As a 2011 Bloomberg article discussed, the average college-educated “millennial” or Gen-Y today would not be caught dead in a traditional casual dining restaurant (e.g. Ruby Tuesday, Red Lobster, TGI Friday, Chili’s, etc.). Such traditional, full-service, casual dining chains have three strikes against them: 1) A perception of a lack of quality service, 2) A perception of serving cheap-quality food, and 3) An outdated décor. These three strikes are especially glaring when compared to the newer and healthier choices such as Panera Bread, Corner Bakery,or at the higher end of the scale, Cheesecake Factory, P.F. Chang’s, and of course, independent operators—especially those serving more “exotic” and “adventurous” cuisines. Simply put, what the Gen-Ys “settled for” when they were kids would not work today (for many of us, venturing into a TGI Friday may also trigger depressing childhood/adolescent memories).
This generational divide in tastes is especially evident post financial crisis as consumers initially cut back on–and then became more selective–in restaurant/discretionary spending. Just as important, casual dining operators such as Brinker International and Applebee’s ramped up store openings from 2000 to 2006—doubling their sales during the six-year period leading up to the financial crisis. As the Gen-Ys come of age and increase their relative spending power, the traditional casual dining restaurants have been trying to reinvent themselves. This need for reinvention became desperate as early as 2009, spurred on by the U.S./global economic recession. According to the National Restaurant Association (NRA), U.S. restaurant sales in 2009 totaled $566 billion, down 2.9% from the previous year. This was the first annual sales decline in the 40-year history that the NRA has been tracking this figure. The 2.9% decline followed a meager 3.2% sales increase in 2008–previously the industry’s worst growth performance. U.S. restaurant sales are projected to rise to $632 billion in 2012, up only 3.5% from 2011. It is obvious that the days of 4%+ growth in U.S. restaurant sales is over.
This generational divide is especially impactful for the traditional casual diners as baby boomers are expected to cut back on U.S. restaurant spending as they retire. Indeed, S&P is forecasting same-store sales growth of just 1% to 2% for full-service casual diners in 2013 (mostly due to higher menu prices). With an ever-increasing number of consumers becoming more health conscious and demanding higher-quality food, independent restaurants are also garnering a higher portion of U.S. restaurant spending. This vicious cycle of declining U.S. causal dining sales (preventing them from increase staffing levels or upgrading their décor) is still an ongoing trend. As evident in the following chart, EAT (Chili’s), DIN (IHOP and Applebee’s), and DRI (Olive Garden, Red Lobster and LongHorn) all experienced negative same-store sales growth during 1Q this year, despite an improving U.S. job market and consumer discretionary spending. Short of a miracle, I highly doubt these brands could develop any pricing power and reinvent themselves in the long-run. Long-term investors should stay away.
Casual Dining – 1Q 2013 Same-Store Sales Change
Source: Goldman Sachs