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Starving for customers

Americans are dining in, and eateries are feeling the pain

October 24, 2008|Ronald D. White and Jerry Hirsch | White and Hirsch are Times staff writers.

Joseph and Victoria Hurley are the kind of customers that keep restaurateurs up at night.

The Hurleys, parents of two young boys, have restructured their lives. The couple -- she's a marketing consultant and he's a much-traveled computer troubleshooter -- dumped their Jeep Grand Cherokee for a Lexus hybrid SUV that gets twice the mileage. Dinners out at places such as the Cheesecake Factory and the Daily Grill are rare treats instead of a weekly habit.

"We're worried about the economy, and we feel like it's more prudent to eat at home rather than go out and blow a lot of money on a meal," Victoria Hurley said. The steady drumbeat of bad economic news "feels like kind of a tidal wave, and the rest of us are trying to bail out with spoons."

Tough economic times are giving restaurant owners indigestion.

Calabasas-based Cheesecake Factory Inc. on Thursday reported a 36% drop in third-quarter earnings, to $11.8 million from $18.5 million, because of higher costs and a 4.8% decline in sales at restaurants open at least a year. Total revenue rose 8% to $405 million.

Cheesecake Factory chief David Overton told analysts that the restaurant industry is "in the midst of unprecedented times. . . . Pressures are further squeezing restaurant operators' margins, and like many others in casual dining, our earnings were impacted by spikes in commodity and energy costs."

Cheesecake Factory, Woodland Hills-based Grill Concepts Inc. and other operators are witnessing dramatic changes in consumer behavior: As the economy worsens, Americans are eating at home to save money.

NPD Group, a market research company, said in its annual "Eating Patterns in America" report that restaurant meals now cost on average about three times what it takes to make a similar meal at home. When people do eat out, they are going to quick-serve and fast-food restaurants more often, according to the NPD report released last week.

Restaurants are trying everything they can to lure customers. The Islands Restaurants chain, for instance, is giving a free side order of French fries with every burger or sandwich. That used to cost $1.49 extra -- plus tax and tip at the Carlsbad-based chain.

The sound of consumers' wallets snapping shut has become so loud that some experts consider it the biggest threat to the U.S. economy.

"There has been so much of a focus on Wall Street and the credit problem, but the real source of the problem in the fourth quarter is going to be consumer spending, and restaurants are one of the canaries in this coal mine," said Edward E. Leamer, director of the UCLA Anderson Forecast. "If the restaurants are open and no one shows, if businesses do not get revenue, people lose their jobs and cut back even more."

The mess is spreading like condiments at a salad bar.

Five major restaurant chains have filed for bankruptcy protection so far this year compared with two chains in 2007, according to Technomic, an industry research and consulting firm in Chicago. The casualties this year include S&A Restaurant Corp., which shuttered all of its company-owned Bennigan's restaurants. Technomic's statistics don't include anecdotal evidence of widespread failures of small, regional chains and stand-alone restaurants.

Technomic reports that no sector of the food industry has been immune. Fast-food franchises, family-style and casual restaurants have been cut out by as many as three out of every five consumers in a recent poll. Those diners were turning instead to prepared meals at supermarkets.

In the 1990-91 recession, restaurants lost 4% of food-market share to grocery stores, said Brian Moore, an analyst at Wedbush Morgan Securities. Moore figures that in this cycle they have lost about 2% -- "and there is more to go."

Worries about consumer spending also have left restaurant stocks starved for investors. Shares of major chains have been among the market's worst performers this year.

Cheesecake Factory shares fell as much as 69 cents to $9 during after-market electronic trading, after closing up 11 cents at $9.69, which was near its lowest closing price since 2000. The stock is down 59% this year. Eatery stocks hitting new multiyear lows Thursday included Brinker International (which owns Chili's and Romano's Macaroni Grill, among other chains), off 35 cents to $8.68, and Red Robin Gourmet Burgers Inc., off $1.57 to $13.95.

The list of chains that have tumbled to low-single-digit share prices includes Ruth's Hospitality Group Inc. (owner of Ruth's Chris Steak House), Benihana Inc., McCormick & Schmick's Seafood Restaurants Inc., Morton's Restaurant Group Inc. and Grill Concepts.

Restaurants have been hit in many ways, and not just with the loss of customers, said Adam B. Kessler, who owns two struggling Italian restaurants north of Atlanta. Kessler said he can't afford to raise prices at Capo's and at Capozzi's because every time he does, he spends $250 to update his website and $1,000 on new menus.

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