Casual dining is in some serious trouble.
Americans have been told for decades, in cheery voiceovers, that inexpensive sit-down meals at national chains meant “Eating good in the neighborhood,” where “It’s always Friday.” Every mall or major intersection was given a Chili’s, an Olive Garden or an Applebee’s – sometimes all three.
Yet the casual-dining industry has largely worn out its welcome. Customer traffic to these restaurants has declined in nine of the past 13 years, according to retail-research firm Black Box Intelligence. Even as the U.S. economy began healing and consumer spending recovered, beginning in 2010, same-store sales were stagnant, based on Black Box estimates.
In December, industry-wide sales at restaurants open at least a year slid by 2%, even as the unemployment rate hit a five-year low and the stock market hit all-time highs. For sure, harsh weather didn’t help, but that can’t account for tepid nationwide results.
As the chart below makes clear, even some of the biggest, most familiar chains have struggled for years to draw diners and spur consistent gains in sales. The chains have been caught in a self-perpetuating cycle of “value menu” discounting to draw consumers with plenty of cheap eating-out or food-delivery options.
While the companies all talk about trying to increase the “average ticket” size, overall price increases for Darden Restaurants Inc.’s (DRI) Olive Garden and Red Lobster, and Brinker International Inc.’s (EAT) Chili’s chains was just 1.4% in the year ended Nov. 30 – well below the 2.1% inflation rate for all restaurant meals.
A confluence of consumer trends is pressuring the casual-restaurant business. Most prominently, the ascendance of “fast casual” chains – notably Chipotle Mexican Grill Inc. (CMG) and Panera Bread Co. (PNRA) – has been embraced enthusiastically by consumers. Sitting between traditional fast-food chains and full-service casual venues, these outlets offer higher-quality, largely all-natural and often made-to-order meals in a relative hurry.
Chipotle and Panera have seen sales grow by an average of 15% to 20% annually over the past five years, while the casual sit-down chains as a group have flat-lined. It has resulted in a rush of new competitors to claim the mantle of the “Chipotle of” – you name it, pizza, pasta, deli sandwiches and more. PotBelly Corp. (PBPB), a 36-year-old sandwich chain, became one of the hottest new stock offerings of 2013 in part by encouraging the idea that it would partake of the fast-casual craze.
The casual-dining chains are also suffering from the broader decline in retail foot traffic as online shopping has begun to bite into physical-store activity. The fewer trips to the mall, the fewer quick stops for dinner or lunch at the Cheesecake Factory Co. (CAKE). Even Starbucks Corp. (SBUX) this month cited waning retail traffic trends as a drag on its sales pace.
Quite simply, too, there are far too many casual-dining locations for everyone to thrive, and many established “concepts” are either tired, too similar to others or both.
Red Lobster is a somewhat faded brand reliant on heavy discounting. The “bar-and-grill” format has been done near to death, with Applebee’s looking like Chili’s, which might as well be a TGI Friday’s or Ruby Tuesday Inc. (RT).
Chains expanded heavily through the 1990s and 2000s, following suburban sprawl, enabled by the housing and consumer-credit bubbles. They never retrenched much in the Great Recession, and with the rise of fast casual and persistent stagnation in worker wages, there seems not enough business to go around.
This has created something of a zero-sum game for market share among the big chain operators, resulting in a separation between a handful of standout growth winners and others left to fight for relative scraps.
Buffalo Wild Wings Inc. (BWLD), for instance, has been one of the best performers, focusing on a younger bar crowd with clever marketing tie-ins with college and pro sports tournaments. The Minneapolis-based chain has increased sales and profits more than 20% a year for the past five years, and is rapidly expanding from the current 990 stores to a planned 1,700. Its stock price, even after a recent 10% slide, is up some 500% over five years.
Among the long-established multi-chain companies, Brinker has done a pretty good job keeping Chili’s in the lead of the burger-centric competitors such as DineEquity Inc.’s (DIN) Applebee’s and the likes of Ruby Tuesday, while Brinker’s Maggiano’s has outperformed Darden’s Olive Garden. Brinker’s shares are up 52% in the past year and 350% since early 2009.
Darden, meantime, is under assault by activist investment firm Barington Capital, which wants Darden to split into a few pieces to liberate trapped value in the company, Darden has responded by saying it will explore spinning off Red Lobster as a separate company, but its critics claim this falls short of the comprehensive restructuring they seek.
Some critics of Darden have cited, as proof of its fecklessness, a recent Florida-based business journal article detailing the apparent efforts of the Orlando company to virtually encircle the Tampa headquarters of rival Bloomin’ Brands Inc. (BLMN), parent of Outback Steakhouses, with Darden-owned Olive Garden, Longhorn Steakhouse and Capital Grille outlets.
Casual and "cast casual" converge
Possible corporate breakups aside, a more fundamental adaptation is also apparently on the way – the blurring of the competitive lines between traditional sit-down concepts and the hot fast-casual companies.
The serial discounting of casual-dining companies and sometimes-pricey meals at the likes of Chipotle and Panera have brought them rather close in terms of cost. The average ticket at Applebee’s of $12.42 a person is just over a dollar more than that of Chipotle, at $11.30, according to data by Geraty Investments.
At the same time, the trendiness of Panera and Chipotle causes long lines and wait times, compromising their perceived quickness advantage.
Indeed, at a big industry conference this month sponsored by research firm ICR in Orlando, Fla., a Brinker executive jibed that the dedicated takeout drive-up service at Chili’s rivals the speed of fast-casual for a workday lunch. Panera and Chipotle have both vowed to add staff to speed service, with Panera in particular noting it used to brag about huge queues but can no longer afford to take the issue lightly.
The bottom line is that – with so many existing and upstart players vying for the appetites of a bargain-attuned American consumer – cheap, fast meals will continue to abound in this land of plenty-to-eat.