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Discounts Have Restaurants Eating Own Lunch

William Neuman |The New York Times
Wednesday, 24 Jun 2009 | 10:33 AM ET

Consumers brave enough to pull out their wallets in this economy have grown accustomed to fire sales on every kind of merchandise, from fancy dresses to gas-guzzling cars. Now, add another item to the list: the casual restaurant meal.

Rulon's Reuben is named after Olympic wrestler Rulon Gardner.
Rulon's Reuben is named after Olympic wrestler Rulon Gardner.
Rulon's Reuben is named after Olympic wrestler Rulon Gardner.

The informal, sit-down restaurant chains that blanket the nation are fighting their most intense price war in years. Applebee's is offering dinner for two for $20. Ruby Tuesday is handing out coupons for two entrees for the price of one. Chili’s, not to be outdone, is promoting some entrees for $7 or less. spacer

“It’s a tit-for-tat pricing war right now,” said Steve West, an analyst with Stifel Nicolaus, a brokerage firm in St. Louis. “Each one’s trying to outdo the other in a battle for consumers.”

The sit-down casual segment of the restaurant industry has traditionally competed more on advertising and location than price, but these days, the chains appear to have little choice. Consumers hurt by the recession are eating out less. So the restaurants are fighting one another for that shrinking pool of diners, using deep discounts, heavily advertised on television, to attract them.

The customers who do venture forth are delighted. “This is really an incentive for us to go out,” said Norma Rosado Blake, 38, an archivist, as she stood outside a T.G.I. Friday’s restaurant in Clifton, N.J., with her husband the other night, for an offer entitling her to $8 off.

But even as the chains compete to come up with the best deal, some of the analysts who follow them are worried. They fear that, as was the case with merchandise retailers that sold luxury goods for 80 percent off, the restaurants are hurting their long-term prospects by training customers to eat out only when they are offered a bargain.

“The problem with that is once you start dealing, you’ve got to deal forever,” said Harry Balzer, the chief food industry analyst for the NPD Group, a consumer marketing research company.

The heavy discounting is leading to tensions between the people who, as independent franchisees, operate many of the restaurants, and the corporate officers who control the brands, menus, advertising and strategy. The franchisees agree that discounts can get customers in the door, but wince at what they can do to profit margins.

A T.G.I. Friday’s promotion in April and May offering $5 sandwiches and salads led to a small-scale revolt among franchisees. Ross Farro, who has seven T.G.I. Friday’s restaurants in Ohio and Pennsylvania, said the promotion included salads that normally sell for as much as $10 and a steak sandwich priced at $11.89 on the regular menu. The ingredients alone for each steak sandwich cost about $4, he said.

The promotion brought in a flood of customers, but Mr. Farro said he could hardly afford to feed them. Within days of the promotion’s start in late April, many franchisees began complaining to the chain’s parent company, Carlson Restaurants Worldwide.

The promotion was supposed to run at lunch and dinner, but Mr. Farro said he and some other franchisees put away the $5 menu inserts at night to stop the bleeding

Franchise owners “were very upset that we’re getting hammered here, we’re giving the food away,” Mr. Farro said. In contrast, he said, another promotion offering two-for-one entrees had worked well.

Brad Honigfeld, chief executive of the Briad Group, which runs 69 T.G.I. Friday’s franchises in seven states, said he considered the $5 promotion a success because it greatly increased lunchtime traffic.

“My ultimate goal as an operator is I need to drive traffic, and if that traffic is going to Applebee’s or going to Chili’s, I need to take that traffic away,” Mr. Honigfeld said. “We are in a fierce competitive environment today.”

Unhappiness over the $5 deal has led some Friday’s franchisees to press Carlson for a rebate on royalties they pay the company. Carlson would not discuss the rebate issue.

“Like most promotions, the short-term economics were tough, but the long-term payoff comes from highly satisfied guests who become valuable loyal guests, which is critical for the health of our brand and franchisees,” Nick Shepherd, Carlson’s chief executive said in a statement.

The economic crisis has occurred at the worst possible time for the chains. For years they expanded rapidly. Technomic, a restaurant consulting firm, said that the number of chain restaurants devoted to casual dining (an industry term for midprice lunch and dinner restaurants that typically serve alcohol and have waiter service) rose to about 10,000 last year, from about 7,000 in 1995.

The economics worked in part because the chains steadily raised their prices. But some analysts said the quality of the food did not always keep pace — and as the economy soured, consumers began casting a skeptical eye on prices like $18 for grilled chicken breasts and $16 for herb-crusted tilapia.

“Restaurant prices were high, and in many cases the quality from a consumer perception just didn’t justify the pricing,” said Bob Goldin, an executive vice president of Technomic.

Now, forced by the recession into discounting, the chains are going beyond traditional advertising to get the word out. They are creating Internet clubs where people can sign up for coupons. T.G.I. Friday’s, which has nearly 600 stores in the United States, said it had signed up more than one million club members in less than a year.

One of those is Steve Mosior, 52, a Heineken sales supervisor. On a recent trip to T.G.I. Friday’s in Wayne, N.J., he took advantage of a two-for-one entree deal and used coupons for a free appetizer and a half-price drink.

“Coupons are found money,” Mr. Mosior said. But he added that once he is in a restaurant he will often buy items not covered by the discounts, such as dessert.

That is exactly what restaurateurs hope will happen. But Mr. West, the analyst, said it had not been happening enough. “These guys are coming in just for that deal, and they’re not buying the soda, they’re stiffing the waiter on the tip, they’re drinking water and they’re leaving,” he said.

Malcolm M. Knapp, a restaurant consultant who collects data from thousands of casual dining chain restaurants, said that preliminary figures for May showed that sales were down 6.7 percent from May 2008, when comparing restaurants that had been in business a minimum of 16 to 18 months. The number of customers was also down, but not as much.

“Dollar sales are decreasing at a faster rate than traffic because the promotions are bringing people in,” Mr. Knapp said. “But when you have deep discounts it takes much more traffic to have a positive sales situation.”

On a recent evening, an Applebee’s in Clifton, N.J., was nearly full. The manager, John Butcher, said that about 80 percent of his customers on a typical night were choosing the $20 promotion, which features two entrees and an appetizer (ordered a la carte, the items could total $31). Despite all the business, he said sales were down about 7 percent from a year ago.

Rick Hendrie, senior vice president for marketing at Uno Chicago Grill, which is offering a $9.99 meal of pizza, salad and dessert in some cities, said the deluge of competing discounts made it difficult to reach consumers. “In some ways it’s a real challenge because everybody is screaming the same thing: X number of items for $9.99 or less, or buy-one-get-one,” Mr. Hendrie said.

He also cautioned that some chains were discounting too deeply and risked hurting their brands.

“I believe, this is my own marketing philosophy, that you degrade your brand value if you’re saying, this is not worth but half,” he said. “At some point people go, ‘I guess it’s not really worth what they charge.’ ”

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