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Casual dinnerhouse outlook remains gloomy for 2007

Casual dinnerhouse outlook remains gloomy for 2007

Shortly before the end of 2006, a Houlihan’s restaurant in the Convention Center District of Austin, Texas, filed for Chapter 11 bankruptcy protection and shuttered its doors after just six months in operation.

The reasons, according to bankruptcy filings, included sales of $30,000 per month, which were not enough to cover expenses of $35,000 per month, and debt totaling as much as $10 million. Other explanations for the unit’s failure, gleaned from local reports, included the oversaturation of casual-dining restaurants in the area where the Houlihan’s unit operated and insufficient consumer demand for the supply.

A spokeswoman for Houlihan’s Restaurants Inc. in Leawood, Kan., noted that restaurants close for a variety of reasons and this franchisee was just “undercapitalized.” She also added that Houlihan’s corporate restaurants have posted positive same-store sales gains for three years.

Still, the closure exemplifies the continuing troubles facing the casual-dining sector, where market saturation, lack of differentiation between brands, and consumers’ demands for value and convenience—needs often met by quick-service players—have all contributed to sluggish sales during the past two years, especially within the grill-and-bar segment.

For casual-dining operators, the year ahead does not look to be much better than the dismal 2006, which followed a weak 2005, industry watchers contend. On just the third day of this new year, restaurant securities analysts at Banc of America Securities LLC in San Francisco downgraded four casual-dining companies— Applebee’s International Inc., Brinker International Inc., Ruby Tuesday Inc. and Texas Road-house Inc.—and said that “2007 fundamentals will be worse than expected.”

Casual dinnerhouse sales outlook remains gloomy for 2007

Andrew M. Barish at Banc of America predicted a weak start to the year, as companies would have trouble lapping the strong same-store sales results in January 2006, which were aided by mild winter weather and gift card redemptions.

“We believe a harsh new year will quickly bring a ‘reality’ check to [casual-dining companies], setting the stage for a challenging start to what could be a very challenging year,” Barish said.

Troubled casual-dining operators say they are slowing new-unit development to help keep cash flows strong, tweaking menus to focus both on higher-end fare and on value, and continuing to focus on advertising designed to break through television clutter. In addition, many are raising prices as much as they can.

Publicly traded casual-dining companies also are buying back shares, increasing dividends and franchising more aggressively to better please investors.

According to research from securities analyst Ashley Woodruff at Friedman Billings Ramsey & Co. Inc. in New York, the segment’s unit growth rate is expected to drop from about 7.9 percent in 2006 to about 6.8 percent this year, which is the lowest unit growth rate in the past five years.

The projected growth rate was derived from projected new-unit openings for the eight largest casual-dining companies. The lower expansion rate should help casual-dining operators gain some positive traction in same-store sales and help to balance the supply-and-demand equation with consumers, Woodruff said.

Dinnerhouses should be able to increase menu prices more this year than they were able to in fiscal 2006, Woodruff added. Companies that already have announced their pricing plans for 2007 are reporting menu price increases of between 1 percent and 2 percent, such as at The Cheesecake Factory, to increases around 4 percent, such as at California Pizza Kitchen.

“The second quarter could be the beginning of a turnaround,” Woodruff said.

In menu news, concepts are working to provide value to the consumer as well as quality high-end food that customers cannot get from the fast-feeders, operators have said.

Orlando, Fla.-based Darden Restaurants Inc.’s flagship dinnerhouse concepts, Red Lobster and Olive Garden, have posted positive same-store sales results of late, helped by menu promotions that have proven popular with customers, like Endless Shrimp and the Never Ending Pasta Bowl.

“You have to stand out in this kind of environment and give people a special reason to come [to your restaurant],” Andrew H. Madsen, president and chief operating officer of Darden, said during a conference call late last year. “That is why [Darden] focuses and works so hard on having compelling news that offers a great value. But we do it in a way that does not change what we stand for, does not change the brand positioning, and does not change the promised experience you are going to get. It just gives people a new reason to come.”

Overland Park, Kan.-based Applebee’s has been focusing on its new ad campaign and the quality of its menu offerings. In a partnership with celebrity chef Tyler Florence, Applebee’s latest offering, “Holiday Flavor,” boasts a 12-ounce seared rib-eye steak with garlic-chile shrimp priced as high as $15.99 in some markets.

The efforts, which are intended to bring back customers who had left Applebee’s, have helped the chain gain some traction. In its latest quarter ended Dec. 31, systemwide domestic same-store sales decreased 1.1 percent, which reflected declines of 1 percent at domestic franchised restaurants and 1.4 percent at domestic corporate restaurants. While still negative, the results were an upside surprise for many analysts who follow the company and were even at the high end of Applebee’s own expectations.

Still looking to provide value to consumers are concepts like T.G.I Friday’s, which recently initiated its newest three-course combination meals, “Indulgent,” which features customer favorites, and “Better for You,” which includes more healthful fare. Both combos, available at the chain’s 855 locations, allow consumers to pick an appetizer, entrée and dessert for around $12.99. T.G.I. Friday’s is operated and franchised by Carrollton, Texas-based Carlson Restaurants Worldwide Inc.

The 78-unit Max & Erma’s chain, operated or franchised by Columbus, Ohio-based Max & Erma’s Restaurants Inc., also hopes to drive traffic by offering value to consumers. The chain recently launched its latest three-course combo meal, “3 Degrees of Temptation.”

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