Diners look for value when spending stimulus checks

Restaurants hoping to garner even a slice of summer spending sparked by federal stimulus checks—and the subsequent lift to corporate profits—must offer consumers compelling value and low prices, both operators and industry observers say.

With inflation continuing to climb and gas prices hitting more than $4 per gallon as the peak driving season begins, consumers are more strapped than ever in terms of discretionary spending. They already have said previously in various surveys that about two-thirds of stimulus dollars would go toward debt repayment and savings, and only one-third would be earmarked for discretionary spending.

Still, in an industry where every additional party of five contributes to sales and profit, even the small percentage of consumers who plan to spend a portion of their rebate checks on dining out—between 6 percent and 9 percent, according to two recent studies—can materially affect foodservice. By taking a conservative estimate of one-quarter of the more than $100 billion total stimulus package earmarked for spending, then figuring that just 6 percent of that amount will be set aside for dining out, an infusion of $1.5 billion can be expected for the restaurant industry.

Most analysts and observers expect the restaurant industry to get a same-store sales lift of at least 1.5 percent during the next few months, with some predicting that the casual-dining segment will get a higher incremental lift in same-store sales of between 2 percent and 3 percent. Every percentage increase to same-store sales can add about 20 basis points, or about 0.2 percent, to per-share profit at public companies, said Larry Miller, restaurant analyst at RBC Capital Markets Corp.

While the boost in sales is expected to be a near-term jolt and not a long-term fix to the restaurant industry’s current downturn, it may be enough to relieve some pressure at certain companies struggling to hit financial projections in the second and third quarters. In addition, a small jump in sales that flows through to profit could help alleviate debt covenant ratios, eliminating any need to refinance at more costly rates.

ESTIMATED PER-SHARE EARNINGS LIFT FROM 1% JUMP IN U.S. SAME-STORE SALES

The operators expected to garner a lion’s share of summer spending, according to almost all sources, are restaurant brands that focus on providing value.

At the recent National Restaurant Association Restaurant, Hotel-Motel Show in Chicago, McDonald’s chief executive Jim Skinner underscored that point by counseling casual-dining operators to offer “an affordable menu, even if it had to hurt.” At Oak Brook, Ill.-based McDonald’s, company executives said late last month that the chain would not pass on all of its inflationary costs to customers, but would continue to focus on “everyday affordability” through its value menu and other promotions.

Jerry Deitchle, president and chief executive of BJ’s Restaurants Inc., the operator or franchisor of 69 casual-dining restaurants, said recently that the more successful dinnerhouse chains will be the ones that “protect their overall approachability for all dining occasions…and offer great quality, great differentiation and overall value.”

BJ’s, based in Huntington Beach, Calif., is one chain that has made analysts’ lists of brands expected to see a bump this summer from the stimulus checks because of its low-to-moderate price range.

Texas Roadhouse, the 293-unit casual-dining chain, also is expected to see a sales lift this summer, according to analyst reports and consumer studies. The chain, based in Louisville, Ky., and owned by parent Texas Roadhouse Inc., has kept menu prices lower than peers—up only 1 percent, compared with a sectorwide average increase of between 3 percent and 4 percent. Texas Roadhouse introduced last month a new, value-centric menu that includes 19 entrées, excluding burgers and sandwiches, priced below $10.

In a report from RBC’s Miller, Olive Garden, Red Lobster and The Cheesecake Factory should join BJ’s and Texas Roadhouse as brands consumers may frequent this summer with any extra cash from stimulus checks. According to RBC’s research survey of 1,000 consumers last month, when asked which restaurants they would frequent from a list of choices, Olive Garden, Red Lobster and Texas Roadhouse received the most votes.

In addition, 20 percent of survey respondents said they would frequent a restaurant not on RBC’s list, indicating that a local, independent restaurant would benefit. A total of 82 percent of the survey’s respondents said they would spend some portion of their check on eating out at a restaurant.

“Generally, consumers showed a preference for moderately-priced, casual-dining restaurants as opposed to fast food,” Miller said

The preference for a casual-dining occasion this summer was echoed by surveys at Goldman Sachs Global Investment Research and by industry consultant Malcolm Knapp, who said the stimulus checks will be viewed as “found money.”

“Some [consumers] have lost part of their standard of living,” he said, especially referring to consumers in the lower-income levels that have really cut back on dining out in the face of credit and inflationary pressures. “They will use this money as treat dining,” he added.

According to Goldman Sachs, which surveyed 2,560 consumers in April, about 73 percent of respondents said they would spend part of their stimulus checks at casual-dining operators, compared with about 15 percent who cited a visit to fast-casual chains and about 11 percent who said they would spend their excess stimulus dollars at quick-service brands.

“We do believe that [the stimulus checks] will benefit casual diners as…consumers lost over the 2007 time frame return to treat themselves to an indulgence,” Goldman Sachs analyst Steven Kron said. “We [also] believe quick-service could see strong benefits…Extra cash in the hands of consumers could very well end up in the hands of quick-service in the form of upgrades to premium items or add-on products.”