EMPTY TABLES THREATEN SOME RESTAURANT CHAINS

Empty Tables Threaten Some Restaurant Chains

John Marshall Mantel for The New York Times

A slow day at the Applebee’s in Times Square.

During a decade of easy credit and loose spending, American businesses built too many cars, houses, stores and factories. It turns out the country built too many restaurants, too.

Oversaturated Restaurant Industry

The proliferation of casual sit-down competitors, like Dallas BBQ has taken away some customers, and the recession is dissuading others.

Now consumers are cutting back, and dining out is among the casualties. Finer restaurant chains have been hit hard, and so have the casual sit-down places that flooded suburban shopping centers and tourist districts across the country, aimed straight at middle American tastes.

A few chains have boarded up already. Many others are going into survival mode, trying to renegotiate their loans, cutting staff, offering bargains to customers and closing less profitable restaurants. Analysts predict thousands more restaurants could close in the next year or two.

The pain is evident even amid the neon glitz of Times Square, which draws big crowds of tourists used to eating at places like Red Lobster and Applebee’s.

Zane Tankel opened an Applebee’s franchise there eight years ago. At the time, he said his nearest real competition, an Olive Garden, was about six blocks away.

Now, Mr. Tankel could sit in his restaurant and throw rocks through the windows of a half-dozen competitors, including ESPN Zone, Dave & Buster’s, Chevys and Dallas BBQ.

“We’ll see some weeding out,” he said one recent lunch hour, sitting in a near-empty Applebee’s dining room overlooking 42nd Street. Noting a restaurant above him and another across the street, he said, “One of the three of us is not going to be here.”

Mr. Tankel’s fears are shared by many analysts and consultants, who say that a decades-long expansion produced too many restaurants even for a good economy, let alone the worst malaise since the Great Depression. 

Since 1990, the number of restaurants and bars has grown to 537,000 from 361,000, a 49 percent increase, according to the National Restaurant Association. Population in the United States grew 23 percent in that period.

Amid the seeming prosperity of a credit-fueled era, people got in the habit of eating more and more of their meals out. The association’s statistics show that 48 cents of every food dollar is now spent at restaurants, compared with 40.5 cents per dollar in 1985.

In a recent note to investors, John Glass, an analyst for Morgan Stanley, said the casual dining industry — midrange restaurants like Applebee’s — needed to shutter about 1,200 of its roughly 18,000 locations to regain financial health.

“The chain casual dining industry has been overbuilt since 2005,” Mr. Glass wrote, noting that was the last year the industry posted positive numbers for customer traffic. “It may take two or more years to reach equilibrium.”

Others said the pruning of restaurants would extend beyond casual dining to all types of restaurants. Bob Goldin, executive vice president at Technomic, a Chicago consultancy for the restaurant industry, predicted that more than 20,000 restaurants would close over the next three years.

“I think 20,000 is a minimum,” he said. “We probably need more than that. There are a lot of marginal players out there.”

Mr. Goldin said the rapid expansion was driven by chains that added 300 or more new stores a year, following a “you build it and they shall come philosophy.”

“There isn’t a sector in the retail market that isn’t overbuilt,” he said.

The result is that after 16 years of sales growth, inflation-adjusted sales declined 1.2 percent last year, an already tough year for restaurateurs as ingredient costs hit record highs. Sales are expected to decrease another 1 percent in 2009, according to the National Restaurant Association.

“There’s not a day that goes by that I don’t get a heads-up about somebody closing their doors,” said Amy Greene, who tracks the industry for Avondale Partners in Nashville.

So far, many of the companies going out of business are small enterprises with one to three locations; they are struggling because of slower sales and limited access to credit, she said. The NPD Group, a market research firm, reported in January that unit growth of small chains and independents declined by 1 percent in 2008.

But larger chains have struggled too, particularly those with a more expensive menu than competitors, or onerous levels of debt. Outback Steakhouse is one example.

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COMMENTARY:  This is without a doubt the worst environment to open a new restaurant or expand an existing restaurant chain.  I remember going to an IHOP a few months back and being the only customer in the restaurant.  That IHOP used to be crowded almost all of the time. 

Just too many restaurants, something has got to give. This is happening all over the place.  Even specialty coffee and beverage businesses are having to restructure.  Starbucks is closing down 500 locations.  Jamba Juice recently announced a refranchising of 150 of its 600 locations (See my previous post).

I remember clients telling me, "I am going into the restaurant business because people have to eat."  Well, that might be true, but in these tought economic times, eating out is considered a luxury or discretionary lifestyle.  Famlies in particular do not eat out as often as they once did, so many casual eat-in establishments are having financial problems.   

Courtesy of an article dated April 3, 2009 appearing in the Business section of the New York Times