Restaurants

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The restaurant category again has change on its 2002 menu. Upscale, casual dining and quick-service chains are trying to warm earnings by finding new customers in an oversaturated and mature market facing greater competition from supermarkets and convenience stores.

In 2001, consumers cut back on their restaurant habits for the first time in 16 years, even before the September terrorist attacks, according to NPD Group, which tracks U.S. eating patterns. On-premise and takeout "eatings" dropped two meals despite the fact that restaurant growth has come from takeout.

Once home, it may be even more difficult to get consumers to come back out, said Harry Balzer, VP, NPD Group, citing Newtonian physics. "When it comes to eating, a body at home tends to stay at home," he said.

Though food manufacturers have improved frozen meals to the point that they often beat restaurants at the convenience and price game, Americans also have entertained at home less and less. "Those upscale restaurants become the place where we're entertaining," Mr. Balzer said.

However, few chains have weathered the economic storminess of 2001 better than casual-dining chains such as Darden Restaurants and Applebee's International, said Allan Hickok, restaurant analyst for U.S. Bancorp Piper Jaffray. "Darden and Applebee's-that's the consumer sweet spot. There are always companies that can gain market share during the weak environment." Both offered heavily promoted value-priced meals under $10 and updated, inviting restaurants.

Expect more of the same in 2002, said Dennis Lombardi, exec VP, restaurant consultant Technomic. "I think you'll see a continuation of casual dining and family dining restaurants promoting price specials and re-engineering menus to maintain margins while they do that," he said. Watch for chains to switch to less expensive items like chicken and pasta in $9.99 combo meals to make profit margins.

As he sees fine dining and business expense-account restaurants continuing to struggle, some may promote price specials or boost local store marketing. Most industry observers expect quick-service chains to finally live up to conventional wisdom that fast food wins in the weak economy. With both McDonald's Corp. and Burger King Corp. trying to catch up to Wendy's International in rethinking their own value propositions, expect a newly escalated burger war. "They will try to meld price points with interesting food," Mr. Lombardi said. Already, each chain has a slew of new products and new value programs on their menus.

Because restaurant companies tend to be "early cycle recover" candidates and many chains already have stabilized, Mr. Hickok believes the economy may well have hit bottom for the restaurant industry. "I am a believer in an `02 economy at some point," he said. "Because you feel a little bit better about how things are going so you go out to eat. You may not buy a new SUV, a new home theater, or a new couch, but you might have dessert after your meal or you might have a glass of wine instead of a beer. Little things like that can juice your sales."

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