OPINIONFinancing

Casual dining finally shrinks unit count

The sector closed more units than it opened last year, according to Technomic, after a decade of weak sales.

The Bottom Line

It’s generally accepted that the decline in the casual-dining restaurant sector began around 2006, as chains like Ruby Tuesday and Applebee’s began having sales problems. Their same-store sales and traffic have been mostly weak ever since.

Throughout this, however, the number of full-service restaurants actually increased every year.

In fact, the sector grew unit count by an average of 1.6% a year between 2007 and 2016, adding nearly 3,000 locations in the U.S. over that period, according to a decade’s worth of Technomic Top 500 Chain Restaurant Report data. That includes the recessionary years of 2009 and 2010, when nobody was eating out unless it was super cheap.

That changed last year. The number of casual-dining locations in the Technomic Top 500 shrunk for the first time, by 1.5%. Chains such as Joe’s Crab Shack, McCormick & Schmick’s, Buca di Beppo and Romano's Macaroni Grill, among others, closed numerous locations.

Casual-Dining Unit Count

Source: Technomic Top 500 Chain Restaurant Report

The culling of supply, while painful, was a long time coming. There simply isn’t enough demand in the sector to support the number of restaurants, which likely needs to come down for the chains to resume improved unit economics.

One could argue, in fact, that increasing unit count over the decade has exacerbated the crisis facing casual dining.

One of the key themes year after year has been a shift in consumer demand, from dine-in to takeout, and from restaurants with wait staff to counter service concepts.

That makes the level of growth in casual dining something of a surprise. Between 2007 and 2016, the number of casual-dining locations grew by 19.2%.

That accounted for nearly all of the sector’s total growth over that period. Sales at casual-dining restaurants in the Top 500 grew by 22%.

That leaves less than 3% for organic sales and traffic growth along with menu price increases.

As you might imagine, that has damaged unit economics for the sector as a whole, leading to the same-store sales and traffic declines that have worsened over the past two years.

Consumers in a low-demand, high-supply environment have a lot of power, and they directed more of their spending toward concepts such as Olive Garden and Texas Roadhouse.

They shifted spending away from weaker concepts, pushing many of them over the edge and leading to a dramatic increase in store closures that finally overcame unit openings last year and shrunk total supply.  

More than half of the 186 casual-dining restaurants in the Top 500 either were stagnant from a growth perspective or reported unit count declines in 2017. And 24 casual-dining chains cut their unit count by 10% or more.

Joe’s owner Ignite Restaurant Group filed for bankruptcy last year. So did Macaroni Grill.

The unit count declines in 2017, in fact, could partially explain the late-year improvement in the sector’s same-store sales, as chains such as Applebee’s and even Famous Dave’s reversed bad, multiyear trends.

And casual dining, using delivery and technology, is also getting in on the takeout trend, finally figuring out ways to get consumers to eat their food without dining in.

But the same trends of weak demand and growing convenience remain. And that means casual-dining chains probably need to cull more weak units from the supply before the sector can truly begin a recovery.

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