Restaurants reshuffle as diners look for deals
Posted on Sunday, September 7, 2008
Americans are seeking lower-priced options when they eat out.
The trend is called “trading down,” according to John Staszak, an analyst for New York-based Argus Research Co.
Fast-food eateries continue to fare well, but “casual dining is having a real tough time, because they’re just generally more expensive meals, and people are hard-hit by higher fuel prices,” Staszak said.
Forty-eight of Little Rock’s 70 top-grossing eateries in 2007 — excluding fast-food places — showed an average decline of 9 percent in receipts for the first six months of this year, according to the Little Rock Advertising and Promotion Commission’s tax records.
Nationally, restaurants open at least a year saw declining receipts in four of six of those months, according to the National Restaurant Association. In June, 53 percent of U. S. restaurants reported declines in customer traffic, and only 32 percent of restaurant operators reported improved sales at restaurants open a year. At the same time, fast-food places are seeing better times. McDonald’s had an 8 percent increase in July in stores open at least a year, Staszak said. “That’s very, very impressive.” According to the information from the Little Rock commission, most fast-food outlets in the city saw increases in profit for the first six months this year. During that period, the Chick-fil-a at 6201 W. Markham St. was the fourth-mostpopular restaurant in Little Rock with $ 1. 76 million in sales, behind only Red Lobster, Olive Garden Italian Restaurant and Chili’s Grill & Bar. Patty Bright of North Little Rock recalled that when her 16-year-old nephew used to help her with chores, she’d take him to The Dixie Cafe or Red Lobster to thank him. Now they go to fast-food restaurants or she cooks at home. She and her friends have stopped going out on a regular basis for drinks and meals at trendy Little Rock venues, such as Crush Wine Bar in the River Market District, said Bright, a claims analyst for the Arkansas Municipal League. “Everybody’s in a bind,” she said. “Everything keeps going up but our wages.” ‘MENU ENGINEERING’ In response to the trend, restaurants are adding cheaper items or streamlining, said H. G. Parsa, food service and lodging management chairman for the Rosen College of Hospitality Management at the University of Central Florida in Orlando. It’s called “menu engineering,” he said — a way to structure a menu to ensure that items are seasonal and to make efficient use of the restaurant’s resources.
There’s a balancing act of keeping things that customers really like but that aren’t profitable, such as prime rib, and pairing them with profitable menu items, he said. “Prime rib always sells, but prime rib never makes a profit,” Parsa said. “Prime rib is just a hook.” Shorty Small’s, a small regional chain based in Oklahoma whose first restaurant is in west Little Rock, offered steak, chicken-finger or shrimp dinners with unlimited salad for $ 9. 99 during the six weeks that ended June 30, said Paul Kreth, chief executive officer and president of the private company.
That special pulled a number of diners into the company’s restaurants, he said. They sold 11, 700 steaks in those six weeks, more than the 9, 000 they sold in the eight previous months. The chain, which has eight restaurants, sold the dinners below cost, but made more money because customers bought profitable appetizers and dessert, he said.
“We’re seeing that the customer wants to get good value,” Kreth said.
As a result, the chain’s “bottom line is up pretty substantially,” he added. However, according to the commission numbers, Shorty Small’s west Little Rock location saw sales fall to $ 1. 03 million in the first six months of the year, down from $ 1. 07 million a year earlier.
Argenta Seafood Co. in downtown North Little Rock offers a three-course dinner for $ 25, said co-owner Brian Isaac, and also offers a lobster dinner on Friday nights for $ 30. “It’s not a big moneymaker,” he said, but it draws in customers and provides them with value.
Parsa said it’s important to make seasonal changes, to delete things that are unpopular and not profitable, and to make sure that every item ordered is used in at least two dishes. “Smaller inventory, more offerings, less waste,” Parsa added. Scott Bowman, owner of Theo’s American Kitchen & Cocktail Lounge, a restaurant in Fayetteville’s Dickson Street entertainment district, said he saw the economic problems coming and helped avoid a slowdown by expanding bar seating and adding cheaper options on the lounge menu. While entrees are mostly in the low- to mid- $ 20 s, the restaurant has lots of appetizers priced between $ 6 and $ 12. They have wine night on Tuesdays and $ 5 martini night on Thursdays to draw in crowds. “People entrust us with two very important things — their time and money,” Bowman said. “The key to that is to make it very accessible, but not to reduce their quality.” LOCAL IMPACT HARDEST Locally owned restaurants are hit the hardest in economic downturns, the experts said. Of Little Rock’s 70 top restaurants by sales in the first six months of 2007, 31 are locally owned. Only eight of those 31 saw higher receipts during the first six months of the year, according to the data from the advertising and promotion commission. Revenue declined for the other 23. “It’s always harder for local restaurants,” Parsa said. “Independent restaurants don’t have the buying power that a national chain does.” Scott McGehee agreed. This is the first year that his eight-yearold Boulevard Bread Co., which has three Little Rock locations, has not seen an increase in sales, he said.
In May he opened ZaZa Fine Salad & Wood-Oven Pizza Co. in the Little Rock Heights, and the restaurant is in its “honeymoon phase,” he said. “Everyone’s busy when they first open because everyone wants to try it. And then if everyone likes it you stay busy and if they don’t like it you go out of business.” Fine-dining places are hurting the most, he added.
Two high-end restaurants in Little Rock closed their doors this year. Velo Rouge Brasserie in the River Market District closed in July after about seven months of business. Imagine A Restaurant, which was in the Pleasant Ridge Town Center in west Little Rock that opened in fall 2006, shut its doors in March.
This has been a tough economy for restaurants trying to establish or re-establish a customer base.
Argenta Seafood Co. opened in December. Isaac, who is also co-owner of Ristorante Capeo, also in downtown North Little Rock, said that “essentially we’re just taking the hit” on increased costs. He hopes to maintain the restaurants’ customer base, in part by keeping prices the same until the economy picks up. The Capital Hotel in downtown Little Rock has run counter to the downward trend since it reopened in November after a two-year renovation, bringing back Ashley’s and the Capital Bar & Grill, according to executive chef Lee Richardson. “People are choosing to spend more,” he said. Richardson said he’s able to control costs through frequent menu changes — an advantage national chains don’t have because of logistical restrictions — and through local buying. He can buy things that are in season and close to home, eliminating transportation costs and higher out-of-season prices.
EATING THE COSTS Higher food costs are indeed chipping away at profit. For McGehee, flour increased 50 cents per loaf at Boulevard Bread over the past year or so. And his sales are down about 6 percent for the year, he said, but he’s not going to raise prices, focusing instead on keeping his customers. “I have not raised prices, even though my profits are almost down to nothing,” McGehee said. In 2007, the Producer Price Index for foods went up the most in four years, by 7. 6 percent, and it has risen an additional 4. 6 percent in the first six months of 2008, according to the Bureau of Labor Statistics.
“It’s really kind of a double whammy,” Staszak said. Restaurants “face higher costs, and their customers face higher costs at the pump.” Some restaurants are passing along the costs to survive. Parsa said that he recently conducted a survey of 250 restaurants, which revealed that about 20 percent were choosing that path.
Mark Abernathy, Consolidated Arkansas Restaurant Industries ’ government affairs chairman, said that most restaurateurs he knows have had to raise prices in the past year, although not enough to keep up with double-digit cost increases. He raised prices between 4 percent and 5 percent in the past year at his Little Rock restaurants, Bene Vita and Loca Luna, he said.
“You have to raise your prices enough to make a profit or you have to close your doors,” he said.
Loca Luna receipts dropped to $ 752, 458, down by 0. 2 percent in the first six months of the year, according to commission records. Bene Vita’s receipts dropped 6. 2 percent, to $ 303, 213 from $ 323, 388 a year earlier.
Sufficient Grounds Cafe, a lunch and coffee shop on Capitol Avenue in downtown Little Rock, raised prices in August for the first time in two years. Eric Tinner, one of the owners, said that fuel surcharges and wholesale food prices kept going up, which forced them to increase prices by about 4 percent.
NATIONAL CHAINS But the problems aren’t limited to local restaurants. Granite City Food & Brewery Ltd., an upscale casual-restaurant chain with 25 restaurants in 11 states, announced Aug. 19 that it was closing its Rogers location, a first for the company. Since opening in October, the restaurant lost a net $ 1. 3 million, according to a news release. Bennigan’s Grill & Tavern and Steak & Ale, both owned by S&A Restaurant Corp., filed for Chapter 7 bankruptcy protection in July, seeking to liquidate their assets and shut down.
For its fiscal year ending June 25, Brinker International Inc., which owns Chili’s, Romano’s Macaroni Grill Italian Restaurant and On The Border, saw its revenue fall to $ 51. 7 million, from $ 230 million in the previous year.
The chain will open 70 restaurants in fiscal 2008, about 15 in fiscal 2009 and even fewer restaurants in fiscal 2010. It also plans to sell Macaroni Grill this year to a private equity firm.
Other chains have done better, thus far.
Darden Restaurants, which owns Red Lobster, Olive Garden and LongHorn Steakhouse, among others, has fared well during the downturn. It reported net income of $ 103. 3 million, or 72 cents per share, on sales of $ 1. 83 billion in its fiscal fourth-quarter earnings report, for the three months that ended May 25, compared with $ 98. 5 million, or 67 cents per share, on sales of $ 1. 46 billion the previous year.
“Darden is just a very well-managed firm,” Staszak said. “They’re doing well because they’re going for more of a value menu.” However, the company cautioned that same-store sales for the first fiscal quarter that ended Aug. 24 were below expectations. Darden changed its outlook from 2 percent to 3 percent growth in receipts for its restaurants open at least a year to flat or 1 percent for the year.
Staszak, like other analysts, rates stocks by buy, sell or hold. He currently has a hold or sell rating on all publicly traded casualdining chains, including Darden
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