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Restaurant Business in Worst Slump Since '91

Casual-Dining Chains Hit the Hardest as $331 Billion Industry Struggles in Q2

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CHICAGO (AdAge.com) -- Sharp same-store sales declines among some of the biggest players in the $331 billion restaurant industry have analysts and marketers worrying whether the slide is a long-term trend or a short-term hit due to less disposable income. In either case, casual-dining chains and independents are the biggest losers.
Casual-dining chains were among the biggest losers in the recent slide in sales.
Casual-dining chains were among the biggest losers in the recent slide in sales.

Slumping sales
Following a week of disappointing sales reports, John Glass, restaurant analyst for CIBC World Markets reported Aug. 8 that restaurants are facing their worst sales slump since the 1991 recession. Indeed, total comparable sales grew just 1.4% in the second quarter.

"This time around, the consumer faces a more volatile mix: Rising energy costs and interest rates have slowed personal consumption expenditures, while unit growth, especially in casual dining, has impeded same-store sales growth," he said. "While we are not in a recession, we have more industry-inflicted damage this time around."

Trading down to fast food
Fast-food chains have thus far been less vulnerable than the casual-dining concepts, as consumers trade down to offset higher fuel bills. Casual-dining chains reported a 0.2% decline in same-store sales during the second quarter, while quick-service chains reported a 1.8% gain, according to Mr. Glass.

"I wouldn't want to be near casual dining right now," said Tony Pace, chief marketing officer for Subway Restaurants' Franchisee Advertising Fund Trust.

Although restaurants represent only 4% to 6% of consumer disposable income, restaurant patronage is viewed as a leading economic indicator as industry trends tend to shift ahead of the economy.

Can't afford to eat at Applebee's
One example is casual-dining leader Applebee's, which recently said 5% of its customers can't afford to eat there on household incomes below $35,000. And the recent heat wave that caused consumers to crank up their air conditioners has a "disproportionate impact on those below the $35,000 household income," said consultant Malcolm Knapp. On the flip side, he noted that consumers in households above $70,000 aren't as affected by energy costs. He pointed to the strong sales of upscale dining players including Ruth's Chris Steakhouse and Capital Grille during the second quarter. "Are times good? No," he said. But "things aren't as bad as some of the reported numbers. It's not true for everyone."

Technomic also recently lowered its forecast for the industry. Among publicly held chains representing 108 brands excluding McDonald's, same-store sales grew 3.15%. Within that group, among 71 full-service chains that have reported so far, the gain was just 1.63%, the lowest since the second quarter 2003.

Actual sales decline
While restaurant traffic has been declining for years, actual sales declined for the first time in two and a half years the week of July 28, according to NPD Group. Worst hit are independent restaurants, which aren't tracked well but represent 43% of the market, down from 47% in 2002. "Independents have really been getting hammered," said Harry Balzer, VP of NPD Group's Foodworld.
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