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Another Negative Year for Casual Dining
A recent report on the outlook for the restaurant industry in 2009 paints a bleak picture for full-service dining.

For restaurateurs dreaming of relief in the coming year, a recent report on the outlook for the industry in 2009 will be a rude awakening.

November predictions from global rating agency Fitch Ratings offer little hope that challenges including a declining U.S. economy, decreased consumer spending, and elevated food costs will let up in the near future. In fact, the report states they're likely to get worse.

Hardest hit will be the full-service dining sector, and especially the casual-dining segment, which Fitch expects to enter its third year of negative same-store sales numbers. The report is more optimistic on the fortunes for quick-service restaurants, but even fast feeders have a tough row to hoe.

I wouldn't say [the outlook for quick-service restaurants] is positive," cautions Carla Norfleet Taylor, a director with Fitch Ratings. "I guess the word is that they're better positioned than the full-service segment."

The Fitch report cites the segment's value perception, lower-priced menu items, and the continuance of customer trade-down from full-service restaurants as factors acting in quick-serves' favor, and indeed the industry has so far been able to leverage its position. McDonald's, for instance, recently reported a 5.3 percent same-store sales gain in the U.S.—a feat analysts attribute to the chain's convenience and affordability.

But that hasn't been the case across the board.

"Other brands are feeling the pinch a little bit more," says Gwen Amador, vice president of Texas-based brand development firm M/A/R/C Research.

Jack in the Box just announced that sales and customer traffic have been hurt by the economy, and the chain expects profits to drop in 2009. Embattled Starbucks made headlines after profits fell 97 percent and same-store sales dropped 8 percent in the fourth quarter. Even the positive picture painted by McDonald's and Yum! Brands is tempered by the fact that much of their good news comes from international markets, which have yet to register a slowdown for the industry, Taylor says.

In the U.S., however, consumers are showing signs of cutting back. A sobering study recently released by M/A/R/C could be an indicator of where the industry is headed in these tough times. Measure QSR, an online survey of 25,000 quick-service customers conducted in September, asked respondents how the economy is affecting their use of restaurants in the segment. Almost half (48 percent) said they frequented fast-food establishments less often over the past three months compared with their typical usage. Moreover, the three months covered were June, July, and August, before fears about the economy began to skyrocket near the end of September and early October. Of those who said they were cutting back on fast food, the majority (84 percent) indicated that they were opting instead to eat at home to save money. Another 35 percent said they were starting to take a lunch to work or school for the same reason.

People are trading down because of fear and price, but if you offer them a good value, they're going to come back.”

To fight at-home food preparation, quick-serves need to offer cheap options for consumers who might be on the fence when it comes to eating out, experts say.

"At this time, what companies should be doing is really promoting value menus," says pricing expert Rafi Mohammed. For chains that don't have one in place, he also suggests introducing a "fighter brand," a mid-point product designed to offer customers a cheaper otion without diminishing the value perception of a premium product through discounting.

Another factor complicating the fate of quick serves going forward is attempts from struggling casual-dining restaurants to stanch the flow of customers trading down from their ranks. The Fitch report predicts casual dining will increasingly turn to promotions and discounting to keep customers coming through the door.

An early example is Applebee's "2 for $20" promotion launched this month. The deal offers customers two full-sized entrees and a sharable appetizer for a set price, a clear attempt, Mohammed says, to appeal to customers who have been trading down.

"People are trading down because of fear and price, but if you offer them a good value, they're going to come back," he says.

Quick serves, however, can counter by offering premium menu items in addition to value-priced options. Taylor cites Pizza Hut's Tuscani Pastas, Long John Silvers' Freshside Grilles, and Burger King's Steakhouse Burgers as examples.

"These are viable alternatives to the deals offered by mid-scale casual diners," she says.

Jamie Hartford is a regular contributor to QSRmagazine.com.