Table Stakes

As the casual-dining industry suffers one of its worst downturns, CFOs are in the kitchen and feeling the heat.

Chuck Sonsteby has worked in the restaurant business for most of his professional life. He began while in college, interning for the company that owned the fast-food chain Long John Silver’s. Today, at 55, Sonsteby is executive vice president and CFO of one of the country’s largest casual-dining companies — Brinker International, the Dallas-based operator of the Chili’s Grill & Bar, Maggiano’s Little Italy, and On the Border Mexican Grill & Cantina restaurant chains.

“I love the industry,” says Sonsteby. “It’s a combination of everything: manufacturing in the back and value-added retail in the front, along with entertainment. And it’s a great people business.” But while Sonsteby’s enthusiasm is alive and well, the same can’t be said for the industry he loves. “I don’t think anyone has ever seen anything like this,” he says. “These are truly historic times.”

In a bad way, that is. As the economy slides deeper into recession, casual full-service restaurants, which were among the first businesses to feel the tremors of impending collapse, are hungry for customers. Brinker’s same-store sales, the key metric for the casual-dining industry, declined across its brands in the latest quarter. Practically everyone else’s same-store sales have dropped too, according to Technomic, a Chicago-based restaurant consultancy. Applebee’s, Outback Steakhouse, Ruby Tuesday, P.F. Chang’s Chinese Bistro — these and other chains have seen a dramatic falloff in their “guest counts” during 2008, not to mention their profits and stock prices.

Some chains have called it quits. In July, the parent company of Bennigan’s and Steak and Ale filed for Chapter 7, closing hundreds of company-owned restaurants and dismissing thousands of employees. Startling for its size and suddenness — many workers found out the bad news when they showed up for work and found the doors locked — the liquidation signaled just how bad the economics of the casual-dining industry have become.

Indeed, while the U.S. economy shrank in the third quarter of 2008, the casual-dining industry (which analysts position between fast-food and fast-casual chains on the low end and fine-dining restaurants on the high end) has been in a recession for many months. “We saw a downturn in consumer sentiment in February 2006,” says Sonsteby, “and we’ve been in a downturn in traffic for quite some time.” Technomic dates the restaurant recession back to the third quarter of 2007, based on overall same-store growth rates for publicly held chains, says president Ron Paul.

For many restaurant finance chiefs, weathering the current economic climate will be the challenge of their professional lives. “Times like these are when CFOs get called to the test,” says Andrew Green, assistant professor of finance at Wofford College in Spartanburg, South Carolina, who was CFO from 2001 to 2005 of Denny’s Corp., a family-restaurant chain.

These times are about to get even worse: consumer confidence is sagging and unemployment is rising. In the third quarter of 2008, for the first time in 17 years, growth in U.S. consumer spending turned negative, according to the U.S. Department of Commerce. A recent Technomic study reports that more than a third of consumers are eating dinners out less frequently than a year ago.

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