Fine-dining restaurants poised for growth in 2014

For many restaurants, 2013 was a challenging year, as consumers, facing higher payroll taxes and feeling a continued unease about the future, were cautious about discretionary spending.

But a different story was being told at fine-dining restaurants, where the growing spending power of affluent consumers, and improved corporate spending and travel trends, fueled sales that are expected to remain strong as 2014 unfolds.

“Each month [of 2013] individually has beat 2012,” said Jennifer Beth Finn Rios, owner of Restaurant Martin in Santa Fe, N.M. “We are starting an expansion as we speak and life is great!”

Other fine-dining operators are equally pleased with their business prospects. Paul Mclaughlin, co-owner of Oceana in New York City, said the restaurant enjoyed double-digit growth over 2012. And Håken Swahn, whose restaurant Aquavit has been blocked by roadwork on East 55th Street in Manhattan, said 2013 was still the 26-year-old restaurant’s best year on record.

The upward trajectory is projected to continue. In a December research note, analysts at Piper Jaffray & Co. concluded that the high-end recovery is only halfway complete, with four more years of “favorable tailwinds” ahead.

“We are 40 months into what we believe will be an 89-month high-end recovery,” wrote Nicole Miller Regan, a senior research analyst with the investment banking firm, pointing to prior recoveries that lasted anywhere from five to nine years, and travel data that continued to improve in late 2013.

For November, hotel RevPAR, or revenue per available room, was up 5 percent compared to the year earlier. Luxury RevPAR was also up 5 percent year over year. RevPAR is calculated by multiplying the average daily room rate, or ADR, by the occupancy rate.

Companies with upscale restaurant brands, such as Ruth’s Chris Hospitality Group Inc. and Del Frisco’s Restaurant Group Inc., are poised to capitalize on this momentum, Miller Regan wrote. Piper Jaffray was making markets in the securities for both companies when the report was issued.

“We believe that revenue per available room, RevPAR, provides the best indicator for when fine-dining same-store sales are expected to improve,” Miller Regan wrote, “because this figure is provided monthly, accounts for the supply and demand aspects of the business traveler, and targets the consumer who most frequently visits fine-dining restaurants.”

Flying high end

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Throughout 2013, the fine-dining segment fared better than the rest of the restaurant industry, according to consulting firm GuestMetrics, which monitors point-of-sale data at independent restaurants.

Sales at fine-dining restaurants grew by 3.6 percent through November 2013 compared to a year earlier, the firm found. In comparison, casual-dining sales were up by just 0.8 percent, and sales at bars and clubs were nearly flat, budging up only 0.2 percent.

Meanwhile, the fine-dining segment was also the only one to see traffic growth, posting an increase of 0.4 percent, GuestMetrics found. In contrast, traffic to casual-dining restaurants contracted buy 1.8 percent and bar traffic fell by 3.3 percent.

The growing divide between more affluent and less affluent consumers has benefitted fine dining, and observers don’t expect business from those who are well off to wane in the near term.

A survey of 2,000 U.S. consumers conducted by Goldman, Sachs & Co. in September revealed growing optimism in households with annual incomes of $90,000 and higher, while members of households earning $50,000 or less said they were feeling less confident. In fact, Goldman officials said that the gap was the widest they had ever seen.

Spending habits also reflected that divide, the survey found. Consumer households with incomes of $90,000 or more reported increasing spending in the third quarter of 2013 versus the second quarter, while those in households with incomes of $50,000 or less reported decreased spending.

At the same time, corporate spending has also risen. According to corporate dining network Dinova, spending, on a same-client basis, grew by 5 percent during the third quarter, compared to the third quarter of 2012. Check averages also were up, increasing 3.2 percent during that period, Dinova found.

Despite being harder hit by unemployment in recent years, Millennials have played a role in fine dining’s fortunes. According to the most recent Small Merchant Spend Sights data from American Express reflecting the second quarter of 2013, the biggest contributor to spending at fine-dining restaurants was a 33-percent increase from people born after 1982.

“This generation is maturing and is not shy about spending the money that they have in more sophisticated categories, which is a benefit to the fine-dining sector,” the report stated.

Baby Boomers, by contrast, curbed their spending by 5 percent, and spending by Generation X was “relatively flat,” the report found.

Hey, big spenders

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When it comes to attracting customers who are willing to spend extra money, there’s little margin for error, according to Stephen Goglia, the new chief executive of the David Burke Group, which operates 10 restaurants — mostly fine-dining operations and steakhouses.

“I think customers are much more educated than they were in the past, and for quality product they are willing to spend more,” he said. “But when you deal with a sophisticated customer and higher check average, the margin for error decreases rapidly.

“We see the dining experience as very holistic,” he continued.

High-quality food is essential, of course, he said, but so is the wine and service. On top of that, the restaurant industry has become a source of entertainment beyond a traditional meal, he said.

That’s why guests at David Burke Townhouse in New York are often treated to cotton candy at the end of the meal, or house-made peanut brittle at the door.

But even fine-dining customers are looking for value in what they buy. In response to growing awareness on the part of his customers, Goglia has responded with new tactics such as lower wine prices.

“There are applications on everyone’s smart phone [that let them look up] what a bottle of wine costs,” so instead of the traditional 300-percent markup, he has calculated a more flat rate, which reflects the amount the company wants to make per bottle of wine with less concern about the percentage cost.

He also has used modern wine preservation technology to offer higher-end wines by the glass.

“That’s really helped our guests embrace not just this high-end, high-quality food,” he said, “but guests who want one glass of wine [rather than a whole bottle] and they don’t want to settle for a lower-end, cheaper version.”

And to attract more affluent Millennials, GuestMetrics’ data points to adding sweet Moscato wine, sales of which rose 55 percent for the first 11 months of 2013. Sales of both Malbec and Prosecco increased 18 percent in the same period, and sales of Sauvignon Blanc jumped 32 percent.

The fastest-growing food that appeals to Millennials is appetizers containing hummus, sales of which were up 15 percent in the first 11 months of 2013, GuestMetrics found.

Contact Bret Thorn: [email protected]
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