Without a single month of positive same-store sales for the sector since 2007, casual-dining restaurants have borne the brunt of the downturn. Operators and experts agree, however, that the largest segment of the industry may be down, but it is definitely not out.
On the segment’s to-do list for the years ahead is slashing units to correct what many say is an over-populated sector, improving and expanding menu offerings, and adding various price points to give consumers more choice and value-based options. Cost cutting, which many brands already have done, will help many casual-dining restaurants run leaner and meaner machines, helping make a profit on a lower sales volume.
“Casual dining has to follow fast food,” says Malcolm Knapp, president of Malcolm M. Knapp Inc., a New York-based restaurant consultant and founder of sales tracker Knapp-Track. “Everything happens in fast food first. They now have multiple price points and products that make money, they have changed décor.… Look at the reinvention of McDonald’s.”
It is a tall order, for sure, but one that many casual-dining operators are determined to fill. A trump card that many say they hold is the ability to entertain guests, provide an experience and help consumers celebrate special occasions—something fast-food restaurants or food from the grocery store can’t do.
“We’re in the entertainment business, we want to provide great service,” says Rick Rosenfield, co-founder and co-chief executive of California Pizza Kitchen Inc. “If we just served food, we’d be a grocery store—and we’re not.”
First and foremost, however, is the segment’s need to correct its oversupply, which already has been addressed with the closing of hundreds of locations this year, and with hundreds more planned to close in 2010. The closures are expected to decrease the number of seats, re-establish consumer demand and bring the sector back to prominence.
According to The NPD Group, a market research firm in Port Washington, N.Y., the number of casual-dining restaurants tallied through the United States in April fell by 713 units, the first year-over-year decrease in the number of locations since 2001. The percentage change of casual-dining locations was nearly flat at a decrease of 0.4 percent, as the number fell from 169,279 restaurants in 2008 to 168,566 restaurant in 2009.
The decrease has been felt by operators.
“In monitoring the restaurant activity in the 19 markets we’re in, we have felt a 20-percent to 25-percent correction in the number of seats, and that will help with the comeback of casual dining,” says Steve Wagenheim at Granite City Food & Brewery Ltd., parent of the similarly named 26-unit casual-dining chain. “Hopefully next year, there will be less seats and more traffic.”
John Glass, a restaurant securities analyst at Morgan Stanley, earlier this year called for casual-dining chains to close a net of 1,200 locations, or about 7 percent of the segment’s capacity, to restore a supply-and-demand equilibrium with restaurant consumers. He expected unit counts to fall by 2.5 percent by the end of this year and 4.1 percent in 2010.
In a re-evaluation of the casual-dining landscape in September, Glass notes that there is still concern about the long-term health of the largest casual-dining chains, and said any recovery could take between two and three years. A return to profitable sales volumes of the past, even with the reduced cost structures, could take between three and four years, he says.
“Cost-cutting stories—and there are many—will work if sales come back in a significant way…and in most cases today’s [average unit volumes] are 5 percent to 10 percent below where they were when margins were at peak,” Glass says.
According to the latest data from Technomic Inc. and sponsored by the International Foodservice Manufacturers Association, sales at full-service restaurants, which include casual-dining and upscale-dining concepts, will continue to post the largest sales losses in years ahead. In 2009, full-service segment sales are expected to fall 8 percent on a nominal basis, which includes menu price inflation, and 10.2 percent on a real basis, which adjusts for inflation, to $165.7 billion. In 2010, full-service segment sales are expected to drop 4.1 percent on a nominal basis and 5.5 percent when backing out menu-price inflation.
“There is a new normalcy,” CPK’s Rosenfield says. “We’ve reset the bar in terms of what revenues to expect, but people do go out, will continue to go out, and as consumer confidence increases, I’m a glass-half-full person that people will go out more.”— [email protected]