The dark economic cloud hanging over the casual-dining segment has become so dismal that even its silver lining appears a tad tarnished. But operators and investors nonetheless say they see rays of hope.
Even as continued layoffs and store closures move the segment closer to a pitched Darwinian battle for survival, some savvy casual players are focusing on the opportunities provided by lower commodity and food costs, easier recruiting and retention of talented management, and reduced media costs that make marketing a less expensive proposition.
Many also are turning up their innovation as they work to lure spending-shy customers back to their folds with new menu items, cooking platforms and value-oriented concepts.
“It’s really all about stealing market share at this point,” says Tim Hackbardt of The White Barn Group, a marketing agency in San Juan Capistrano, Calif., that specializes in strategies for restaurant chains.
“You have the whole world trading down to McDonald’s, or they are trading out into brown bagging and groceries,” Hackbardt says. “You have to think about what you are promoting that will drive transactions. You have to have a specific offer that is attractive, interesting and relevant to the consumer. And you have to offer innovation, something the consumer hasn’t seen before that he would really like to try. It could be product or an experience.”
Many casual-dining companies are finding a small amount of breathing room in lower costs for many commodities, from cheeses to proteins such as beef and chicken.
Chuck Sonsteby, chief financial officer and executive vice president at Brinker International Inc. in Dallas, in discussions with analysts over the company’s second-quarter financial results, said he was seeing “encouraging signs of abatement in commodity pressures,” and he expected those prices, already off their peaks of 2008, to show further improvement later this year.
Sonsteby added that Brinker, the parent to the Chili’s Grill & Bar chain, had found “commodity pricing is certainly moving in the right direction.”
“We think there is the opportunity for continued favorability on cost to sales on a year-over-year basis as we look out in the third and fourth quarter,” Sonsteby said.
With many chains locking in new commodity contracts at lower rates later this year, they will “expect to realize some of those savings,” said Marie Perry, Brinker’s vice president of investor relations and treasurer.
Many casual-dining chains also are finding that the bleak economic climate is helping them recruit and retain top-level talent, which in turn helps to improve service levels for both internal and external customers. Current employees are more likely to stay put, and the growing numbers of unemployed are a boon to those employers with positions to fill.
A prime example was the hiring call in early February at the new 12,935-square-foot, 557-seat Yard House in Temecula, Calif., which is scheduled to open March 22.
Steele Platt, chief executive and founder of Yard House USA Inc., says the 22nd Yard House’s first day of hiring drew more than 700 applicants for the 180 positions available at the new store. Job seekers were lined up down the block to interview for the positions, and the company is bracing for similar numbers when it begins hiring for its 23rd unit in Miami, which is scheduled to open in April.
“We’re finding applicants with tremendous experience, maybe somewhat overqualified or coming from other industries,” says Jennifer Weerheim, a spokeswoman for Yard House Restaurants. “We’re seeing extremely diverse applicants right now. You have to do a few more interviews to find the right candidate. We are definitely, definitely seeing a surge in qualified candidates.”
Retention is also better, Weerheim says.
“People are not shopping around the jobs,” she said. “We’re trying to keep them happier. We’re all in this together right now.”
The tumultuous economy is also providing casual-dining chains with the incentive to innovate. Marketing consultant Hackbardt says restaurants have to put themselves under pressure to provide unique products and experiences, especially in tough times.
Hackbardt likens the need for innovation in restaurants to other consumer products, such as razors. Razors through the years keep adding new blades and other functions that set them apart, with the old standard one-blade razor now heading toward five blades.
“They innovate their own product,” Hackbardt says. “They will add another blade to their razor before the competition does. They attack themselves and innovate to beat themselves. You have to get that mind-set. You have to get the customer to say to themselves, ‘I have to get in there because of some innovation.’”
Darden’s Red Lobster division did that last fall with the introduction of a wood-fire grilling system. The 680-unit chain announced in November that it had rolled out the grills systemwide at a cost of $10.5 million as part of its efforts to increase menu offerings, especially those that are lighter and more healthful.
Andrew H. Madsen, president and chief operating officer for Orlando, Fla.-based Darden, said in analysts calls earlier this year that “wood-fire grilling is a very important component of their phased plan to refresh the brand, building on prior brand enhancements, such as the introduction of today’s fresh-fish menus, new plateware, more culinary-forward menu items and seafood expert training for their servers.”
“Every restaurant now has a wood-fire grill operated by grill masters who are certified experts in the art of wood-fire grilling,” Madsen said. “Guest response to the new menu offerings has been very positive.”
Such moves attract the attention of investors and stock analysts. David E. Tarantino, an analyst with Robert W. Baird, this month initiated coverage of Darden stock with an “outperform” rating, saying that the company’s initiatives were a “compelling value idea.”
Smaller casual-dining chains also are racing to offer new items and experiences.
For instance, Food Concepts International of Lubbock, Texas, parent to the 40-unit casual-dining Abuelo’s Mexican restaurant chain, introduced a fast-casual version of the concept called Nieto’s Mexican Express in early February in Evansville, Ind.
The company converted a 3-year-old Abuelo’s unit to the new fast-casual concept. A company spokeswoman said Nieto’s has targeted a check average of about $8 per person, versus the $14 per-person check for a traditional full-service Abuelo’s. Menu prices will be $4.49 to $9.99.
Nieto’s will offer counter service and a casual atmosphere, the company said. Nieto’s will have about 210 seats, about 30 fewer than at the Abuelo’s, which had been open three years.
“Nieto’s Mexican Express offers us a way to further express our passion for food in a distinctively different way, while at the same time giving our guests the same quality they have come to expect from Abuelo’s, only with faster service and a menu that is value priced for today’s budgets, with no tipping required,” says Bob Lin, president of Food Concepts International. “Nieto’s offers a great value and an economical way to feed the whole family.”
Lin says Evansville was picked as the test market because it’s in the Midwest and the demographics reveal a community that is value-oriented.
“We understand that for more and more dining occasions, people want their meals quickly, with premium quality and service, but at a better price point than typical casual dining,” he says, “and that’s why we developed the Nieto’s concept.”
Conversely, casual-dining restaurants also can benefit from their prominent locations and familiarity at a time when consumers are looking for comfort, says Chris Tripoli, owner of A’la Carte Foodservice Consulting Group in Houston.
“In hard times it is less likely for customers to reach out for something new and travel outside of an existing buying pattern,” he says. “Most casual-dining brands have good, free-standing, visible locations on established shopping routes. This is an obvious advantage and extremely hard for others [such as fast-casual operators and startups] to replicate.”
Tripoli notes also that casual dinnerhouses’ recent attempts to play up their value propositions with less-expensive menu offerings seem to be working.
“This is a good and safe move for casual dining because it is a back-to-basics move and says, in effect, this is why you liked us in the first place,” Tripoli says. “Playing to the core customer makes the most sense when times are tough. I think the casual-dining segment will survive and can become strong again.”
The search for value in this economy extends beyond restaurant customers to casual-dining companies themselves. Nowadays, marketing departments are seeking out—and finding—better deals on media.
As traditionally big advertisers, such as auto companies, rein in ad spending, smaller companies are rushing in to make their presence known on radio and television. Even prices for billboard rental are going down, operators say.
“We are talking to vendors who would never have talked to us before about trade and discounted rates,” says Weerheim of Yard House. “They are doing just about anything to earn our business.”
Hackbardt of The White Barn Group is seeing the same phenomenon.
“You have decreasing media costs, which are dropping dramatically, as much as 30 and 40 percent for our clients,” he says. “At this point, if you advertise, you will stand out from the crowd tremendously. Media costs will go up. If you get in now at this baseline rate, it won’t raise as much over the years.”
In addition, Hackbardt says, his clients also are able to negotiate a lot of programs that come along with the advertising, such as ‘lunch-time cafes’ sponsored by a restaurant or products that are given away.
“Those can be negotiated into the media buys on top of these discounts,” he says, “so that helps you show up even more and have a larger brand presence across a market. Those can be for radio, television and cable television.”
In addition to price reductions for media, the once heavy-handed outlets of radio and television are becoming much more flexible in the sizes of the commercials they will sell.
“You used to be able to choose only from 30- or 60-second ads,” Hackbardt says. “Now, there are a lot of opportunities for 10-second ads or 15, even on television. Those costs are much lower, and they allow smaller brands to transition into traditional media.”
Today, even single casual-dining units and smaller chains can afford advertising on Facebook or through e-mail marketing, which costs little compared with media purchases, Hackbardt says.
It’s a time, he adds, when some restaurants can gain market share at the expense of competitors.
This economy has thrown casual dining back into “the olden days of ‘this is a special night out,’” he says.
“It’s really going back to the days when casual dining is a special occasion, and operators have to ask themselves whether their occasion is any better than the guy’s over there,” he says. “If it isn’t any different, you better figure out how to make it different.”
