Red Lobster’s struggles have been a closely watched subject of late. The venerable seafood chain last year underpriced an all-you-can-eat seafood deal. It lost so much money that its owner wrote off its investment in the brand, declared that it “was not expecting much” in any sale while the CEO of said owner apparently swore off lobster.
On Tuesday, word emerged that the company was considering a bankruptcy filing to address its concerns, a report not terribly surprising following a year-plus of bad news for the company.
We can explore all the reasons why Red Lobster has struggled. Private equity sold off too many assets. Current owners ran bad promotions in a bid to lift weak sales. All of that is true. But its struggles highlight the challenges in the full-service market right now. There just isn't any room for error as consumers shift so many of their occasions to convenience-oriented concepts.
Full-service restaurants have underperformed their limited-service cousins for years. According to data from the Technomic Top 500 Chain Restaurant Report, the five-year average sales growth for casual dining chains was 2.7%. For family dining chains that rate was 1%. The Top 500 average was 6%. At fast-casual chains the average growth was 9.5%.
Four years ago, the share of Top 500 sales that were generated by full-service restaurants was 24%. Last year it was 21%.
Full-service chain sales last year slowed notably. After recovering strongly in 2021, sales have slowed markedly each of the past two years and last year sales for Top 500 full-service restaurants grew 5%. At limited-service chains, sales grew 8.5%.
In short, full-service restaurants have lost share and their sales are slowing and not keeping pace with fast-casual and quick-service concepts.
The sector itself has kept unit growth to a minimum, which is good for a sector that has struggled to get consumers interested in coming in. Full-service chains remain 800 locations short of where they were in 2019, according to Technomic data. By contrast, limited-service chains have grown by about 6,400 locations over that same period.
The consumer for years has been shifting occasions to limited-service restaurants, a phenomenon that began long before the pandemic hit, but which accelerated in the years since then.
At the Restaurant Leadership Conference, we heard from operators who noted that customers who used to come in three or four times a month now might come in once. Or they just come in for occasions.
While consumers are apparently fretting over fast-food prices, they are responding generally by rejecting full-service restaurants, which have the reputation for higher prices. TikTok may say that Chili’s is cheaper than McDonald’s, but consumers are a long way from viewing it that way.
Because of this, full-service restaurants have limited markets on acquisitions, which leaves them at the mercy of investment companies or other buyers that do not have the brands’ long-term interest at heart.
Customers do like full-service restaurants. But they have a lot of choices among independent restaurants that are newer and more innovative and, perhaps more important, local. They love experiences, and are willing to spend on them, but it’s made lift tough on those in the middle.
And anybody that fails to properly give those consumers what they want is going to have problems. In Red Lobster’s case, the brand has yet to recover sales lost during the pandemic. It offered an entirely-too-aggressive promotion that hammered sales and profitability and put the company in the position it is in today.
So how can brands respond? First off, do not cut back on service. Winning chains that keep customers over the long term have won by spending on service and quality. Texas Roadhouse, which just leapfrogged Applebee’s to become the country’s second-largest casual dining chain, has insisted on investing in hospitality.
Remind customers about why they want to go out to eat at a full-service restaurant in the first place. Give people a reason to go out.
But there also is an opportunity to tell customers about the value they get when they eat out at a casual-dining restaurant. No, it’s not cheaper than McDonald’s. But Chili’s gives you an awful lot more than does McDonald’s for your buck. And you’ll be waited upon in the first place.
There will always be room in the industry for full service, even in this era of self-order kiosks and delivery and AI drive-thrus. It’s just more work.