Casual Dining Restaurants Suffer from Slackening Consumer Spending

By , Money Morning •

By Jennifer Yousfi
Managing Editor

Casual dining restaurants are being hit hard by a softening U.S. economy, as consumers tighten their household budgets to cope with high food and energy prices.

While some fast food restaurants are benefiting from penny-pinching consumers at home and strong sales overseas, mid-level domestic casual dining restaurants are facing declining same-store sales.

On Tuesday, two chains under the Metromedia Restaurant Group umbrella closed their doors after filing for Chapter 7 bankruptcy protection. More than 300 Irish pub-themed Bennigan's Grill & Tavern locations, as well as nationwide Steak & Ale outlets were told not to open, as the chains no longer had enough money to pay staff through the rest of the week.

The casual dining restaurant closings are "something we're going to see more of over the next 6 to 12 months," Amy Greene, a director at Avondale Partners who tracks the restaurant industry, told The New York Times.

And while the casual dining restaurants are struggling, there's slim hope of receiving financing to help make it through the current economic downturn.

"Banks have become less willing to lend to restaurants and franchisees," Greene said. "The business fundamentals just do not support it right now."

It might seem odd that casual dining restaurants are having so much trouble when data from the National Restaurant Association is pointing to a 4.4% increase in restaurant sales this year. But many analysts feel those figures are misleading, as the number of new chains and locations are outstripping consumer demand.

"The absolute sales are up for the restaurant industry; that's because new units are opening," Lynne Collier, restaurant analyst for Keybanc Capital Markets, told CNNMoney. "But when you look at same-store-sales, that has been negative for the industry for quite a while now."

Same-store sales were flat in 2006, down 1.1% in 2007, and down 1.1% year-to-date, Collier said, although there was a slight bump in May, mainly attributed to the government issued stimulus checks.

The pattern of declining same-store sales for casual dining restaurants is why the closing of Bennigan's shouldn't have come as much of a surprise for anyone familiar with the industry, according to Ron Paul, president of Technomic, a restaurant industry-consulting group.

"These restaurants share many subtle and complex challenges that extend beyond this difficult economic climate," Paul told MarketWatch. "To some extent, they've become victims of their own success – a mature category with too many units and not enough differentiation, at least in the eyes of consumers."

With so many similar choices in the casual dining restaurant market, consumers have little incentive to choose Bennigan's over similar competitors such as Carlson Restaurants Worldwide, Inc.'s T.G.I. Friday's chain or Ruby Tuesday, Inc. (RT), whose shares are down almost 30% so far this year.

"All these bar and grill concepts are very, very similar," Bob Goldin, executive vice president of Technomic, told The New York Times. "They have the same kind of menu, décor, appeal," making it more difficult to establish brand loyalty among customers.

But some casual dining chains have found the recipe for success.  Darden Restaurants Inc. (DRI), owner of Red Lobster and The Olive Garden, has been able to position itself as good value for the price.

"[Olive Garden] appears to be gaining share through a strong value message," Bryan Elliott, restaurant analyst for Raymond James, told CNNMoney. He praised the company for its effective advertising and marketing. "All-you-can-eat bread sticks and salad creates a perception of lots of value for the money." 

And that's why Darden shares are up over 18% year-to-date, while some of its casual dining rivals are being forced to close their doors.

News and Related Story Links:

  • MarketWatch:
    Bennigan's Bankruptcy Indicative of Larger Casual Dining Woes, Says Technomic