Frugal Consumers Could Squeeze Restaurants As Costs Rise
15 Juin 2009 - 8:19PM
Dow Jones News
Restaurants could see their margins squeezed as inflationary
pressures return to the commodity markets, especially as the chains
find it harder to wean customers off a steady diet of meal
deals.
Analysts expect higher ingredient and energy costs for
restaurants in 2010, with inflation returning to normal levels
after a year when costs increases moderated and, for some items,
fell from year-ago levels. That could make it harder for chains to
continue with the aggressive stream of coupons,
buy-one-get-one-free offers and other promotions to bring customers
into their doors.
"There's no sign of a pullback yet on discounting," Barclays
Capital analyst Jeffrey Bernstein said in an interview. But, "if
you see a return to inflation in 2010, it'll prove more challenging
to offer these deals."
Consumers are responding to those deals, said Morgan Keegan
& Co. restaurant analyst Robert Derrington, who believes that
Brinker International Inc.'s (EAT) Chili's Grill & Bar deal
offering 10 items for $7 or less is putting more customers in its
seats.
But as ingredient costs rise, restaurants may find it harder to
raise menu prices to protect their profit margins, especially since
consumers have grown accustomed to deals. Derrington termed the
casual-dining environment as a competitive "flea-market" for
consumers, who are going out to eat when they get coupons or see a
good deal advertised on television.
"Consumers are being extremely frugal," Derrington said.
With aggressive menu price increases no longer in their arsenal,
restaurants may face margin pressures in 2010, when most chains
will see their current purchasing contracts expire and they
encounter a pricier market for their basket of goods.
The challenge could damp the rally that casual-dining stocks
have had so far this year, with some chains bouncing off multiyear
lows to post big gains.
Ruby Tuesday Inc. (RT) shares have increased more than
seven-fold to $6.26 in recent trading since hitting a 52-week low
of 85 cents in early March. Other chains with dramatic gains
include Applebee's and IHOP owner DineEquity Inc. (DIN), whose
shares were recently at $29.86, up roughly six times from their low
in February, and O'Charley's Inc. (CHUX), whose shares traded
recently at $8.19, up more than 300% this year.
Casual dining giants Brinker and Darden Restaurants Inc. (DRI),
owner of Olive Garden and Red Lobster, are also up 53% and 19% so
far in 2009.
Higher costs should hit casual dining chains that operate most
of their locations themselves rather than those that sell
franchises, since they bear all the costs. Bernstein cited
Cheesecake Factory Inc. (CAKE) and P.F. Chang's China Bistro Inc.
(PFCB) as two facing such exposure.
Some think that those restaurants that have offered big time
discounts have shot themselves in the foot, as their customers will
come to expect lower-priced food.
"When the economy turns, those that were in the promotional
business will suffer more than most," Larry H. Lattig, senior
managing director at Mesirow Financial Consulting LLC, said at last
week's Nasdaq OMX conference on the food and restaurant
industry.
-By Paul Ziobro, Dow Jones Newswires; 212-416-2194;
paul.ziobro@dowjones.com