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Restaurant Marketplace Has Big Appetite

The competition is stiff, but the potential for growth still exists in today's restaurant marketplace. And as the nation's appetite for eating out increases, so does the number of concepts that restaurateurs are introducing. The race is on for consumers' food-away-from-home dollars.

The outlook is promising for the restaurant industry (defined as encompassing all meals and snacks prepared away from home, including all takeout meals and beverages). According to the 1998 Restaurant Industry Forecast by the Washington, D.C.-based National Restaurant Association, sales are on track this year to hit the $336.4 billion mark nationally.

This figure represents a 4.7 percent increase over 1997, the report notes. When adjusted for inflation, it still indicates a 1.8 percent rate of real sales growth, well in line with the 1.7 percent increase the industry enjoyed in 1997.

The restaurant industry is enjoying the benefits of the current economic upswing. "Since upper-income households are the best restaurant customers," says the report, "growth in the number of these households is particularly good news for restaurateurs - and the numbers are rising."

The number of U.S. households with incomes in the $50,000-and-up range went well past the 37 million mark in 1997, according to the report, as "more than 3 million additional households reached that income threshold.

"The industry also is reaping the rewards of shifts in the country's demographic profile. "The nation's population is aging, and baby boomers are eating out more and more," says Scott Tilghman, securities analyst with Baltimore-based Legg Mason. On a per-capita basis, this group is spending a higher amount of its income on food prepared outside the home, he notes, fueling demand for restaurants.

"At the same time," he adds, "the restaurant base has been growing very fast, exceeding the growth in demand generated by an aging population."

The restaurant industry experienced rapid growth in the number of units opened between 1991 and 1995, reports Darl Hatfield, partner in charge of the restaurant industry for Dallas-based KPMG Peat Marwick LLP.

"Money coming into the restaurant business resulted in a fairly rapid expansion in the number of units during this period," he notes, "particularly among the larger chains."

Today, however, the emphasis has shifted from unit expansion to acquisition. "As opposed to creating new units, major restaurant companies are buying different concepts/formats, such as Apple South's acquisition of Canyon Cafe, for example," Hatfield says, adding that this allows companies to spread their risk in a diverse marketplace. "As a result, the net annual change in the total number of units has not been as great since 1996."

Trends and currents According to the 1998 Restaurant Industry Forecast, the overriding factor behind the success of the restaurant industry is fairly basic. "Restaurants usually provide a convenient, reasonably priced experience that offers better flavors and taste sensations than consumers can get at home," the report notes.

And in today's marketplace, there is a variety of flavors, taste sensations and environments for restaurant-goers to choose from. One trend that cuts across the breadth of the restaurant industry is the move away from formal dining, says Bob Barach, vice president of restaurant industry marketing for New York-based American Express Travel Related Services.

"There has been a tremendous casualization of dining in recent years," he notes. "There appears to be a great deal of movement by the consumer away from the traditional white-tablecloth, formal kind of environment to a more casual atmosphere."

In fact, says Tilghman, "That's where most of the growth in the restaurant industry has been coming from for the past couple of years." Competition in this segment - which includes everything from Applebee's to Macaroni Grill to Ruby Tuesday - has been intense of late, he says.

"From mid-1996 through mid-1997, most of the restaurants in this category were really hurting on a same-store sales basis," says Tilghman. As opposed to broadening their respective customer bases, many chains attacked their competition by discounting their products, a common strategy in the restaurant business.

"What happened is that the discounting typically didn't create any new customer traffic," he explains. "Instead, consumers just ate at the place offering the best deal of the week. [Discounting] didn't change any chain's core customer base, but did work to erode margins."

The steakhouse segment of the casual dining experience is on the brink of growth. "There is a move afoot for steakhouses to become chains," Barach notes, in the fashion of Ruth's Chris and Morton's of Chicago.

For example, New York City's Smith & Wollensky steakhouse has recently opened new units in Miami and New Orleans. "Steak seems to replicate well from location to location," says Barach.

While the popularity of steak may seem to fly in the face of today's focus on healthful eating, it actually coincides with another trend. "If you read a lot of consumer research," he says, "you'll see that there is a definite move among consumers toward food that tastes good." Today's baby-boomer may be working out regularly in the gym, Barach adds, "but he's also eating more fat."

Fast-food focus The more prevalent fast-food outlets are nearing their peak. The few street corners left without a fast-food outlet might take awhile longer to fill than their predecessors. "Although unit expansion in the United States is no longer the growth engine it once was," notes the National Restaurant Association, "quick-service operators are still opening new units."

A recent survey by the association reported that four out of 10 such operators are entering new markets in the United States, while nontraditional sites such as convenience stores, airports and gas stations "are continuing to gain appeal."

Nontraditional means of paying for fast-food meals are also on the way. Growth in this sector has attracted the attention of American Express, which will soon venture into this sector with its charge cards. With corporate customers attempting to get a better hold on travel-per-diem costs, says Barach, "Look for plastic to become more prevalent in fast food."

Competition was stiff in the fast-food sector in 1997, and Wendy's was a big winner, says Tilghman. "Wendy's posted phenomenal numbers last year," he reports, citing a high-quality product as one part of the equation.

The other part, he notes, was a new demographic to its customer base. The chain, often seen as catering to older men and women because of its salad/food bars, formed a promotional alliance with the National Hockey League. "This increased its appeal to young adult males, a category previously dominated by McDonald's," he says.

Meanwhile, Ronald McDonald and his minions had a tough year, says Tilghman, thanks largely to the pressure from certain promotions. He acknowledges that some of McDonald's promotions, including Beanie Babies and Monopoly, were effective sales drivers. Not so with Campaign 55, which slashed sandwich prices on the heels of introducing higher-priced and ultimately unpopular sandwiches.

"Campaign 55 was a flop," says Tilghman. "McDonald's discounted to an extent that ate into any increased sales that may have been generated by the campaign."

McDonald's is now focusing more on the international expansion of its business, adds Tilghman, "and has recently formed an alliance with Chevron to share locations and co-brand, hoping to drive some incremental sales increases with a relatively low investment cost."

More theme restaurants on the way Just as the retail industry is adding entertainment to the consumer shopping experience, so too is the restaurant business. "There's been quite a move in the direction of theme restaurants," says Barach. "Consumers are always looking for something different, and we are seeing growth in that category."

Clustered primarily in major metro areas and around tourist attractions, theme restaurants include now-established stalwarts such as Planet Hollywood, Hard Rock Cafe and Rainforest Cafe.

The big move recently has been in the sports-themed arena. According to published reports, entrants in this competition include the National Football League, Planet Hollywood's All-Star Cafe, and a Hard Rock Cafe/National Basketball Association joint venture that plans to open at least 10 basketball-themed restaurants during the next three years.

Meanwhile, ESPN Zone is reportedly opening this summer in Baltimore, while NASCAR Café, which already has locations in Myrtle Beach and Nashville, is reportedly looking for 10 sites for new locations over the next five years.

'Replacement meals' Performance of the meals-to-go, "home meal replacement" marketplace has been mixed, says Neal Kaplan, vice president and securitiesanalyst with Richmond, Va.-based Scott & Stringfellow.

"A lot of companies have gotten into this market, most notably Boston Market, whose [publicized] problems have been more operational than conceptual," he notes.

A relatively new entrant in this market is Dallas-based EatZi's Market and Bakery, a Brinker International (Chili's, On the Border) concept featuring prepared foods along with a variety of upscale groceries.

A number of supermarkets also have tried to enter the fray. "None of them have been particularly successful in terms of making a profit, though," Kaplan notes.

Still, supermarkets can compete well with restaurants in terms of convenience because most people visit one several days a week. The trick is for grocers to learn to think and act more like restaurateurs.

"It's a lot different from running a grocery store," Kaplan says. "You have to be more cognizant of portion control, spoilage and, most of all, looks. After all, presentation is a big thing in the restaurant business."

Outlook The National Restaurant Association forecasts $336.4 billion in total restaurant industry sales for 1998 (including commercial and institutional sales).

Fast-food sales are predicted to be $105.7 billion, a 2.1 percent increase over 1997. Sales at full-service restaurants are slated to be in excess of $110.3 billion, or a 2 percent growth. Meanwhile, menu prices are projected to rise 3 percent in 1998, outpacing the 2.8 percent increase the industry enjoyed in 1997.

The restaurant marketplace will be extremely competitive, cautions Hatfield, with consumers constantly looking for good value. Still, he says, "Demand is strong, the economy is good, and people are eating out more often than in the past."

On the operations side, food costs have remained stable but workers are scarce. "The 17- to 25-year-old age segment is growing, but the economy is so good, you have trouble finding people to work for the relatively low wages restaurants offer," says Hatfield.

A declining number of 25- to 35-year-olds is also a problem for restaurants, he says, "because this is the age group that most of the unit management people come from."

On another labor-related note, an increase in the minimum wage could significantly impact the restaurant industry. Says Tilghman: "There has been a lot of margin contraction and moves to increase productivity as a result of the last two increases. Another one could be devastating if it comes soon."

On the other hand, he notes, "This could also translate into a positive by weeding out some of the weaker players that have just been hanging on."

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