Weathering the Storm: Course correction

Weathering the Storm: Course correction

Glori Ann Byrd, a married mother of two, has completely re-evaluated the way her family spends money in a slumping economy. In so doing, she and countless other Americans like her are provoking survival-minded restaurateurs everywhere to rethink their abiding focus on diners’ wants and needs.

When Byrd’s Clarendon Hills, Ill., family took stock of its increasingly squeezed budget, one of the first items to be radically downsized was dining out, she says.

The Byrds, however, weren’t affected by job losses, a home mortgage crisis or any of the dramatic setbacks being chronicled repeatedly by media that dwell on today’s battered consumer. The family just wanted to live more practically during these difficult economic times.

“It’s a similar instinct that happens when a mother is pregnant and she decides to start organizing her house before the baby comes,” Byrd says. “When things around you aren’t going along as usual, it occurs to you that maybe you should take a look at how you spend your money to live as smart and practical as possible. The piece of the pie that was the grossest overspending was our eating out.”

Similar stories are told from New York to Los Angeles and in most spots in between. The amount of spending cuts relate to consumers’ varying income levels and financial situations, but even those without serious concerns are cutting back. Almost all data on discretionary spending point to a sea change in consumers’ choices about how often they should eat at home or dine away from home, with the consensus decision appearing to reverse a long-running trend favoring restaurants.

Fostering fears that any consumer would be hard-pressed to ignore are the current economy’s confluence of workforce downsizings; skyrocketing gas prices that already exceed $4 a gallon in some markets; increased food costs at every local grocery store and many restaurants; rising rates of personal debt, bankruptcy and mortgage foreclosures; and the declining values of most people’s homes, 401(k) savings and equities portfolio.

Adding a worrisome note for restaurateurs is the leveling off or decline in the rate of growth of women entering the workforce—which for decades had propelled families’ needs for meals outside the home.

At the same time, health concerns, in the form of consumers’ growing interest in organic and locally sourced meal ingredients, have led to more food purchases at venues other than restaurants.

“There is a fundamental shift [in the consumer] that is only being exacerbated by economic uncertainties,” says Harry Balzer of the NPD Group Inc., a market research firm in Port Washington, N.Y.

While the restaurant industry continues to produce revenue upticks in absolute terms, consumers everywhere are changing their attitudes toward spending, experts warn.

What will consumers do with their government rebates?SOURCE: THE NPD GROUP INC., APRIL 2008DATA COLLECTED FROM 784 TOTAL RESPONDENTS FROM A NATIONALLY REPRESENTATIVE SAMPLE OF 2,000 MEN AND WOMEN AGED 18 YEARS AND OLDER.
Debt service or savingsTotal: 63%
Pay down bills42%
Save it21%
Do not qualify for rebate checks14%
Spend on discretionary items12%
Other11%

Balzer says consumers have decided that they will indeed continue eating out, just not more than they used to, and in some instances, a bit less. Last year the average American ate about 207 meals at restaurants and this year might eat only 205 meals away from home, NPD research indicates.

“That’s a loss of about 1 percent, which is a disaster for an industry that grows through unit-growth rates of 1 percent,” he says. “But those 205 meals are still there…and the atmosphere of those 205 meals should be the focus.”

Restaurant companies large and small have been focusing intently on the changed consumer, offering them lower prices, more value to the dollar, incentives to encourage repeat visits and more convenient ways to provide a meal.

“The gains will be made by those that are getting people in the door with something new, something exciting—whether it’s taste, cost or convenience,” Balzer says. “The battle will still be what the battle has always been: capture more from your competitor.”

Starbucks has experimented with $1 coffees and begun offering free add-ons to regular customers while expanding the chain’s marketing as never before. McDonald’s [3] has done giveaways of new menu items, expanded its dollar menu and begun testing sales of $1 large sodas in some markets to better compete with grocery and convenience store prices.

The Cheesecake Factory [4], meanwhile, is testing delivery service in six geographic markets and plans to introduce catering services through two Los Angeles restaurants this summer. Curbside takeout service is another offering the casual-dining chain plans to market heavily, emulating several of its segment’s lower-volume, more mass-market contenders.

“I think those kind of convenience initiatives are important for guests today, and we want to take advantage of them,” says Michael Dixon, The Cheesecake Factory’s chief financial officer.

For its part, Domino’s [5] Pizza now offers a “recession-busting” deal on three 10-inch pizzas for $4 each, called the 444 Deal.

Uncharacteristically, California Pizza Kitchen [6] is attempting to spark repeat patronage with its new Thank You promotion, whose sealed-envelope prizes could be anything from free dinners to thousands of dollars or luxury vacations. Customers can only find out what their prize is upon a return visit to the restaurant.

Yet, with consumers facing such fundamental challenges, the majority of those newfangled sales drivers may not get the results restaurants expect, some industry analysts say. Indeed, Starbucks last month reported reduced quarterly income and cut its annual earnings outlook on continued slow sales. McDonald’s last month reported its first monthly domestic same-store sales decline in five years. And Cheesecake Factory reported its first quarterly earnings drop in eight years.

“We are still on the down slope of consumer spending,” says securities analyst Larry Miller of RBC Capital Markets. “The challenging time for restaurants will continue in the near future.”

RBC and Miller conduct a monthly “Restaurant Spending Snapshot” as well as other consumer studies, and results from March showed record-high levels of consumers who expect to spend less at restaurants in the next three months, a full 32 percent of those polled, and record-low levels of confidence in the overall U.S. economy. Only 20 percent of consumers felt the economy would get better in six months, leading RBC’s Expectations Index to plummet to its lowest level ever, a negative 41.6. The Expectations Index was as high as a positive 90 in January of last year and still was around 40 two months later.

Consumers told RBC they are most concerned about the increased cost of living and their need to reduce debts and save more to improve their financial circumstances. The most pessimistic consumer groups were married women and women aged 45 years and above, according to the data. Those two groups are less confident in the economy today and think it will get worse in the next six months. They are also less comfortable making household purchases and future investments and are less confident about job security.

Denise Kumm, a married mother of two in Denver, fits right into that category of decreased spenders. She and her husband never used to think about the cost of going out, but today both think twice before heading to a restaurant, she says. Even worse for operators trying to lure back families like hers is Kumm’s perception that a lack of value at restaurants makes the decision to stay home easier.

“If we do decide to go out, the experience has not been worth the money spent,” she says. “I suppose dropping prices and offering discounts would be an incentive, but we would still think twice before going out and spending money.”

While restaurants have worked hard to provide value, whether in combo meals at casual-dining places or dollar menus at quick-service eateries, the customer remains the ultimate arbiter of what constitutes value.

“We don’t see any increase in consumers reporting that they’re getting a deal,” says NPD restaurant researcher Bonnie Riggs. “It’s the perception…when combo-meal deals first came out, they were considered a deal, it was new, but now it’s commonplace. The same thing is happening with dollar menus.… They are no longer perceived as a deal. It’s the way consumers order now.”

In addition, while wholesale food prices have risen and while the increased costs of groceries is even cited as a factor driving consumers’ cutbacks on restaurant spending, there are still data that show—both in reality and perception—that eating at home is considered a cheaper alternative. One NPD study shows that a meal at a restaurant can be three times the cost of a similar meal at home. The absolute food dollar is what is driving decisions today, not the rate of increase in food prices versus menu prices, NPD has concluded.

“We as marketers tend to think of [the grocery and restaurant] categories separately,” says NPD analyst Arnie Schwartz, “but if you look through the consumer eye, what are they trying to solve? Feeding the family. It’s about certain needs—whether health, expenses, keeping the kids happy—and depending on those needs, they will choose the best option to satisfy those needs.”

Grocery chains have of late been stepping up their game in hopes of garnering more share of the food dollar, and have started to deploy in-store restaurants and more prepared-food options as some have experimented with the marketing of carryout meals.

One of the most recent grocery maneuvers speaks exactly to meeting consumers’ needs. Piggly Wiggly, the Southeastern supermarket chain, has developed a new prototype store that attempts to mimic how consumers think about food solutions, the company says. Food items are arranged according to how consumers intuitively look for them. Fresh, frozen or canned fruit and vegetables, for examples, are grouped together. One-stop stations will provide compete meal solutions with items like ground beef, hamburger buns, chips and beer all grouped together for a barbecue, for example. Additional features include curb-side pickup, an in-store sommelier and more than 1,500 wine varieties.

Efforts at hybridizing also can be seen in tests by several leading family-dining chains to incorporate fast-casual-style counter service and grab-and-go elements at refashioned cashier stations, reflecting the restaurant industry’s attention to consumers’ shifting priorities, even the growing aversion to tipping that could be seen in the disproportionate customer traffic surges being tallied by fast-casual chains.

Most pundits agree that the restaurant industry will see a slight sales lift starting this summer and running through September because of the federal economic-stimulus package that will send tax rebates of at least $600 to qualifying taxpayers.

The Bush administration even moved forward the checks’ mailing date to help spark spending more quickly, and the government predicts it can reach the $50 billion mark in dispersed rebates by the end of this month. Many restaurant operators have said they hope to share in ensuing spending, though some analysts expect much of the money to go toward debts and deferred essentials.

Some studies show that consumers plan to use the rebates to pay bills or bolster savings, although what consumers say and do is often very different. Even if consumers use the rebate for debts, such allocations could prompt a greater willingness to spend the next month on restaurant meals, some pundits assert.

However, grocers want their fair share of the tax rebates. The Kroger chain of 2,400 grocery stores in 31 states is offering “bonus dollars” to every customer who exchanges a rebate check for a Kroger gift certificate. Customers redeeming a $300 check will get a gift card for $330 while those with $600 rebate checks will get two $330 cards.

Some analysts say that restaurants similarly willing to market against the rebate checks may get more of a sales bump than others—yet another reflection of wary consumers’ perceptibly growing appetites for food values.

Weathering the perfect storm economy [7]