Something Big is Eating Your Old Favorite Restaurant Chains

Olive Garden

If we're in an economic recovery, good luck trying to convince the country's largest casual dining chains -- they're sputtering.

  • Darden Restaurants (DRI) suffered a combined same-restaurant sales decline of 4.6 percent for Olive Garden, Red Lobster, and LongHorn Steakhouse in its latest quarter, and analysts predict a sharp drop in earnings for its fiscal year that ends this week.

  • DineEquity (DIN) also posted negative comps at Applebee's and IHOP in its latest quarter. DineEquity is in the process of unloading company-owned Applebee's to franchisees, so it's not a surprise to see revenue falling sharply. But profitability is also sliding.

  • Ruby Tuesday (RT) checked in with a 2.8 percent drop in same-restaurant sales at its company-owned namesake eateries. Investors have been feeling the pain. The stock has been meandering about in the single digits for nearly two years.

And it's not as if hungry customers are flocking to cheaper fast food.

After nearly a decade of positive comps, McDonald's (MCD) saw its domestic same-restaurant sales decline last October. It wasn't a fluke. Comps have gone on to slip in three different months after that.

If casual dining establishments and fast food joints are smarting for traffic, where are people getting fed?

Kicking Burritos and Taking Names

Fast casual -- a hot niche where quality food is served quickly without a dedicated wait staff -- is what's eating into both the fast food and casual dining markets.

Chipotle Mexican Grill (CMG) and Panera Bread (PNRA) have become the new darlings of the dining scene. They're the poster children for fast casual, where diners can get a meal that may be slightly more expensive than fast food alternatives, but the food quality and perceived ambiance is also better.

At Chipotle, the burritos, tacos, and rice bowls are pieced together as they're ordered by a lightning-fast human assembly line. At Panera, fresh salads, soups, and sandwiches are ready within minutes of being ordered. There's no waiter to tend to your soda refill, but that also means that there's no need to tip the waitress or wait around for your check when you're done.

Industry tracker NPD Group estimates that fast casual sales rose 8 percent last year, compared to a slight decline at traditional table service restaurants.

The burrito-rolling and salad-tossing darlings will continue to gnaw away at the competition's market share. Analysts see Chipotle and Panera growing their revenue 16 percent and 14 percent, respectively, this year. Double-digit percentage growth is also projected for next year.

The Waitress Strikes Back

Casual dining isn't taking this lying down.

Earlier this year Applebee's began expanding a lunchtime platform where customers can order and pre-pay for their meals at a counter. Runners then deliver the food to their table. For now, the Express Lunch option is only available at roughly two dozen locations in the company's home turf of Kansas City. Other chains are trying to buy their way out. Ruby Tuesday acquired Lime Fresh, a small Chipotle-esque concept with a wider menu, last year.

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Casual dining giants are also reaching higher up the food chain, snapping up more upscale concepts that haven't suffered from the defection to fast casual. After all, someone hankering for a foodie hotspot or a fancy chophouse isn't going to trade down to a carnitas burrito at Chipotle. Darden is one of the operators going higher end, snapping up the fast-growing Yardhouse brewpub chain and expanding its own Seasons 52 concept.

Your local casual dining operator doesn't have much of a choice. The trend isn't its friend these days, and chains that fail to adapt will have to change their approach to lunch if it doesn't want nimbler competition to eat it first.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill, McDonald's, and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill, Darden Restaurants, McDonald's, and Panera Bread. Try any of our newsletter services free for 30 days.