Restaurants Battle for Customers
Nov 1, 2008 12:00 PM, By Hortense Leon
Restaurants hit particularly hard by the economic slowdown are promoting reduced price menus to drive traffic and reel in struggling consumers. In a similar vein, shopping center owners are finding that if they want to keep restaurants in place, they may need to cut prices too. As a result, operators are offering concessions and higher allotments for tenant improvements to keep restaurant owners in place.
Like retail stores, restaurants have seen spending abate as cash-strapped Americans contend with a global economic crisis that has fueled fears of a continued rise in U.S. unemployment against the backdrop of higher food and energy costs and slumping housing prices. The effect? Some restaurant chains have declared bankruptcy, shuttered locations and reneged on signed leases.
Most restaurant chains are not expanding, and in some cases, they are contracting, says Steve Althoff, senior vice president of leasing and property management at Sembler Co., a St. Petersburg, Fla. based retail developer with its significant footprint in the Southeast.
In the second quarter of 2008, same-store sales for restaurant and food service units were only up by 0.39 percent compared to a 2.00 percent increase in the same quarter for the previous year, according to Technomic, Inc., a food service research and consulting firm based in Chicago. As of October, there had been 13 bankruptcy filings for U.S. restaurant companies and franchisee operators, up from two during all of 2007, according to Boston-based New Generation Research, Inc.'s bankruptcydata.com.
Coinciding with the increased number of restaurant bankruptcies is a precipitous decline in development of retail space. According to McGraw-Hill Construction, during the first seven months of the year development within the restaurant/entertainment sub-class was valued at $692 million, down from $1.3 billion during the same period last year. Restaurant/entertainment construction starts through July amounted to 5.3 million square feet versus 9.9 million square feet in 2007.
Fast and casual
Casual sit-down and fine dining restaurants have been hit the hardest on the sales side, says John Hamburger, president of the Franchise Times Corp., a Minneapolis-based business-to-business publisher. The majority of those that had filed bankruptcy were mid-price and casual dining establishments, including Tampa, Fla.-based Shells Seafood and S&A Restaurants, headquartered in Dallas, a subsidiary of the Metromedia Company, owner of the Steak & Ale and Bennigan's chains.
Even strong brands like the Cheesecake Factory and P.F. Chang's China Bistro have less customer traffic than a year ago because people are cutting back, says John Owens, senior stock analyst who specializes in restaurants at Morningstar in Chicago. According to Technomic, same-store sales for the Cheesecake Factory were down 4.1 percent in the second quarter compared to the same quarter in 2007 and P.F. Chang's same-store sales decreased by 2.3 percent for the same period.
However, fast-food chains are faring better, says Althoff. Technomic reported fast-food sales in the second quarter were up 1.5 percent compared to 2007. Same-store sales at full-service restaurants (the category includes chains ranging from Denny's to Benihana), meanwhile, were down 0.7 percent during the same time frame.
But even in the fast-food industry, the aggregate statistics look better than they would otherwise because of the performance of several strong chains, including McDonald's Inc., whose sales in its U.S. units were up 3.4 percent in the second quarter 2008 over the second quarter in 2007 and Burger King Corp., whose sales at company stores were up 5.5 percent.
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