Areport on the state of the casual-dining business published late last summer by Cleveland Research Co. paints a gloomy picture of the already battered segment’s immediate future.
Citing such challenging fundamentals as extreme margin pressures from food, labor and utility costs, declining consumer demand, and market saturation, the equity research firm concluded that “casual dining is largely a broken model and that the industry will need to rationalize and reformulate over the next two to three years—either by choice or by force.”
Signs have grown even more portentous since the study was published and the global economic tsunami really began to pick up destructive force. Ron Paul, chief executive of Technomic Inc., the Chicago-based research firm, predicts that more than 1,000 casual-dining outlets will be shuttered by the middle of next year.
“We’ll also see an increase in bankruptcies,” Paul adds. “In the near term, things look bleak.”
But while industry observers acknowledge that casual-dining brands have arrived at a major crossroads, they also maintain that operators who make the required modifications to their concepts stand the best chance of surviving the shakeout and expanding profitably into the next decade.
“In this tough environment where we don’t have headwinds, we have ‘demand destruction,’ the casual-dining concepts that hold true to their core equity values and maintain service and quality will emerge stronger than they are today,” says Malcolm Knapp, president of Malcolm M. Knapp Inc., a New York-based restaurant consultant. “Those that do not will suffer the consequences.”
But experts also say operators cannot just kick back and pursue a business-as-usual course if they want to remain relevant 10 years from today. Looking forward into the next decade, they say casual-dining operators will need to address some critical problems currently hobbling the sector, including lack of brand differentiation, diminishing food and service quality, shifting demographics, expensive building costs, and inefficient daypart management.
“This not a time to just think inside the box,” says Dennis Lombardi, executive vice president of foodservice strategies for Columbus, Ohio-based WD Partners. “Operators must think beyond the box. This is not a time to think about little tweaks. Substantial changes must be made.”
In the meantime, he says, “you’re going to see a lot of units close, and some brands will go through some form of bankruptcy. There will be a thinning of the herd.”
Blaine Sweatt, a former executive with Darden Restaurants, agrees, noting: “There are a lot of ‘B’ sites with old, worn decor. A lot of those ‘B’ sites will be closing. You can’t operate a restaurant in a bad site in this market.”
To be sure, the casual-dining sector has been weathering some tough times as the numerous stress cracks in its foundation continue to widen. Technomic’s Paul maintains the sector has been in recession since the third quarter of 2007. Technomic also reports that five major chains, including the venerable Steak and Ale and Bennigan’s brands, filed for bankruptcy this year, compared to only two chains that filed last year.
Knapp-Track, which measures casual-dining sales and traffic, reports same-store sales for outlets open at least 16 months have slipped 1.8 percent during the first eight months of the year. Same-store traffic has fallen 4.3 percent for the same period, the study says.
At the same time, Nation’s Restaurant News’ research shows that 31 publicly held casual-dining brands reported same-store sales declines for the most recent quarter, versus six that recorded increases during the period.
“This is a watershed time for this segment of the industry,” says Alfred Thimm Jr., president and chief executive of the restaurant division of Al Copeland Investments Inc. in Metairie, La. “The growth was so big and went on for so long, it almost had to end.”
Industry sources estimate that casual-dining chains grew their unit tally from 3 percent to 5 percent annually for many years. Technomic reported that the top 20 chains in its bar-and-grill category increased their number of outlets by 45 percent between 2002 and 2007, opening 7,000 new locations in that period.
More recently, though, dwindling customer counts and other fundamental pressures have resulted in the closure of stores in the overbuilt segment. Lone Star Steakhouse shuttered 26 outlets last year, while Apple-bee’s closed 24 stores this year. Darden Restaurants closed 56 Smokey Bones and sold off the remaining 73 restaurants. The Chapter 7 bankruptcy filings of Steak and Ale and Bennigan’s resulted in the shuttering of some 200 stores.
To be sure, not all casual-dining players have been impacted uniformly. Darden’s Olive Garden chain reported a 2.4-percent increase in same-store sales for the first quarter ended in August, the Italian brand’s 56th consecutive quarter of same-store sales gains.
Lombardi calls Olive Garden one of the sector’s most successful chains, saying: “It has continued to reinvent itself—with its Tuscan-style decor, its culinary school in Italy, its [limited-time] offerings. Those are all important tactics and help it differentiate itself from the pack.”
Major brands like Chili’s, T.G.I. Friday’s, Applebee’s and Ruby Tuesday already are attempting to differentiate themselves, though with varying degrees of success. Ruby Tuesday, for example, began an ambitious two-year program, which called for the overhaul of its menu and service. At the same time, the 948-unit chain spent $70 million to upgrade its restaurants.
By the time the chain had unveiled its changes, however, the economic climate already had deteriorated, prompting casual-dining customers to flee to less expensive fast-casual and quick-service brands as well as supermarkets offering an upgraded generation of prepared foods. Consequently, Ruby Tuesday, like other casual brands, suffered a sharp decline, with same-store sales falling 10.8 percent and 7.9 percent at company-owned and domestic franchised stores, respectively, in its first-quarter.
Despite the decline, some observers say Ruby Tuesday executives made the right decision.
“That’s where the industry needs to go,” says Lane Cardwell Jr., a former executive of Brinker International who sits on the boards of several restaurant companies. “It was the right thing to do in a tough time. Unfortunately at the time they started, none of this was apparent.”
In fact, when it comes to envisioning a successful casual-dining concept a decade from now, virtually all pundits cite the importance of differentiation.
“The trouble with the bar-and-grill segment is there is too much sameness,” Card-well says.
Nancy Kruse, president of The Kruse Co., says: “One of the real fallouts of this unfortunate economic crisis is that casual-dining chains in the fern bar and broad menu set are finding themselves at a disadvantage against those concepts with a differentiated menu. Long-term survivors will find a hook and exploit the daylights out of it.”
Kruse suggests that in the future some casual diners will shift their paradigm up-ward to accommodate culinary-school-trained chefs at the store level.
“It will enable [the chains] to maintain menu excellence and reinforce their commitment to quality,” she says.
This shift, she continues, also will give each chef more latitude to develop some of his or her own menu items.
“I don’t know how far the average casual-dining chain will be able to go with this,” she says, “but if you look at McCormick & Schmick’s, 70 percent of the menu is at the discretion of the local chefs, while only 30 percent is dictated by the corporation. This shift toward more upscale kitchens will take us into uncharted waters, and some chains won’t be able to move in that direction.”
But even for those concepts that can’t accommodate this more upmarket approach, the need for menu differentiation still will be a critical component for growth.
For some, “moving menus in a more ethnic direction will be seen as a way to differentiate a concept,” Paul says. “Olive Garden and P.F. Chang’s have had good success with Italian and Asian. We’re not seeing much from Mexican these days, but that will probably change. Maybe we’ll be seeing a concept that focuses on Southwestern food instead.”
Latin American-theme national chains that cater to the country’s growing Hispanic population also may prove to be a viable concept, Sweatt says.
For other brands, well-conceived limited-time offers and even signature dishes could provide opportunity for differentiation, Lombardi says.
“LTOs will be seen as an increasingly important tactic in the future,” he says.
Menu customization also will play an increasingly important role in separating players from one another, Thimm says.
“The one-size-fits-all mainstay of the casual-dining sector will evolve into an interactive customized menu,” he says.
Thimm points to existing concepts like Vapiano International, which prepares pasta dishes in front of the customer. “The emphasis is on made-to-order and adding ingredients according to the customers’ instructions,” he says.
Small plates offered at moderate prices also will enable consumers to customize their meals.
“The casual-dining experience will offer a lot of flavors at a good price,” he says.
Frank Guidara, chief executive of the West Roxbury, Mass.-based Uno Restaurant Corp., maintains that overall food will be “better tasting and more wholesome.”
“People’s taste buds have only gotten more sophisticated,” Guidara says. “Chefs will be better in the kitchens. Everybody will have moved up.”
But at the same time, Guidara adds, another component that casual-dining operators likely will have to address in the future is nutrition menu labeling.
“I think in 10 years we can assume [menu labeling] will be nationwide,” he says. “Customers will want to know more about the food they’re eating, and we’ll have to accommodate them.”
Guidara expects there “will be a lot of learning with menu labeling, things we may not expect.”
“People may stop eating things that they enjoy today,” he says. “But if rational minds prevail, [menu labeling] won’t ruin the dining experience.”
Experts forecast that service likely will be better at casual diners in the future as well.
“The service component is huge,” Kruse says. “Service has not historically kept up with improvement in food, and kitchen excellence is being subverted by dining-room mediocrity. The service piece is going to have to be fixed.”
Kruse also says service becomes even more critical in the face of stepped-up competition from supermarkets, which are predicted to continue to chip away at restaurant sales. Supermarket culinarians already have found a way to compete in the food arena with restaurants, and the service piece will become an increasingly more important differentiator of the two experiences.
Cardwell agrees that dinnerhouses will have to focus on the service component in the future. Compared with quick-service or fast-casual brands, “casual dining has a huge advantage,” he says. “It’s one of few segments in which the service and ambience components really can make a difference to the guest experience. Casual diners have between an hour and 90 minutes to win over customers.”
Guidara worries, however, that in 10 years labor might pose an even greater challenge than it does today, negatively impacting restaurants’ ability to deliver a better level of service.
“People love good service, and it makes sense to want to upscale it,” he says. “But in 10 years our workforce may be nonexistent. A lot of people will be retiring and kids today are different from those of yesterday. They may not want to work.”
As a result, some casual-dining brands may opt to create less service-oriented, fast-casual operations that would merchandise elements of their full menus.
“We will probably see restaurant companies with multi-tier strategies that will address different dining opportunities,” Guidara says.
Downscaling a casual-dining concept into a fast-casual brand will be one way to go, he notes. In fact, Uno launched its own fast-casual concept, Uno Due Go, earlier this month. The concept is a pared down version of the company’s standard Chicago Grill with a core menu emphasizing pizza and designed to be installed in suburban shopping malls, colleges, transportation centers and hospitals.
The company also is opening more of its Uno Express outlets, which require even less space.
Creating fast-casual operations based on larger casual-dining brands, however, is not a wholly new development. Ray Bartolomucci Jr., president of Strizzi’s Restaurants Inc. in Dublin, Calif., says his casual-dining company spun off a fast-casual concept, Rigatoni’s, in 1996 and now has three units. Rigatoni’s operates with a pared-down menu, a lower check average of $9 per person compared with Strizzi’s $22, and a smaller footprint.
While Bartolomucci says his company will open additional Strizzi’s outlets, he is planning to franchise the fast-casual Rigatoni’s, which he believes has longer legs.
“Guests are trading down from dinnerhouses to fast-casual operations as lifestyles get busier,” he says.
At the same time, Bartolomucci echoes a number of observers when he says dinnerhouses will have to decrease their footprint to remain economically viable.
“Smaller spaces are the future for casual,” he says.
Copeland’s Thimm notes the dramatic increase in construction costs have “called big-box formats into question.”
“It will become a function of reality—how do you get the right ratios of sales volume to investment costs?” he says. “Every-body is looking at smaller formats.”
He says that Copeland’s has designed a smaller 6,500-square-foot prototype that is 1,500-square-feet smaller than the chain’s standard restaurant.
Sweatt says customers no longer “want the shtick of the big boxes with the pseudo-corporate design” and are “willing to trade off the hokey stuff on the walls for quality on the plate.” He also says that the aging baby boomers will be looking for a more comfortable experience.
“They won’t want big, themey music; they’ll probably want less music, in fact,” he says. “They also will want more comfortable seating at larger tables. We may even see a swing away from booths to more chairs. The lighting will have to be right, too.”
Experts predict casual-dining restaurants will move away from the dated “chain or fern bar look,” opting for more individualized decor. The “cheap look” will be a thing of the past, Paul says.
“A lot of concepts just look tired,” he says. “If you look at [Chicago restaurateur Rich] Melman’s restaurants or Houston’s restaurants, they don’t look like they’re chains. Consumers want something more sophisticated.”
In 10 years casual diners will be looking to fractionalize dayparts more than they do today in an effort to leverage existing assets, observers say. Some might look at offering breakfast or late-night service, although that probably would be on a store-by-store basis, Kruse says, adding, “Breakfast is convenience- and location-driven, so lots of chains won’t be able to play in this particular pool.”
Breakfast may not be attractive to some players because not only is it a lower check average but it also creates additional labor problems, Guidara says, because “it needs another manager and additional staff.”
Technomic’s Paul says some operators will find ways to “improve the management of the evening daypart.” For instance, “from 5 to 7 p.m., you might cater to people looking for fairly fast meals, who are shopping or are going to the movies,” he says. “From 7 p.m. to 9 p.m., you might cater to families. Then, after 9 p.m. you’ll cater to a younger, more late-night crowd with more energy.
“What works at 5 o’clock does not necessarily work at 10.”
The need to accommodate different types of customers also will help shape dinner-houses in the future. The segment grew up catering to the baby boomers, but the boomers themselves are changing, Sweatt observes. As a result of the current economic meltdown, many are getting a modest taste of what their parents and grandparents experienced in the Great Depression, he says.
“Fifty million people just saw their 401(k)s blow away,” he says. “For many of them, it’s going to be the value component on steroids. They’ll be willing to trade off large portions for reasonable portions at a good price.”
At the same time, casual diners must be prepared for the Millennials, or Generation Y, Lombardi says. Born between 1982 and 2001, the 88 million Millennials will be looking for a somewhat different dining experience than the boomers.
Casual-dining operators will have to reconcept their brands to some degree to accommodate the Millennials, Lombardi continues. In addition to being prepared to cater to their growing families, dinnerhouse operators might focus on Millennials’ comfort with technology.
“They will definitely have to be kid-friendly,” Sweatt says, “and technology might play a role, too. Millennials would probably be very comfortable with touch-screen menus, for instance.”
Technology, in fact, could play a bigger role in future dinnerhouses, experts say.
“I think we’ll see technology play a huge role,” Cardwell says, “through table management and reservation systems, labor-scheduling tools, handheld devices at the table. As the cost of labor goes up, we’ll have to find a way to get it out of the system, like fast-casual. Or else we’ll have to figure out how to get the job done with less labor without the customer knowing or caring.”
But while experts concur that casual-dining operators certainly will have to find a way to weather the economic storm that has enveloped them, most tend to be generally upbeat about the future of the segment.
“I think casual dining will be around forever,” Sweatt says. “This is more like a change in season. It’s like shorts and short-sleeve shirts are not the right outfit anymore. Operators need to change their wardrobe.”
Knapp voices a similar thought.
“The reason for my optimism about casual-dining brands who do the right thing is that the fundamental demand for eating out is very high and is unsatisfied,” he says. “When the economy picks up, people will be back in restaurants in force.”
