  ) has a serious weight problem.

Sure, the restaurant chain reported strong sales growth again this week. Revenue was up by better than 21%, marking the eighth consecutive quarter where sales rose by 20% or more.

Those are results that other restaurants can only dream of. Fast-growing Chipotle, for example, increased sales by just 13% last quarter. Ditto for Panera Bread, which grew by 13%.

But B-Dubs' profits told a much different story. Earnings were a disappointment -- falling by 10%. And that's another trend that's been going on for years.

BWLD Gross Profit Margin Quarterly Chart

BWLD Gross Profit Margin Quarterly data by YCharts

Secret sauce
It's no secret that the company's profits are getting squeezed by rising costs. Chicken wing prices, which make up a huge chunk of B-Dubs' food costs, are up about 50% since the third quarter of 2011: 

Source: Buffalo Wild Wings conference calls.

The good news for B-Dubs is that the tide might finally be turning. The company says that wing prices are trending down so far this quarter.

Bigger birds
But adding to that cost spike has been an even bigger problem for the company: Birds are getting fatter.

Producers have been growing bigger chickens lately. And, as a result, B-Dubs is getting fewer wings per pound from its suppliers. While that's good news for customers, who've had meatier wings to munch on, it has amplified the cost pressure on Buffalo Wild Wings. Last quarter, for example, wing costs rose a high -- but manageable -- 9%. However, because of the increase in average wing sizes, B-Dubs' costs were up an incredible 30%.

And that's not even the worst of it. Two quarters ago, wing prices and chicken sizes combined to drive the company's costs 90% higher than in the year-ago period.

No longer winging it
That obviously can't continue for long. Thankfully, the company has a plan to deal with the oversized poultry. Starting this summer, B-Dubs will begin selling wings by portion size, and not by piece. Instead of ordering wings by the dozen, customers will choose from  "snacks, small, medium, and large portions." With that switch, the company will line up the way it sells its wings with the way it buys them -- by weight.

While it should help B-Dubs get a handle on its costs, there's no denying that this change will be a huge transition for its customers. Many of them could be confused by the new portion system, or see it as a sneaky way to increase prices. Restaurant traffic might even take a hit as customers adjust to the switch. But the truth is that B-Dubs really doesn't have a choice anymore. The birds are getting too big.

Still hungry?

Chipotle is another company that's had to deal with rising food costs. Its stock has been on an absolute tear since the company went public in 2006. Unfortunately, 2012 wasn't kind to Chipotle's stock, as investors questioned whether its growth has come to an end. Fool analyst Jason Moser's premium research report analyzes the burrito maker's situation, and answers the question investors are asking: Can Chipotle still grow? If you own or are considering owning shares in Chipotle, you'll want to click here now and get started! 


Read/Post Comments (10) | Recommend This Article (3)

Comments from our Foolish Readers

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  • Report this Comment On May 04, 2013, at 10:31 PM, bcweir wrote:

    If the problem is that bad, sounds to me like the birds have been given hormones to increase their size and weight. Frankenchicken.

    No thank you. Time to find a new source for chicken wings -- might be time for B-Dub to find a supplier that's not trying to introduce hormone-laden food.

  • Report this Comment On May 04, 2013, at 11:01 PM, music4eels wrote:

    Not to mention, their wings bl0w with their prefab sauce!

  • Report this Comment On May 04, 2013, at 11:30 PM, rav55 wrote:

    @bcweir

    Chickens aren't feed hormones to increase weight, the way that food is delivered to them and the fact the birds are in cages to reduce mobility and interaction with other birds to reduce injury has the effect of increasing weight. Birds spend their entire life in about 2' square cages containing maybe 2-4 birds. Feed rolls in on one end and eggs and shyte roll out the other. Once or twice a year the birds are cycled out, coops cleaned and new birds emplaced.

    You can't grow a chicken with 4 wings. But the weight ratio of the wing / chicken means that there is a huge amount of by product (legs, thighs, and breasts, etc., that must be sold as well.

    The high demand for wings, a relatively small component of the bird is doing 2 things. Raising the price of wings and increasing the amount of meat made available and thus depressing the overall chicken market.

  • Report this Comment On May 05, 2013, at 12:04 AM, anthcaz12 wrote:

    I remember when i first started working a b-dubs in 2005 as a cook. Wing prices have almost doubled since then.

  • Report this Comment On May 05, 2013, at 12:22 AM, wallygator60 wrote:

    Never a fan of BWW. Do you still have to go pick up your food? Are they still using plastic forks & knives? Been many years since we've been.

  • Report this Comment On May 05, 2013, at 1:35 AM, mr091468 wrote:

    I thought we just read in yahoo news just weeks ago that the price of wings has gone DOWN. What gives? Let's get the story(ies) STRAIGHT.

  • Report this Comment On May 05, 2013, at 2:35 AM, jmyoung666 wrote:

    BWW is definitely one of the better places to get wings outside of Buffalo. Very authentic. If I had not read this, I would have been pissed at the move to sizes rather than number of wings.

  • Report this Comment On May 05, 2013, at 1:08 PM, goknickscowboys wrote:

    Screw you B-DUBS your already pretty pricey. I love your food but this is stuiped wings by the pound so less wings more money thanks. deffently gotta find a new wing place. BDUBS makes enough money they dont need to change anything

  • Report this Comment On May 05, 2013, at 2:20 PM, luckyagain wrote:

    "Many of them could be confused by the new portion system, or see it as a sneaky way to increase prices."

    You mean customers will actually believe that it an increase in prices? Imagine that.

  • Report this Comment On May 05, 2013, at 6:02 PM, TMFSigma wrote:

    @mr091468 - the price of wings per pound has been going down lately, but the weight of each wing is still going up as birds get bigger -- so B-Dubs' costs per piece are still rising.

    Demitrios

    (TMFSigma)

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