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Casual restaurants burned by inflation

Posted Jul 21 2008, 04:41 AM by Anthony Mirhaydari
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It's not just health-conscious diners who should be concerned about restaurants like Cheesecake Factory, Red Robin Gourmet Burgers, P.F. Chang's China Bistro, and Texas Roadhouse.

With food and fuel inflation at critical levels, investors should be worried about the health of the entire casual dining sector, including companies like Darden Restaurants and Brinker International, operators of Olive Garden, Red Lobster, and Chili's.

All must contend with rising food prices, especially for meats, seafood, and dairy products at a time people are drastically reducing discretionary driving and rediscovering the joys of eating in. A recent Nielsen survey of 50,000 consumers found that 52% are eating out less often.

This has happened before. Research by Morgan Stanley analyst John Glass notes that during the inflationary period of 1979 and 1980, traffic fell nearly 4% as consumers were forced out of restaurants and into grocery stores. In fact, although limited somewhat by data availability, Glass was able to uncover a moderate statistical relationship between gas prices and restaurant traffic.  

Traditionally, restaurants were early-cycle performers that perk up just as a recession reaches its nadir. But by all indications, this won't be a typical recession in either length or severity for a majority of Americans. And a comparison to the last consumer-led recession of 1990-1991 doesn't offer much solace to current shareholders. Those were the good old days of cyclicality: Margins actually expanded as a slowing economy brought down food and labor costs.

Now, food prices are decoupling from the American consumer; to be determined by Asia's appetite for protein and petroleum. Labor costs are on the rise as federal minimum-wage legislation continues to be phased in over the next two years.

There is also the issue of artificial demand and oversupply. Empowered by swelling home equity, consumers enjoyed restaurant meals at an unsustainable rate during the go-go years between 2005 and 2007. During that time, restaurant sales grew faster than disposable income by $13 billion cumulatively. Decades of growth in per capita restaurant visits has hit a ceiling around 210 meals per year -- people just aren't willing, or are unable, to eat out more than that.

Corporate management, in a bout of unfortunate optimism, assumed all this new business would continue indefinitely. So they eagerly responded with new locations and new dining concepts like overzealous homebuilders. Not only are we faced with a glut of homes, but a glut of restaurants as well.

These new competitive pressures make any effort to pass on costs an exercise in futility. Cost-conscious consumers will balk at menu hikes, reducing traffic and further contracting margins as economies of scale are unwound.

Although valuations are tempting at these levels, I recommend avoiding the sector until underperforming restaurants are closed, real wages recover, and energy prices -- and therefore food prices -- come back down to earth. Plus, after a few more months of home-cooked meals, people might pay any price to order off a menu again.

(Disclosure: I don't own shares in the companies mentioned)

Related reading:

Experts wrong on economy. So go wild

Chipotle to collapse like a wet taco

Comments

 

On top of that, the menus seem to be shrinking, specializing in fried and grilled everything. Too much fat, too much grease, too much cheeze and cream sauces. I think they all use the same frozen and pre-packaged processed stuff. I can eat only so many sub sandwiches, pizzas, and eggs  in a week. If greasy mexican or chineses fast/semifast food isn't appetizing, the choices are slim.

The restaurants of the late 80's and early 90's seemed to compete on menu and service. Today I find too many similar menus and too little service at most of these places. I dread going to any of them.

The only thing worse than seeing obese people is hearing people tell you what "America" should do.  What "America" should do best is mind your own business.  

As a registered nurse, I have been backing off eating at restaurants because of the large number of foodborne illnesses being contracted at outside cooking facilities.  I know I wash my hands and I am sure of the cleanliness of my kitchen.  Also, I learned that I was being lazy about not cooking at home.  Occasionally, I will eat out, but the rising gas prices really impacted my and my family's behaviors concerning extraneous expenses.  So, coupled with the uncertainty about the hygiene of restaurants and the costs of travel, if I can't walk or bike to a restaurant, I don't go.  Also, I am very concerned about a healthy diet so I have learned about making nutritious meals at home.  My family hasn't complained and my budget is more manageable.  I guess it is a choice people need to make on their own.  I still see people speeding in their cars (wasting gas) and driving large vehicles very fast so perhaps other consumers aren't as concerned about maintaining a budget as myself.  My advice is to think globally and act locally.

By the time you get your beverage at $2 ea. for three people and add tip you have already spent $16 right off the back not including meals or appetizers, it has gotten to be too expensive. We use to eat out several times a week because it would be so late by the time we got home from work to cook. I now make several meals on Sunday and freeze them. With the money we save from eating out so often we are able to do more family things on weekends.

I disagree with "Wake Up People" where he said "We have become a society that mistakes needs vs. wants.  Eating out is a "want"  I'm a single dad, and I work 12 hour days a lot, so its hard for me to even get to the store to buy food to make at home.  And I travel for work so sometimes the food I buy rots before I can eat it.  When it hits 6 pm, my kids are hungry and its hard for them to wait for me to go shopping. Yeah, I know, get a better job with less hours is the answer.  The last few companies I worked for went under, so its hard to get anything better.  We're kind of stuck going out to eat a lot.  

I can see more business for the small, cheap, no-frills type of restaurant, especially take out chinese/mexican food, chicken, BBQ foods. The restaurants that are one step above the fast-food burgers.

We are a small family of three but have limited how often we go out to eat (on weekend only) by the time you add in tea at $2 ea and tip you are looking at $16 right off the back not including appetizer or meal it is just outragous! I now cook sevearl meals on Sunday and freeze them for during week. The money we save we use to do family things like movie or bowling (but no munchies too expensive, we buy them at convience store instead $5 for popcorn that cost cents to make is absurd!)

We're supposed to be getting Cheesecake Factory in my area in a year ago.  Hopefully, the economy will be better by then.  I have to go 135 miles just to go to that restaurant.  Last time, I had to use my credit card.  The Golden Girls would go there!

I eat out too much.  It's not always practical to eat at home.  "Wake Up People" does make a good point, though.

I've noted that overall service appears to have suffered dramatically in the last several yerars!  Remember table clothes (even paper ones), we now get silverwear wrapped in a paper napkin on a bare table.  Remember the limitless refills of coffee or tea?  Remember when the "wait staff-server" was called "waiter or waitress"? And do you remember when the "server" provided a menu before he/she addressed us as "what dos uz guyz (or goys) want?" ,  this all before a mediocre  meal is served.  Further, when has the "gratuity" been added automatically to the bill? The combination of poor service and food, has caused our family to remove a number of restruants of our list!

I agree. I think people are cutting back simply because of the cost of it all. A family of 4 pays about $50 on a minimum ($10 per plate, add tip and tax) and you add the cost of gas as well. Staying home or simply inviting friends/neighbors over for food is about 1/3 the cost. If times are tight  - why pay more?

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