Economic Storm Changes Restaurant Dynamics
by Spence Cooper on 11/30/09 at 1:37 pm
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One of the many restaurants hit by the economic downturn
According to NPD Group, a market research firm, the number of people visiting restaurants has plunged for four consecutive quarters. The National Restaurant Association’s performance index shows that the industry has declined for 23 months in a row. Sales at high-end eateries are off by 20 percent or more. According to Bellwether Food Group, a food industry consulting firm, restaurant chains such as McCormick & Schmick’s and Morton’s saw same-store sales, or sales at restaurants open at least a year fall 18.8 percent and 16.8 percent in the third quarter compared with a year earlier. And Bellwether projects stagnating sales for at least another two years.
Earlier this year, the original McCormick & Schmick’s Seafood Restaurant in Portland, Oregon, closed down after 30 years. McCormick & Schmick’s had double-digit declines at restaurants open more than a year, and lost nearly $70 million in 2008 and $1.1 million in the first quarter of 2009. Denny’s saw same-store sales at company-owned restaurants fall 6.6 percent in the third quarter. In July, the seafood restaurant chain Oceanaire Inc. filed Chapter 11 bankruptcy and closed four of its 16 restaurants. Tavern on the Green, the landmark Manhattan restaurant in Central Park also filed for bankruptcy protection.
First-quarter results for Chili’s Grill & Bar disclosed that customer traffic fell for the 21st consecutive quarter with revenue down 21 percent and profits off by 34 percent. Distressed sales have also battered Applebee’s, P.F. Chang’s, Benihana, and Ruby Tuesday. An October 2009 Zagat Survey of 145,000 “local restaurant-goers” across the United States over the last five years revealed that the percentage of lunch and dinner meals eaten away from home has turned down from 53 percent to 48 percent. IbisWorld Inc., a market analysis firm in Santa Monica, California, predicts Christmas-season spending at bars and restaurants will be up this year by almost 6 percent from a year ago, but will still be down 11 percent from the pre-recession level in 2007.
“I think it will only get tougher. People are still losing their jobs, credit is still tight, and we could see another wave of foreclosures,” said Erik Oberholtzer, co-owner of Tender Greens, a group of three restaurants based in Culver City, California, that emphasizes locally grown food.
“It is not a pretty picture,” said Bonnie Riggs, a restaurant industry analyst with NPD in Chicago. “Consumers have pulled back so much. In 33 years of tracking restaurant traffic, NPD “has never seen this type of a weakness for this long of a period,” Riggs said.
Slashing Wine Prices to Keep People Coming
Consumers are eating out less and cooking at home more, and when they do dine out they skip alcoholic beverages, appetizers and desserts. From “pay what you want” schemes at casual diners to slashing the price of fine wines at upscale eateries like London’s Le Bouchon Breton, desperate restaurant owners have been forced to devise creative measures to mitigate their rapidly declining revenues.
Rick Newman with U.S. News analyzed data to see which publicly owned restaurant companies with at least $250 million in annual sales have gained revenue and market share since the recession began near the end of 2007. Newman then researched earnings reports and other sources to separate firms with strong inherent growth. The restaurant firms that fared well all emphasized value in either huge portions or quality for less money. A few of the firms he mentioned were Olive Garden, Panera Bread Co., Chipotle Mexican Grill, and Buffalo Wild Wings.
Chris Muller with R&I [Restaurants and Institutions] makes an astute observation. He cites the five year Zagat Survey and claims “these are not statistics about the current recession; these are about trends which have their roots reaching back to the economic expansion of 2004-2005…This isn’t about bank failures, foreclosures or recent high unemployment. These trends show consumers are choosing modified vegetarian diets and smaller portions, that both women and men are preparing more meals for their families, and everyone is interested in health and wellness….”
Muller suggests restaurants need to adapt to consumer lifestyle changes or they will become obsolete. “There are companies in and out of the casual segment that are emerging as the beneficiaries of the new demographics.”
While Muller advises future restaurant survival will depend on addressing consumer trends which he believes are based more on fresh ingredients, health, and nutrition, as Rick Newman points out, the restaurants that have weathered the ravages of this recession have promoted value in either huge portions or quality food for less money. Instead of choosing between the two, restaurants may now be forced to do both.
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