Midday Report: Casual Dining Chains Still Feel the Pinch

Produced by Drew Trachtenberg

Food for thought: the restaurant industry is hungry for customers. The overall economy may be picking up, but major chains are hurting.

Pedestrians walk by a Red Lobster restaurant in Times Square in New York, NY, Wednesday September 19, 2012. Photograph: Victor J. Blue
Victor J. Blue, Bloomberg via Getty Images

And it's the casual, or family-style restaurants – such as Red Lobster, Applebee's, and Bob Evans – that are feeling the most pain. According to the Knapp-Track Index, a key measure of monthly restaurant sales has dropped for three straight months (December, January and February). It's the first time that's happened in about three years.

Malcolm Knapp, who founded the index and is an advisor to the food service industry, says these restaurants are particularly sensitive to changes in our disposable income, and that's been the problem over the past few months.

The main factor is the end of the tax holiday, which cut the payroll tax by two percent in 2011 and 2012. But that ended on January 1st – and for most of us, it felt like a tax increase, sine our disposable income went down. Less take-home pay means fewer trips for nice dinners out.

There were other factors, too. The big spike in gasoline prices back in January and February had a direct impact on restaurant spending. And the weather packed a wallop as well. You probably recall that last winter was very mild, while there have been a number of big storms this year. As Knapp tells us, casual-dining restaurants never make up for a lost week or weekend of sales.

He also says the casual restaurant category is the most sensitive to all of these factors. Fast-food restaurants often benefit when we feel poorer, and high-end restaurants are somewhat immune to things like the payroll tax or changes in the price at the pump.

Here are the biggest players in the casual dining industry:

  • Brinker International (EAT) owns Chili's and Maggiano's.

  • Darden (DRI) owns Red Lobster, Olive Garden and Longhorn Steakhouse.

  • DineEquity (DIN) operates IHOP and Applebee's.

  • And Bloomin' Brands (BLMN) has Outback Steakhouse and Carrabba's Italian Grill.

But it's not all bad news for these chains. Knapp says sales are trending up this month. What's helping? Consumer confidence is up as more and more people find jobs.