This post is part of the On the Margin blog.
Are there too many casual-dining restaurants?
The CEO of one of the largest operators of such concepts thinks so.
Speaking on his company’s first quarter earnings call on Tuesday, Darden Restaurants Inc. CEO Gene Lee suggested that some supply needs to be culled from the casual-dining sector.
“I’m hoping more inventory will come out of the system,” Lee said. “I also think, as you drive down the road, you’re starting to see more restaurants close. We could use some inventory to come out.”
The inventory question is a big one in the industry at the moment, but in particular for a casual-dining sector that has been beset by a long string of declining sales and traffic.
Casual-dining traffic has fallen for each of the past 14 months, according to data from the MillerPulse index. And it has fallen at least 2.3 percent in each of the past five. Only four months since 2012 has the MillerPulse index recorded positive casual-dining traffic.
Darden’s seven concepts, led by Olive Garden, reported a 1.3-percent increase in same-store sales — outperforming the overall casual-dining sector by a whopping 340 basis points.
To be sure, quick-service chains haven’t exactly flourished in recent months. Yet until July its same-store sales had increased every month for at least the previous 66 months, according to MillerPulse.
Yet overall restaurant sales remain relatively healthy. In August, for instance, restaurant sales increased 5.8 percent, according to federal data — a level that has been common even as same-store sales at chains have declined. That increase, coupled with the weak traffic at chains, suggests consumers are spreading their dollars.
And as the traffic continues to weaken, concerns about the number of restaurants continue to grow.
The recent spate of bankruptcies, meanwhile, demonstrates just how weak many restaurant chains are in the current environment. A couple of bad quarters simply proved too much for these chains to handle. Even some companies that have filed for bankruptcy, like Ruby Tuesday, are shuttering locations.
The problem is that many companies are in build-and-expand mode even with the recent sales and traffic weakness.
Demands from investors, and many lenders, drive the need for many executives to push their concepts to grow. And as long as these new units continue to pay for themselves, these investors will keep building. Indeed, Darden is building 28 new restaurants, for instance.
As for the weaker concepts, those too will likely stay afloat. Just about all of the 10 companies that filed for bankruptcy since November continue to operate. Even the owner of Fox & Hound, whose own lender suggested it be liquidated, ultimately found someone willing to take the chain on the cheap to keep it going.
So while Gene Lee might want more inventory taken out of the system, that’s a lot easier said than done.
Jonathan Maze, Nation's Restaurant News senior financial editor, does not directly own stock or interest in a restaurant company.