http://www.ocregister.com/articles/menu-percent-chains-2231392-diners-polly
Tuesday, November 18, 2008
O.C. restaurants face perfect storm of issues
In the midst of one of its worst downturns, the restaurant industry faces consumers looking for discounts amid soaring food costs.
By NANCY LUNA
The Orange County Register
Restaurants starving for customers are engaging in a menu of marketing tactics to boost sales and avoid layoffs during one of the industry’s worst economic downturns.
In Orange County, chains are teasing penny-pinching diners with recession-busting value deals, smaller (and cheaper) food portions and 2-for-1 coupons.
Not everyone is discounting. Faced with soaring food costs, some chains like Cheesecake Factory and Chipotle Mexican Grill are raising menu prices. Others are throwing in the towel, shutting stores or slashing hours to stem losses.
From fast food to fine dining — no sector is immune. Cold Stone Creamery expects to close 100 ice cream shops by the end of the year. Locally, diners have seen Togo’s, KFC, Macaroni Grill and Wilhelm’s Chophouse (formerly French 75) close eateries this year.
Some Black Angus restaurants have eliminated lunch service to trim costs, including steakhouses in Fullerton, Lake Forest and Fountain Valley.
While there’s no formal data on the number of restaurant closures sweeping the nation, one industry consulting firm estimates that at least 1,900 units have gone belly up since January.
“It’s tougher now than it’s ever been,“ said Ed Sheldrake, a KFC franchisee who closed a Brea location earlier this year.
Still, the competitive environment has been great for diners, who are snapping up menu deals.
“The coupon will dictate where I go for lunch,“ said Amanda Wormley, 29, after finishing a meal at Polly’s Pies in Fullerton last week.
Pricing in a perfect storm
As the economy unravels, industry data shows that casual dining eateries such as Polly’s Pies have been hurt most as their customers cook more at home or trade down to less expensive fast-casual eats.
To make matters worse, chains are also facing record food inflation. That perfect storm — soaring ingredient costs and dwindling foot traffic — has forced restaurant operators to do the unthinkable during a tanking economy: raise prices.
Besides operating 14 KFC eateries, Sheldrake also owns Polly’s Pies, a family-style sit down chain based in Anaheim. The Fullerton resident said operating costs at Polly’s have shot up 35 percent, while revenue is down 8 percent.
“We have a lot of senior citizens who are coming in less,“ said Sheldrake, 82.
With diners fleeing, Sheldrake has opted not to raise prices for fear of scaring away loyal customers.
But other chains are willing to take that risk.
Togo’s, for example, recently launched a tiered-menu to cope with rising food costs. Sandwiches with higher-priced ingredients — such as avocado or chicken — cost about $1 more than other subs of the same size. Next year, menu prices will go up 6 percent at Chipotle and 2.5 percent at Cheesecake Factory, both chains said recently.
In normal economic times, most diners tend to be forgiving when restaurants raise menu prices, said Ron Paul, president of restaurant consulting firm Technomic.
But in today’s economy such a strategy might backfire.
“Having said that, though, it (a menu hike) is one more discouragement from eating there,“ Paul said.
Coping with coupons
The National Restaurant Association — which tracks restaurant performance each month — said its index fell to a record low 96.7 in September.
The trade organization also said that nearly two of three restaurants are reporting negative same-store sales, a key financial indicator. To bolster business, some chains are responding with menu makeovers that focus on special meal deals. Others are offering more coupons.
In a September survey, Technomic found that 29 percent of consumers are using restaurant coupons more frequently now, compared to six months ago.
Chains are leveraging that demand.
“We’re definitely going to see heavier promotions, e-marketing, couponing — anything to get the customers in the door,“ said Paul, whose consulting firm has an office in Newport Beach.
Polly’s owner Sheldrake said he launched a Sunday newspaper flier promoting three coupons for breakfast, lunch and dinner. The dinner meal deal for $8.99 includes a four-course dinner of chicken pie, a side dish, a drink and a slice of pie. For Thanksgiving, Polly’s plans to knock off $10 from its traditional $79 turkey dinner catering package.
Taking advantage of the new deal is Howard Neidiger, 84, of Anaheim. Last week he used a Polly’s coupon to get a burger, fries, drink and a piece of pie for $6.99 at lunch.
“I go to a lot of places to eat, especially if I have a coupon,“ Neidiger said.
Steven Gray, chief operating officer for Money Mailer in Garden Grove, said his firm has seen a 5 percent growth in the number of dining coupons stuffed in its mailers. Gray couldn’t offer redemption data, but anecdotal evidence shows that demand is up.
“Consumers are saying, ‘We want these coupons,‘“ Gray said.
Seeking other strategies
Some restaurants fear the long-term repercussions of offering deep discounts and 2-for-1 coupon deals.
“People will expect (those prices) to stay” once the economy rights itself, said Harald Herrmann, chief operating officer of Irvine-based Yard House.
Jerry Deitchle, chief executive of Huntington Beach-based BJ’s Restaurants, echoed those sentiments during an October conference call with investors.
The Chicago-style pizza chain is keeping its “average check as low as we possibly can,“ Deitchle told investors. That being said, he added: “We are not going to resort to excessive discounting or couponing to buy market share.“
As a result, some chains are concocting creative “cheap, but chic” menu deals to appeal to foodies without sacrificing quality or undercutting profit.
In the fall, Yard House reduced the size of its desserts and cut the price in half. The new pint-size treats such as Crème Brulee and Lemon Soufflé are selling like wildfire, Herrmann said. Earlier this year, Tustin-based Mimi’s Café debuted a “Just Enough” dinner menu. Entrees are smaller and range in price from $8.29 to $11.29.
A few months ago, The Daily Grill, which has eateries in Newport Beach and Irvine, launched a $25.95 three-course dinner to attract diners. While enticing, some deals haven’t been enough to combat a devastating drop in foot traffic. So far this year, the Daily Grill has cut 25 percent of its staff.
To avoid more layoffs, the company’s top brass took a 10 percent pay cut in October. The salary slash will save the company $100,000 a quarter, said chief executive Philip Gay, whose 2007 base salary was $288,000.
The reduction will remain intact until consumer confidence picks up, Gay said.
“They (diners) will come back and eat again,“ he said. “It’s just question of when.“
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