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Growth at casual dining chains slows

Casual dining companies, caught between cash-strapped consumers and a tight financing environment, are slashing U.S. expansion plans and some are looking overseas for growth.

While the U.S. economy was booming, casual dining became a frequent indulgence for consumers. But with the country mired in its greatest financial crisis since the Great Depression, many have changed their habits to eat at less expensive restaurants or prepare more of their own meals. To contend with a slowdown in customer traffic and rising costs to run their business, casual dining chains have been raising menu prices, cutting portion sizes and controlling raw material costs. They have also tried to manage their labor requirements closely and step up promotions.

This year, Asian-themed restaurant chain P.F. Chang’s China Bistro Inc, is on track to open 17 of its namesake restaurants and 25 Pei Wei stores, but for next year it plans to open only 12 to 14 P.F. Chang’s restaurants and 6 to 10 Pei Wei locations.

Expansion at O’Charley’s, which operates bar and grill restaurants under the O’Charley’s, Ninety Nine and Stoney River Legendary Steaks brand names, has come to a halt.

“We are not building restaurants right now,” Chief Executive Gregory Burns said at a recent Thomas Weisel Partners Consumer Conference.

“The industry is going to a very slow-growth mode and so the number of restaurants in the pipeline is being decreased.”

Burns said O’Charley’s has also deferred remodeling work on some units that had been planned for the second half of 2008 as it awaits more clarity on the economic climate and higher sales and profits.

Financing has also become a major restriction on unit growth for both company-owned and franchised restaurants, said Ron Paul, president of restaurant consulting firm Technomic.

This could hurt companies that rely heavily on a franchising model such as Denny’s, DineEquity’s Applebee’s chain and Brinker International’s Chili’s brand, Wedbush’s Moore said.

Casual dining as a segment has traditionally been company-owned, but that has been changing as some companies opt for more franchised stores to reduce operating exposure.

Difficulty in servicing existing debt could also put the brakes on a company’s growth plans.

Ruby Tuesday, for one, has suspended new restaurant openings as its “business sector is overbuilt and demand has declined.”

In its latest annual report, the operator of more than 950 bar-and-grill restaurants, said its spending could be restricted as it sets aside cash to repay its “significant” debt.

Analysts also say most restaurants are being careful about opening new stores in areas hit the hardest by a U.S. housing slump, such as California, Nevada, Arizona and Florida.

Filed under: Restaurant News