Meanwhile, skyrocketing food and energy prices over the past two years have only recently started to moderate. Larger outlays for wheat, corn, soybeans, and cheese have eaten into profit margins, while steeper fuel costs have taken bigger bites out of the bottom lines for restaurateurs and consumers alike. Labor costs have risen, too. No wonder the phrase “perfect storm” has found currency among industry analysts. “I’ve never seen a time when the consumer was strained this much, when all the commodity prices were up, when every single input was unfavorable,” says Brad Ludington, a restaurant analyst at KeyBanc Capital Markets in Cleveland.
Too Much of Everything
As the tide of consumer spending recedes, the weaknesses of the casual-dining sector have been exposed. Foremost among them is overexpansion, fueled in the past few years by cheap credit. The consensus among analysts is that there are simply too many restaurants, which Paul attributes to a prevailing “take-the-hill mentality.” As chains sized up new locations they rarely worried whether a Red Lobster or Ruby Tuesday was already next door; the thinking was “our concept is good, our food is better,” says Paul. “For a while, it seemed to work, but you couldn’t support 4 or 5 percent growth per unit when demand was rising only 1, 2, or maybe 3 percent.”
As chains piled on top of each other they all began to look alike to consumers. Asked why they patronized one restaurant versus another on a given night, many focus group participants answered that “the line was shorter.” No loyalty was being built up, says Paul. “Restaurants were look-alikes in terms of menu, pricing, and even TV commercials — consumers couldn’t remember which chain did which commercial. Restaurants became bland and tired, the decor packages were kind of ‘been there, done that.’ The customers grew up, but the concepts didn’t.”
But other things were changing. “Prepared foods from supermarkets and other retailers have gotten infinitely better,” says Paul. “The consumer now realizes that the salmon you pick up at Whole Foods is really pretty good” — and less than half the price of a casual restaurant’s seafood entrée. Wine and soft drinks are a lot cheaper at the supermarket, too. Combine those options with concern about the cost of gas and babysitting and it’s no surprise that more people are dining at home on Saturday night.
But the restaurant chains are fighting back. “This is the time we really have to perform,” says Sonsteby. As consumers scale back, he says, “their expectations become higher because their dollars are more precious, so we have to make sure everybody gets a fantastic experience.”
That experience begins with appearances. Despite the credit crunch (see “On the Financing Menu, Limited Choices” at the end of this article), a number of chains have recently spent millions to “reimage” or refresh the look of their restaurants. “The exterior is your billboard, your drive-by,” explains Sonsteby. “It’s important.” Brinker reimaged 73 Chili’s restaurants in fiscal 2008, at a cost of about $250,000 each. “We’re putting in glass, making them much brighter and lighter,” says Sonsteby. “It’s really helped customer traffic.”