Tough Times Are Ahead For The Casual Sector

Michael Sanson

Most economic industry forecasts in January predicted a solid year ahead. But as I write this column in late August, the sweet spot of the restaurant industry is experiencing its worst slump since 1991. How quickly things can change.

Some of the biggest casual sector players, such as Applebee's, are reporting sharp declines in same-store sales. The casual segment has been sideswiped by rising gasoline prices and a host of other economic pressures. As a result, consumers just don't have the disposable income to visit these restaurants as much as they once did.

Dining-out frequency has long been considered a leading economic indicator, even though restaurants representing only about five percent of consumer disposable income. The decline in the casual sector signals a weakening of the economy.

Applebee's reports that a percentage of its customers can't afford to eat at its restaurants because their household incomes are below $35,000. When push comes to shove, poorer households must first deal with financial priorities like utility bills.

"It is pretty tough out there," says Bob Derrington, an analyst for Morgan Keegan & Company. "Both Brinker and Outback have reported that they have not seen consumer spending this depressed since the early '90s."

Gasoline prices are just the tip of the iceberg, he explains. Consumers are also seeing a rise in their utility bills, medical insurance bills and adjustable rate mortgage bills. "The inflation rate is far beyond what the government is admitting," he says.

On top of all that, minimum credit card payments have doubled from what they used to be and the interest rate on those cards is up substantially. All of it adds up to fewer dollars for discretionary spending on items such as restaurant meals.

Somewhat unfazed by all this are the lower and higher ends—quick service, fast casual and upscale restaurants. Regulars at casual dining restaurants are trading down, while upscale diners are less affected by gasoline and interest rate increases.

Nevertheless, margins are razor thin, so it's incumbent upon you to run as tight a ship as possible. Those who don't may not be around this time next year. We'll try to help, too. On page 35 you'll find a story on how some operators are picking up incremental business by keeping their doors open longer. Next month, our cover story will offer tips on how to cut your kitchen costs. The month after that, we'll offer a feature on gimmicks and promotions that will bring dollars to your bottom line. Hang tough.

Danny Meyer. In October, we will stage our 8th annual Concepts of Tomorrow Conference. It will be a two-day event to help you grow your restaurant concept. A late addition to that conference agenda is famed New York City restaurateur Danny Meyer, who owns several of the city's top restaurants, including Union Square Cafe and Gramercy Tavern.

Meyer is one of the country's great service providers. He, alone, is worth the price of admission. Call Katie Smith at 216-931-9559 for details.