Mid-scale brands are struggling, with some major players shuttering handfuls of restaurants and experiencing alarming revenue loss. Is this a passing trend or is it a warning sign of things to come?
Much of 2016 for the restaurant sector has been categorized by declining sales and traffic. For chain restaurants—and particularly the casual dining segment—the effect has been most pronounced, with brands shuttering stores and laying off employees as sales continue to drop.
“When we look at it by brand, you can see that the percentage of brands that are positive is shrinking,” says Victor Fernandez, executive director of insights at industry tracker TDn2K. “So it’s not just the one or two big players that are moving it one way or the other. For casual dining, only 34 percent of brands had positive comparable [restaurant] sales in quarter three.”
The sector has experienced eight consecutive months of declining sales—with only February showing positive sales growth—and traffic growth has trended down at an increasing rate since the beginning of 2015, according to TDn2K, which measures data based on weekly sales from nearly 26,000 restaurant units and 130-plus brands representing $65 billion in annual revenue. Year-to-date traffic growth has fallen by 3 percent, which Fernandez categorizes as a “troubling scenario” when compared to the drop of 0.8 percent for all of 2015.
“When you think about from recession until now, it’s all been negative traffic growth every year,” he says. “It’s less and less guest occasions than what we had the previous year, so that’s the main concern for the chain restaurant industry.”
While negative sales have been attributed to everything from poor weather to the presidential election, consumer preference for convenience may be negatively impacting the casual dining sector.
“Quick service has been doing much better, and it has been doing much better for the last year or two. They’re able to drive some positive [comparable restaurant] numbers for both sales and traffic, so they’re in a much better spot,” Fernandez says. “Full-service has been struggling a bit more, and within that, casual dining is really the sub-segment that is struggling the most. If you drill down a little bit more, it’s the bar and grill sector that’s really having the most trouble.”
Quick-service restaurants were the top performer based on same-store sales in the third quarter with a growth of 2.2 percent, and have posted the highest total sales growth during the first half of this year, at a rate of 4.7 percent.
Upscale casual dining and fine dining have also shown positive same-store sales growth during 2016. Fernandez says that this suggests consumers are favoring chain restaurants for inexpensive, convenience-driven and on-the-go dining, and, at the other end of the spectrum, experience-based dining is also strong for chains.
But it’s mid-scale spending where brands are having the most trouble.
“[Quick-service] restaurants are eating these sit-down restaurants’ lunch, all across the board I think,” says restaurant franchise attorney Harold Kestenbaum. “I think they are for a number of reasons ... the price points are lower, the food quality happens to be better at a lot of these places, and people don’t want to sit, wait, and get served, and sometimes get bad service.”
Some of the largest brands in casual dining have exhibited the effects of a struggling segment. Ruby Tuesday has seen its revenue fall by 8.2 percent since its first fiscal quarter of 2016, and closed 109 restaurants. At Applebee’s, same-restaurant sales are down 4.4 percent for the first nine months of fiscal year 2016, and fell 5.2 percent in the latest quarter. Chili’s company owned same-restaurant sales fell 2.6 percent for its 2016 fiscal year, and traffic dropped by 3.7 percent.
But some chains have seemed impervious to this overall trend, managing to draw customers in and continue sales growth.
Olive Garden’s same-restaurant sales increased 3.1 percent throughout 2016, and The Cheesecake Factory has experienced 27 consecutive quarters of positive comparable sales.
“What we see from the top performers is the way they deliver the experience to their guests seems to be a big factor,” Fernandez says. “Service and value are the two key metrics in which we’re seeing better results from some brands [more than] others.”
At Denny’s, which had same-restaurant sales increase by 1 percent in its latest quarter and opened 13 new restaurants while closing five, the executive team has placed a focus on value to push the brand forward.
“It’s a continual focus on our guests and insights for us, and it’s one that’ll never be fully finished. One of the biggest factors in our performance has been in our ability to continuously work to improve the quality of our food while still offering incredible value,” says John Dillon, Denny’s senior vice president and chief marketing officer. “It’s a continual balance between marketing and operations, between driving traffic and making sure the guest experience can be delivered to [get] those guests we get in to come back.”
A focus on value may also be key in helping brands recover from slowing traffic and declining sales, as Ruby Tuesday’s interim president and CEO Lane Cardwell points out in a financial statement.
Cardwell says that Ruby Tuesday plans to drive traffic through the strategies of its new Fresh Start initiatives, including a “Fresh New Menu, Fresh New Garden Bar, and Fresh Experience.”
“We are focused on showcasing the affordability and value that Ruby Tuesday offers through a redesign of our core menu,” Cardwell says. “Our team has never been more excited and focused on the plan ahead. We are moving with greater urgency to change the trajectory of our business through a renewed focus on our guests.”
Fernandez says that full-service brands that have been financially successful have been capitalizing on changing consumer preferences, such as using technology for convenience and to bump up to-go sales.
“From a full-service restaurant perspective, it’s how do we make an experience that makes people want to come to keep those traffic numbers up?” he says. “When people don’t seem to be choosing the concept when it comes to dining out and selecting chain restaurants, especially.”
Dillon says that Denny’s has “improved or changed” more than 77 percent of its menu in the last six years, and continues to connect with consumers and their changing desires—including millennials—through its marketing.
“Today’s customer has no shortage of choices when it comes to where they spend their money eating out and we know how important it is for them to feel like they are getting the best possible meal and a fair price,” Dillon says. “We are working harder than ever to make sure our guests are getting food made with high quality ingredients at an affordable price, and our operators and franchisees are focused on the improvements in guest experience that are paying off.”