The Future of Casual Dining

Once a key source of industry growth, the casual-dining segment has dealt with more than its fair share of challenges in recent years. Getting casual dining back on track will include developing more flexible formats, faster service and more.

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Seasons-52
Polished casual concepts like Seasons 52, seen here, are higher priced than the traditional players, but offer more atmosphere, menu innovation and hospitality. Image courtesy of Seasons 52
What’s eating casual dining? A better question might be, what isn’t? While no segment of the foodservice industry has sidestepped the impact of the recession, casual dining seems to have taken a supersized blow. It’s getting hit from virtually all directions as the economic malaise drags on consumers make fundamental shifts in their eating-out behaviors. And casual dining’s own considerable bulk makes implementing change a slow and laborious process. Even the strongest, most iconic brands find themselves scrambling to adapt to new realities and facing nimble new competitors who are strategically positioned to gain from their pain.

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While a small handful of players has achieved growth — mostly contemporary “polished casual” brands — and some badly beaten chains have begun to climb back from record losses, the segment’s collective pain is acute. Consider recent performance numbers: After this segment posted annual growth rates consistently in the 7 percent to 8 percent range from 2000 through 2006, the sky started falling in 2007, when growth slowed to 5.8 percent. By 2008, casual dining had lost all momentum, with sales losses of 2.6 percent that year followed by an even steeper 6.8 percent drop in 2009 and another 1.8 percent drop in 2010. Technomic pegs total casual-dining growth over the next five years on a real basis, excluding inflation, at 1 percent per year.

Contrast those figures with sales data in a recently published Technomic study, 2011 Top 100 Fast-Casual Chain Restaurant Report, which shows that this segment continues to outpace the industry as a whole. The 100 chains included in the study together grew their sales by 6 percent in 2010, an even faster pace than the prior year. A smaller Mintel study of 24 fast-casual chains, including concepts such as Qdoba, Chipotle and Panera Bread, showed that its subjects together achieved compound annual growth of 35 percent from 2004 to 2006.

Such fast-casual leaders have rapidly become the industry’s new darlings, and their continued strong growth leaves most traditional casual-dining competitors in the dust. Chipotle Mexican Grill, for example, widely regarded as the fast-casual segment’s biggest success story, saw its total revenues increase by 24.5 percent in fiscal year 2010 while same-store sales rose 12.6 percent over the prior year. In 2009, when casual dining as a whole dipped by 6.8 percent, Chipotle saw revenues increase 14.0 percent and same-store sales grow by 2.2 percent. On the casual-dining side of the aisle, meanwhile, segment leader Brinker International reported a decrease in overall revenues for 2010 of 12.8 percent, with same-stores sales at its Chili’s Grill and Bar and Maggiano’s Little Italy brands down 4.6 percent and 1.2 percent, respectively. Fellow segment leader Darden fared better but still landed in the red again last year with core brands Olive Garden (down 1.0 percent), Red Lobster (down 4.9 percent) and LongHorn Steakhouse (down 0.7 percent) all seeing same-stores sales decline over the prior year, a year in which same-store sales were down even more dramatically.

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Buffalo-Wild-Wings
Chains like Buffalo Wild Wings have chosen to tap a flex-casual format that switches from fast casual at lunch to full-service casual dining during dinner. Image courtesy of Buffalo Wild Wings
While traditional incumbent casual-dining behemoth’s such as Darden and Brinker may have the resources to hang on and implement changes to right their respective ships, many in the segment have succumbed. A recent story on financial news website 24/7 Wall St. shined the spotlight on “vanishing American restaurant chains,” listing 10 companies with the greatest decline in sales — all 60 percent or more — from 2001 to 2010, citing data provided by Technomic. Seven of the 10 are casual-dining chains, most of which have within the past few years filed for bankruptcy protection, laid off thousands of workers, sold off assets and closed large numbers of stores — if they have not simply ceased operations. Among them are what were once headline-making growth brands that helped define the sector: Bennigan’s, Ground Round, Bakers Square, Damon’s, Tony Roma’s and Black Angus Steakhouse. Last October, Real Mex restaurants, operator of nearly 200 Acapulco, Chevy’s Fresh Mex and El Torito Mexican restaurants, followed suit, as did Friendly’s Ice Cream Corp.

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It’s the Economy — and a Whole Lot More
The reasons for the shakeout are many and complex, and not unique to casual dining. But the casual-dining segment’s survival is about much more than simply waiting out the recession. Too much has changed outside of the segment, and, in many respects, too little has changed within it.

“There’s no doubt that the economy is largely to blame,” says Joe Pawlak, vice president at Technomic. “When unemployment is high and disposable personal income drops off, that has a negative impact on what happens in foodservice. Casual dining, being a more discretionary purchase, has been particularly hurt by that. As their traffic numbers began to slow down, many in this segment started taking price increases that went too far.

“They’d always been well known for value, for providing a lot of food at a good value price. But postrecession, that whole price-value equation really no longer holds true in the consumer’s mind,” Pawlak continues. “Not only did they start to see prices go up, but in many cases quality started to go down and chains started cutting back, not using the best meats or the best produce anymore. Consumers realized that, and it hurt too.”

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Tilted-Kilt
Part of an emerging group of chains, the Tilted Kilt, seen here, have menus with higher price points than traditional casual dining concepts but justify this through better quality food and atmosphere. Image courtesy of the Tilted Kilt
Still other factors are compounding casual dining’s woes. Among them is market saturation, the product of earlier glory days of high demand and easy access to credit. Lack of differentiation and shifts in consumer behavior and lifestyle have since led many consumers to largely abandon or dramatically cut back on their traditional casual-dining visits. “There are too many casual-dining restaurants out there to support what’s going on in the industry from a consumer standpoint,” Pawlak says. “And even in a recession, consumers are increasingly busy. They don’t take time to sit down for meals very often anymore, and when they do go out they find they can get equal if not even better-quality food for considerably less time and money at fast-casual alternatives where, by the way, they also don’t have to add on a 15 percent to 20 percent tip.”

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Add to all this steadily increasing commodity costs, unrelenting pressure to discount to keep seats filled, and the fact that casual-dining restaurants are big, labor-intensive and expensive to operate, and it’s no wonder they’re struggling. It’s also no wonder that they’re busy undertaking not-so-casual attempts to reinvent themselves and regain their footing.

The Great Adjustment: Back to Relevancy
“To those who say casual dining is dead, what comes to mind is the famous quote from Mark Twain, ‘The reports of my death have been greatly exaggerated.’ It’s not dead, and it’s not going to go away. But it is in what I call the great adjustment from the great recession,” says Dennis Lombardi, executive vice president, foodservice strategies, at WD Partners, a global design and program management consultancy headquartered in Columbus, Ohio. In addition to economic and other factors discussed above, Lombardi says demographic shifts must play a key role in that adjustment.

“We’re seeing the passing of the torch from the boomers to the millennials,” he says. “By 2014 there will be more older, driving-age millennials than there are boomers. Millennials are at the beginning or middle stages of their earning years, and boomers are approaching the end of their earning years. That has drastic implications for how they spend their income. Many casual-dining chains were created by and continue to be managed by boomers. The issue, in my mind, is whether they can make the transition from being boomer-friendly to being millennial-friendly, and do so without alienating boomers. Over the next five to 10 years, we’ll see who’s successful at doing that and who isn’t.”

Bart Mills, principal at Back Lot Productions, an Atlanta-based brand development and retail design firm, puts it this way: If you’re not changing, you’re done. “Places like Olive Garden and T.G.I. Friday’s, they’ve got to get more sophisticated in what they’re doing to stay competitive,” he asserts. “There will be more of the BJ’s, Buffalo Wild Wings and other more contemporary competitors that have fresh appeal. They draw younger customers but are also comfortable for more mature guests, and they make food quality a point of distinction. Is Olive Garden going to be known as the place with grapes painted on the walls where the 60 and older crowd hangs out for all-you-can-eat and fills up on salad and breadsticks? You do need to continue to delight your core customers, but at the same time you have to always be changing to entice new customers.”

The ways in which forward-thinking casual-dining operators are attempting to do just that are, to some extent, concept-specific, but industry experts see some key trends emerging that we’re likely to see more of as the segment fights for share. Among them:

Flexible Formats. Many casual-dining companies are looking at ways to capture traffic that would otherwise go to fast-casual or quick-service competitors. Mills — who, with partner and graphic designer Tracey Barker, has worked to reimage brands including Schlotzsky’s, Mama Fu’s Asian House and the Hotel Indigo chain — predicts rethinking traditional service paradigms will become more prevalent. Mama Fu’s rebranding, for instance, includes creating a hybrid “flex casual” format that switches from fast casual at lunch to full-service, casual dining at dinner. Buffalo Wild Wings, too, is tapping both formats. The company, whose total revenue and same-store sales gains have far outpaced those of most casual-dining competitors for the past few years, lets customers order at the counter or at their table. According to the company, it “allows our guests to customize their Buffalo Wild Wings experience to meet their time demands, service preferences or the experience they are seeking of a workday lunch, a dine-in dinner, a take-out meal, an afternoon or evening enjoying a sporting event, or a late-night craving.”

Faster Service. Improving their ability to get food to customers fast is a priority, says Robert Derrington, managing director and restaurant industry analyst at Morgan Keegan, a Memphis, Tenn.-based investment banking and securities brokerage firm. “The real opportunity for a lot of these chains relates to kitchen productivity and speed of service,” he says. “The most forward-thinking are going to find ways to further differentiate the financial returns they generate because they can turn tables faster, serve more expeditiously, keep the satisfaction levels higher and at the same time have more efficient production in the back of the house. It’s especially critical at lunch: If casual-dining chains can’t deliver a meal to the table within 12 to 15 minutes, they risk being irrelevant.”

To Derrington’s point, Applebee’s this summer launched a “14 Minutes or It’s Free” lunch campaign supported by a Facebook page, Smartphone scannable QR codes, YouTube videos and an online invitation form that consumers can use to invite a friend to enjoy the 14-minute lunch. Brinker’s Chili’s, too, is working to improve its speed of service with an eye toward gaining market share at lunch. It’s in the process of re-engineering and streamlining back-of-the-house operations through an initiative it calls Kitchen of the Future, including accelerated cooking technologies intended to boost efficiencies and shave several minutes off average service times.

Gathering Places. Many customers today rush in and out, but when they’re not in a hurry those same customers increasingly look to restaurants as places to hang out, get work done, and gather with friends and colleagues. “There’s a broader emphasis on creating spaces for groups to collect, where it’s very easy to combine tables and accommodate large, spontaneous groups,” says Jim Lencioni, president of Aria Group Architects in Oak Park, Ill., which specializes in restaurant and hospitality planning and design. “They’re creating rooms that can be private for parties or opened up as part of the general dining room. They’re incorporating bar spaces with mid-height tables that people can gather around and enjoy an atmosphere that’s not necessarily traditional bar or dining room. They have a different vibe and contribute to conversation and getting together over drinks and food. In contemporary casual-dining restaurants, the bar areas tend to be a little more well-defined, and the dining areas have a different energy, but still relate to the bar.”

As gathering places, the fast-casual segment is also applying pressure and finding success where traditional casual dining hasn’t. “Not only are the fast-casual guys winning on time, money and efficiency, in many cases they’re also winning on the quality of the experience,” Derrington says. “Go into Panera Bread at 10 a.m. on a weekday, and that restaurant will be two-thirds to three-quarters full with people who essentially outsource their office there. They’re having business meetings; they’re using Wi-Fi for work or for personal surfing. Becoming popular gathering places is one of the big success features these types of concepts have hit upon. They’re where people want to hang out, and casual dining should pay attention to that going forward.”

Faster Refreshes. Historically, major casual-dining chains looked to remodel about every seven to eight years. Now, the life cycle of relevancy has shortened significantly, and brands need to refresh the restaurant or something significant about the experience far more often than that, according to Mills. “Think about the impact of technology alone and how fast it changes everything,” he says. “The customer today is different from the customer five or even three years ago. They’re much more sophisticated, and their expectations change quickly.”

Failure to freshen up the look and feel of a concept before it crosses the line to being outdated is the “kiss of death,” Lencioni adds. “We’re meeting with casual-dining leaders who know they need to update and refresh, to appeal to a more contemporary, more sophisticated audience. They don’t want to lose their established brand identity and equity, but they know that identity has to evolve and modernize. It’s a fine line, but many chains that didn’t do that are no longer around. Those that will dominate the segment in the future will pay close attention to making sure they stay as relevant and compelling as they were five years ago. It doesn’t necessarily mean full remodels, but at a minimum it involves refreshing of the menu, the marketing, specials and features, replacement of items that need to be replaced with something a bit more contemporary and relevant as opposed to just replacing in kind.”

Smaller Footprints, Tighter Kitchens. Going forward, many casual-dining chains will seek smaller, less expensive footprints, including in-line locations. Some chains that are already doing so as a way to tighten up unit economics, according to Derrington, include Ruby Tuesday, Texas Roadhouse and Red Robin. And most casual concepts are looking as hard at the back of the house as the front, if not harder, to find efficiencies. That includes more strategic engineering of smaller kitchen spaces, as well as seeking to use fewer, smaller and more versatile pieces of equipment, Lencioni says. “The more equipment you have in the back, the more people you need to operate it, and the more rent you pay for the space it takes up,” he says.

“I continue to expect kitchens as we know them to be the focal point for where we can find economies of scale,” Lombardi adds. “Innovation will play a big factor in how we reduce the square footage of the kitchen, reduce labor in the kitchen, and reduce the amount but not necessarily the sophistication of the equipment in the kitchen. It’s a very big component of what’s got to happen.”

Contemporary, High-Energy. A subset of casual dining is what Pawlak calls “polished casual,” and if there’s any growth to be seen in the segment, it’s happening there, he says. It’s made up of chains like Cheesecake Factory, Seasons 52 and P.F. Chang’s — concepts that are higher-priced than the traditional players, but that offer more atmosphere, menu innovation and hospitality. In addition, a newer group of growth chains is emerging that offers elevated quality and atmosphere at price points closer to traditional casual dining. Examples include BJ’s, Yard House, Brick House and Tilted Kilt. “Their prices are higher than Applebee’s, but they justify those price points with top-quality food and with an atmosphere that is very contemporary and fun. They have lots of TV screens for sporting events and other types of video entertainment. They have free Wi-Fi and are doing things where people can engage,” he says. “They regularly add new and innovative things to the menu; their plate presentations are great, and they focus a lot on mixology — especially craft beers and specialty drinks. Perhaps most important, their service is very attentive. In all of these ways, they’re significantly differentiated from what we see in traditional casual dining, where lack of differentiation is a long-standing problem.”

Buffalo Wild Wings is one in this subset that has succeeded in creating a contemporary, multimedia, social environment. In a typical unit, guests have the option of watching sporting events or other popular programs on projection screens and approximately 50 additional televisions, competing in Buzztime® trivia or playing video games. The restaurants’ open layouts offer dining and bar areas that provide distinct seating choices for sports fans and families.

BJ’s Restaurant and Brewhouse, whose menu touts signature deep-dish pizza as well as a variety of salad, sandwiches, pastas and other entrees, small bites, shareable appetizers and its own handcrafted beers, is another emerging polished-casual success. It offers contemporary, inviting décor and a unique video statement, including a 103-inch plasma display as well as several additional high-definition flat panel TVs to create not a sports bar or brew pub, but a high-energy, fun and family-friendly casual-dining environment. While it’s taking a slow approach to unit growth, adding 10 units in 2010 and 13 in 2011, its sales have increased an average of 21.5 percent annually over the past five years. Comp-store sales gains have hit between 5 percent and 6 percent in the past two years. With a check average of $12 to $13, considerably less than competitors such as Cheesecake Factory and P.F. Chang’s (where checks average closer to $20), average unit sales pushing $6 million, and earnings per share that have risen from $0.39 in 2008 to an estimated $1.06 this year, BJ’s is a poster child for next-generation casual dining.

Indeed, moving forward, the big challenge for so-called traditional casual-dining operators will be to figure out how to zig while the BJ’s and other fresh faces in the segment zag — or, at a minimum, to apply some strategic shine and polish to their own brands as they reach for what’s fast become the casual-dining Holy Grail: relevancy.

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