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Empty Tables Threaten Some Restaurant Chains

During a decade of easy credit and loose spending, American businesses built too many cars, houses, stores and factories. It turns out the country built too many restaurants, too.

Now consumers are cutting back, and dining out is among the casualties. Finer restaurant chains have been hit hard, and so have the casual sit-down places that flooded suburban shopping centers and tourist districts across the country, aimed straight at middle American tastes.

A few chains have boarded up already. Many others are going into survival mode, trying to renegotiate their loans, cutting staff, offering bargains to customers and closing less profitable restaurants. Analysts predict thousands more restaurants could close in the next year or two.

AP

The pain is evident even amid the neon glitz of Times Square, which draws big crowds of tourists used to eating at places like Red Lobster and Applebee’s .

Zane Tankel opened an Applebee’s franchise there eight years ago. At the time, he said his nearest real competition, an Olive Garden, was about six blocks away.

Now, Mr. Tankel could sit in his restaurant and throw rocks through the windows of a half-dozen competitors, including ESPN Zone, Dave & Buster’s , Chevys and Dallas BBQ.

“We’ll see some weeding out,” he said one recent lunch hour, sitting in a near-empty Applebee’s dining room overlooking 42nd Street. Noting a restaurant above him and another across the street, he said, “One of the three of us is not going to be here.”

Mr. Tankel’s fears are shared by many analysts and consultants, who say that a decades-long expansion produced too many restaurants even for a good economy, let alone the worst malaise since the Great Depression.

Since 1990, the number of restaurants and bars has grown to 537,000 from 361,000, a 49 percent increase, according to the National Restaurant Association. Population in the United States grew 23 percent in that period.

Amid the seeming prosperity of a credit-fueled era, people got in the habit of eating more and more of their meals out. The association’s statistics show that 48 cents of every food dollar is now spent at restaurants, compared with 40.5 cents per dollar in 1985.

In a recent note to investors, John Glass, an analyst for JPMorgan , said the casual dining industry — midrange restaurants like Applebee’s — needed to shutter about 1,200 of its roughly 18,000 locations to regain financial health.

“The chain casual dining industry has been overbuilt since 2005,” Mr. Glass wrote, noting that was the last year the industry posted positive numbers for customer traffic. “It may take two or more years to reach equilibrium.”

Others said the pruning of restaurants would extend beyond casual dining to all types of restaurants. Bob Goldin, executive vice president at Technomic, a Chicago consultancy for the restaurant industry, predicted that more than 20,000 restaurants would close over the next three years.

“I think 20,000 is a minimum,” he said. “We probably need more than that. There are a lot of marginal players out there.”

Mr. Goldin said the rapid expansion was driven by chains that added 300 or more new stores a year, following a “you build it and they shall come philosophy.”

“There isn’t a sector in the retail market that isn’t overbuilt,” he said.

The result is that after 16 years of sales growth, inflation-adjusted sales declined 1.2 percent last year, an already tough year for restaurateurs as ingredient costs hit record highs. Sales are expected to decrease another 1 percent in 2009, according to the National Restaurant Association.

“There’s not a day that goes by that I don’t get a heads-up about somebody closing their doors,” said Amy Greene, who tracks the industry for Avondale Partners in Nashville.

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So far, many of the companies going out of business are small enterprises with one to three locations; they are struggling because of slower sales and limited access to credit, she said. The NPD Group, a market research firm, reported in January that unit growth of small chains and independents declined by 1 percent in 2008.

But larger chains have struggled too, particularly those with a more expensive menu than competitors, or onerous levels of debt. Outback Steakhouse is one example.

Known for its fried appetizer the Bloomin’ Onion and its ostensibly Australian décor, Outback was taken private in 2007 at the peak of the private equity buying binge, even as the casual dining sector was struggling with sluggish sales. Outback’s owner, OSI Restaurant Partners , now finds itself saddled with debt and declining customer counts.

“Because of all the debt they took on, there’s limited cash available to fix the stores,” said Howard W. Penney, an analyst at Research Edge, in New Haven. “The structure for the company is disastrous right now.”

In early March, the rating agency Moody’s included OSI Restaurant Partners on its list of “bottom-rung” companies that are most likely to default on debt payments. A company spokesman, Michael Fox, said the company had recently significantly improved its financial position by retiring $300 million of debt at a discounted cost of $85 million.

The company also is trying to lure customers with values and created a new menu with 15 meals for $15.99 each.

Other restaurant chains on that ignoble bottom-rung list included Krispy Kreme Doughnuts, Sbarro and Arby’s .

Of course, there are some exceptions to the industry’s malaise, even in the casual dining sector. Darden Restaurants , which owns Olive Garden and Red Lobster, recently announced a better-than-expected outlook for the coming year. In the most recent quarter, same-store sales dropped 3 percent, compared with a 6 percent decline for the rest of the casual dining industry.

“You are not in an environment where a rising tide will raise all boats,” said Clarence Otis, Darden’s chief executive, noting that strong brands and mature and efficient operations were crucial. “We have a lot of strengths. We are gaining share.”

In addition, fast-food restaurants with a value menu like McDonald’s , Taco Bell and Subway have thrived by offering full meals for less than $5.

“The guys that are succeeding are the ones that have ingrained in the customer that it is less expensive to eat there than to buy groceries and prepare it at home,” Ms. Greene said.

Mr. Tankel, whose company owns 30 Applebee’s franchises in and around New York, has had a first-row seat to the restaurant industry’s woes. In 2007, Applebee’s was acquired by Dine Equity, the owner of IHOP, and some analysts have worried about its ability to pay off its debt.

He is also on the board of Morton’s Restaurant Group , which has struggled as expense accounts have dried up, and Perkins & Marie Callender’s Inc., which is on Moody’s “bottom rung” chart.

Still, Mr. Tankel, an adventurer who has climbed Mount Everest and visited both poles, said his 30 stores were beating the odds by being up 2 percent so far this year, which he attributes to a relentless focus on service. He plans to continue expanding during the downturn.

“Dine Equity’s problems are not our problem,” he said. “They gave us a brand, and the brand has weight, the brand has firepower.”

Even so, several passers-by in Times Square said Friday that they had cut back on dining out. Scott Wood, 37, said economic uncertainty and a 20 percent pay cut had forced him and wife to cut their restaurant visits in half.

“We go to the same places, but just not as much,” said Mr. Wood, who was visiting from Utah.

Renita Dickens, a 42-year-old from Connecticut, said she too had cut back on restaurant visits, curbing a once-a-week habit to once a month, because of worries about the future. But she made an exception to her informal rule on Friday, eating lunch at Red Lobster with a friend.

“We’re going to treat ourselves,” she said. “But we’ll pay for it later.”

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Louise Story contributed reporting.

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