The casual dining company Darden Restaurants reported third-quarter earnings this morning. In line with analyst expectations, the company — which operates the Red Lobster, Olive Garden and LongHorn Steakhouse chains — saw profit fall 18 percent last quarter as sales slipped almost 5 percent.
Darden has also said it will open fewer Olive Garden restaurants than previously anticipated, and will not raise menu prices as much as expected, even though it is being squeezed by higher food costs. Darden is not alone. Some of its competitors, like Chili’s (owned by Brinker International), are also struggling right now.
S&P equity analyst Jim Yin says people don’t have as much money to spend as they did last year — or they feel like they don’t.
“Even though the economy is growing, still people feel very nervous,” says Yin. “And you have the higher payroll taxes. That affects middle class people particularly.”
In January, Congress let the Obama Administration’s partial payroll-tax holiday expire. Payroll taxes rose from 4.2 percent to 6.2 percent. Consumers have also been hit by higher gas prices and health insurance premiums since the beginning of the year.
And when discretionary income is squeezed, dining out is the first item to go, followed by clothing and vacations. A survey by RBC Capital markets found that, following the payroll tax hike, 54 percent of Americans had cut back on restaurant dining or planned to do so soon.
“Some people have simply decided they’ll eat in,” says Yin. “Or, they might trade down to a more informal setting.”
More ‘informal’ could be a shift to what’s called ‘fast-casual’ dining — a place where you wait in line to order, find your own table, scoop salsa, pour drinks, and clear your table on your own. A place like Chipotle, the made-to-order burrito chain, or Panera Bread.
These chains are doing better in this economy than casual sit-down dining (examples include Olive Garden, Red Lobster, LongHorn, Red Robin, Ruby Tuesday’s, IHOP, Applebees), or fast-food (such as McDonalds, Taco Bell or KFC), says Ronald Ruggless, Southwest bureau chief at Nation’s Restaurant News.
“People like the flexibility of so-called ‘fast casual,’” says Ruggless, “because they get about the same quality of food, but they don’t have to pay any tipping, and they get it faster.”
Ruggless says Chipotle and Panera also stress sustainability and fresh, local ingredients in their marketing, which consumers place a high premium on right now. Customers also like seeing the food prepared to order. So even though the burritos and sandwiches are cheaper than a three-shrimp seafood medley at Red Lobster ($18.95), or the Chicken Marsala at Olive Garden ($17.50), these fast-casual restaurants are appealing to more affluent consumers, who aren’t feeling the payroll pinch as much right now.
The Ten Fastest Growing Chains with Sales Over $200 Million
(Ranked by % increase in sales in 2012 vs. 2011)
Rank Chain U.S. Sales ($MM) % Sales Growth
1 Dickey’s Barbecue Pit* ($249 ; 46.5%)
2 Firehouse Subs ($380 ; 33.5%)
3 Jersey Mike’s Subs* ($348 ; 26.3%)
4 Raising Cane’s Chicken Fingers* ($260 ; 26.0%)
5 Jimmy John’s Gourmet Sandwich Shop ($1,263 ; 24.6%)
6 Cheddar’s Casual Café ($540 ; 23.2%)
7 Buffalo Wild Wings ($2,474 ; 21.0%)
8 Chipotle Mexican Grill ($2,716 ; 20.2%)
9 Yard House ($315 ; 20.1%)
10 Panda Express ($1,797 ; 19.8%)