Casual dining reservations

August 28, 2017 03:00 AM

Since the Great Recession, there has been a noticeable trend in how consumers allocate their discretionary income. Many now favor spending their hard earned cash on experiences rather than things. This is a development that has favored restaurants but hurt other retailers such as departments stores. Even so, not all restaurants are benefitting, with spending occurring mostly at opposite ends of the spectrum — fast food and fine dining — but not at casual restaurants. This seems to be mirroring the current situation of the U.S. middle class, which has been slowly eroding for decades. 

According to the U.S. Census Bureau’s 2015 report, Americans now spend more eating out than they do at grocery stores for the first time in history (see “Going out,” below). Still, this trend is not benefitting all restaurants. Consumers are on the lookout for value, which has helped boost the bottom lines of many quick-serve chains. Restaurants such as McDonald’s (MCD), Taco Bell (YUM) and Wendy’s (WEN) not only offer that value, but have expanded to fresh and healthy options, now preferred by health conscious consumers, and once only available at higher-end restaurants. Even fast-casual joints such as Shake Shack (SHAK) and Panera (PNRA) have capitalized on this trend.

It’s a step up from there where profits start to get murky. Casual chains such as Applebee’s (DIN), Outback Steakhouse (BLMN) and Cheesecake Factory (CAKE) have all been suffering, and the category was a main contributor to restaurant same-store sales that came in at their lowest levels in three years in December. There are several reasons for the poor results: as mentioned, the middle class, which used to be the target customers for casual restaurants, is shrinking; secondly, lunchtime traffic is seeing a massive depression as more people opt for takeout options during the work-week (although breakfast is seeing a huge surge); and lastly, you have the rising cost of labor. 

Increasing labor costs have impacted all U.S. publicly traded restaurants and was recently mentioned on Darden’s Restaurant’s (DRI) second quarter call — as local hikes in minimum wage for 19 states went into effect on Jan. 1, 2017, greatly pressuring company margins. To offset these higher costs, restaurant chains are being forced to expand takeout options, raise menu item prices or employ more technology. 

Technology is becoming a key component of who survives in the current landscape, with mobile applications and touch screen kiosks helping to reduce staff, and creating a more efficient ordering and pickup process. Starbucks (SBUX) is without doubt the pioneer in this space, with mobile payments making up 29% of all transactions at this point. 

There are also some new entrants in the space that could potentially threaten traffic at restaurants. Meal kit delivery services, such as the newly IPO’d Blue Apron (APRN), still only represent a very small percentage of the food space, but could continue their growth trend of 25% to 30% per year according to food industry consulting firm Pentallect. Judging by Blue Apron’s early trading days, however, it doesn’t look like that threat is going to come to fruition anytime soon. 

Another recent story in the food retail merger and acquisition space could actually have a massive impact on restaurants, however. Amazon’s (AMZN) announced acquisition of Whole Foods (WFM) has many restaurant chains worried. With Amazon’s focus on value, there is no doubt they will drive prices down at the grocer, only widening the current gap between the cost of eating at home and going out, as food prices continue to drop, but restaurant prices remain high. According to the Bureau of Labor Statistics, the price of meals outside of the home rose 2.6% since last year, while grocery prices fell 1.3%. Likely, they aren’t passing these savings onto consumers as they cover increased costs related to labor, but at some point diners won’t be as willing to cover the difference. With more options and competition than ever, there’s no doubt it’s a great time to be a consumer, but an increasingly difficult time to be a retailer.   

About the Author

Christine Short is a senior vice president at Estimize. An expert in corporate earnings, she produces content highlighting Estimize data. Prior to Estimize, Christine held positions at Thomson Reuters and S&P Capital IQ. @Estimize