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Restaurant industry has long road to recovery

Product innovation, not rapid growth, vital to rebuilding traffic, NPD says

The restaurant industry is well on its way to recovery, but it has yet to rebuild traffic to pre-recession levels, according to The NPD Group, which said further gains will be spurred by product innovation, unit redesigns and a move away from discounting.

Despite improvement, per capital restaurant visits in 2010 reached only the same levels seen in 2005 as consumers continue to spend cautiously, Warren Solochek, vice president of client development for The NPD Group, said during a webinar presented Friday by Morgan Stanley restaurant analyst John Glass.

“We are absolutely back at 2005 traffic levels because we dropped so many visits in 2008 and 2009,” Solochek said. “[The decrease] was consistent across high- and low-income groups. We asked people why they cut back on restaurant visits, and the vast majority say, … ‘What if I lose my job? I need to save for a rainy day.’ When we ask what it would take to bring them back [to dining out], a lot of them say an improvement in the economy.”

In order to get customers back, restaurants should focus on developing new menu items and updating their locations, so that customers have different reasons to visit restaurants and to perceive getting a good value for the dollars they spend, Solochek said.

“Nobody should assume growth is going to come back at a quick rate in 2011 or 2012,” he said. “It’s all a share game. I would have said at the end of 2010 that we’d be less dependent on value, but gas and grocery prices have gone up, so we all have less to spend. But people always want new, and they’re always willing to try new.”

More highlights from the webinar:

Growing pains

As economic recovery gains momentum — the United States added 216,000 jobs in March, bringing the national unemployment rate to 8.8 percent — restaurant fortunes will improve, but the industry’s growth won’t look like that of 2005 to 2007, because excess capacity won’t allow for many new units to be built, Solochek said.

However, certain categories will expand, particularly fast casual, he said.

“Panera, Five Guys and Smashburger — the more upscale players are continuing to expand units,” he said, “perhaps not at the same rate as before, but still expanding. But they’re coming off a small base.”

Similarly, Solochek said, Buffalo Wild Wings has a more limited base of nearly 750 restaurants in the United States, which would allow it to be one of the few exceptions to casual dining’s trend of halting growth or closing units this year. NPD projects the net number of casual-dining units to decline in 2011 compared with 2010, with heavy losses expected from independents.

Several major casual-dining brands have stated plans to invest in their current restaurant locations rather than expand. Darden Restaurants Inc. tied its modest growth targets for its big three brands with increases in media spending for LongHorn Steakhouse and remodeling programs at Red Lobster and Olive Garden, the latter of which could encompass as many as 400 locations. OSI Restaurant Partners LLC said its increased capital expenditures would go toward refurbishing many Outback Steakhouse units and expanding Bonefish Grill, which at 152 restaurants has a much smaller base of locations than the 968-unit Outback.

“A recovery is starting in weekday traffic at casual dining,” Solochek said. “The question will be what’s going on in March, however, because that’s when gas prices started to peak up. … Even among major chains we’re not seeing a large expansion of new units. They said they’re going to take that cap-ex money and focus on their existing units.”

In quick service, unit growth will be fairly flat overall, Solochek said, though he noted some chains like Dunkin’ Donuts and Subway have been offering aggressive incentives to franchisees to drive expansion.

Let’s not make a deal

In the final three months of 2010, restaurant visits involving a deal or discount remained flat compared with a year earlier, while nondeal traffic inched up 1 percent, Solochek said.

The proliferation of value menus in quick service and bundled meals in casual dining during the recession has hurt average checks and sales, he said.

“What’s scary to me is that the bar-and-grill segment lost 37 million visits in the fourth quarter of 2010, which was a 2-percent decline,” Solochek said. “A lot of the promotions have been focused here, and the ‘2 for $20’ deals have muddied the waters where consumers are more loyal to a deal and price than to specific operators.”

Deal traffic accounts for 25 percent of all restaurant visits, NPD research showed. As food inflation becomes a bigger concern for operators, restaurants across quick service and casual dining will have to weigh how much they can afford to offer in terms of deals, Solochek said.

“I’m not dropping menu prices necessarily, but I’m making more promotional offerings available to those who need them,” he said. “What quick-service players are more worried about is having to expand the value menu, particularly in the morning. The margin for breakfast food is really high, because a lot of it is beverage-related.”

Casual-dining chains will be more concerned with portion sizes, he said.

“We’ve had 2 for $20 and 3 for $20, or $5 foot-longs, so how do restaurants successfully move away from promoted value and get people in who are not focused on absolute price points?” Solochek said. “The ones that crack that code first will succeed. Operators that show more unique products are the ones to lead the industry out of that.”

Bright spots

While many challenges remain for the industry, NPD has observed the return of families to restaurants. Parties with children accounted for 80 percent of the traffic declines in 2009, NPD research showed, but those family visits increased 12 percent in the fourth quarter of 2010, while traffic from adults-only parties slipped 8 percent.

“Restaurants have to have stuff on the menu that will at least be the tie-breaker for kids,” Solochek said. “As long as we get those parties coming back, that will be a huge win for the industry.”

Breakfast and evening snack, two dayparts that largely weathered the recession and have grown, continue to perform well, NPD data showed. Solochek said breakfast growth has been more substantial than that of any other daypart over the past 10 years. The key driver of that trend has been specialty coffee from the likes of McDonald’s and Starbucks and the entry of major chains like Subway into the daypart. This trend is important for restaurants because morning meal purchases, such as a daily cup of coffee, become some of the most habitual restaurant visits.

Sales at the evening snack time also improved during that time, and the average check for that daypart rose 12 percent to $7.95 in the fourth quarter of 2010.

“It’s still not a big daypart for the industry, but the big increase is there,” Solochek said. “Restaurants are taking advantage of happy hours and doing some interesting promotions and menuing for late evening, and it’s related to beverage alcohol, which has a much higher margin.”

Market research firm The NPD Group is based in Port Washington, N.Y.

Contact Mark Brandau at [email protected].


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