Yahoo Finance Red Lobster Peers Square Off in Fight for Discount-Hungry Guests
(Bloomberg) -- Familiar US restaurant chains are navigating the same pressures now-bankrupt rival Red Lobster faced, with falling foot traffic, higher labor costs and generous promotions that don’t always bring the most profitable customers in the door.
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Higher prices are the main threat to these casual-dining establishments, whose patrons tend to be middle-class Americans getting hit hard by rising costs. Those diners have shifted to more affordable options, whether cooking at home or picking up cheaper takeout meals.
The dynamic has led to challenges at chains including Applebee’s, Olive Garden, Outback Steakhouse and others in recent quarters. Although their financial conditions are much better than Red Lobster, which filed for Chapter 11 on Sunday, they face obstacles. TGI Fridays, for instance, recently sold a business and is seeking new financing to repay debt as it contends with weaker sales.
“We’re fighting for every guest,” Dine Brands Global Inc. Chief Executive Officer John Peyton said in an interview earlier this month.
Dine, which owns Applebee’s and IHOP, posted a 3.5% revenue drop in the first quarter, with sales down across both brands. A downturn that began in 2023 has gotten worse, he said, citing a “clear retrenching” by customers making less than $50,000. Even so, traffic has improved recently, and most guests aren’t buying value items, he said.
Similarly, Darden Restaurants Inc., which owns chains including Capital Grille and Olive Garden, cited “much lower” transactions from customers earning less than $75,000 a year last quarter. Outback owner Bloomin’ Brands Inc. said lower-end consumers are still under pressure and managing their spending accordingly.
The dynamic has changed the competitive landscape. Those companies are now vying against not just each other but also fast-food chains like McDonald’s Corp., fast-casual outlets like Chipotle Mexican Grill Inc., and even supermarkets.
With Americans boosting spending on groceries relative to meals out, household debt at a record and diminished savings, families on a budget must make every penny count.
“It takes time for that mentality of managing your wallet to catch up to people,” said Peyton. “I think it took all of last year for that to happen.”
Credit-card balances are up almost 25% from 2020, according to the Federal Reserve Bank of New York. In the poorest 10% of zip codes, more than 17% of borrowers are delinquent — the most since 2002.
That has helped fuel the deterioration in casual dining traffic, which has been in the negative for over a year, according to MillerPulse data.
“Any low-cost, casual dining chain right now has got to be concerned,” said Michael Jerbich, president at B. Riley Real Estate, where he advises restaurant chains facing losses and closures. “People are maxed out — just loaded up with debt — and between that and inflation, the hit to the industry has become a lot more than just the steady decline we’ve seen over the last several years.”
Cheap Hits
To lure back diners, chains have been rolling out special discounts and launching advertising campaigns.
Applebee’s offers attention-grabbing deals such as $1 margaritas, 50-cent boneless wings and a $9.99 burger. Outback has promoted free Bloomin’ Onions. Chili’s recently introduced the Big Smasher, a burger it touts as better than the Big Mac, part of a broader campaign in which three menu items cost just $10.99.
Yet for Red Lobster, hot deals didn’t do the trick. In fact, its $20 “Ultimate Endless Shrimp” meal was so popular — but unprofitable — that the Orlando-based company cited it as a contributing factor to its bankruptcy.
Those promotions can be the kiss of death for companies that should instead focus on improving experiences, said Aaron Allen, CEO at restaurant consulting firm Aaron Allen & Associates.
“These chains sabotage themselves by trading down just to get cheap hits,” Allen said. “It’s like taking grandma’s jewelry to the pawn shop just to get a few quick bucks.”
Growing Stress
Of course, low-cost shrimp was not the only cause of Red Lobster’s decline. The chain had been struggling for years and failed to bounce back after the pandemic, with foot traffic down around 30% compared with 2019. It also sold real estate to quickly raise cash, which led to expensive leases. That exacerbated cost issues Red Lobster was already encountering.
Restaurant analysts and consultants do not see the pain going away any time soon. The list of stressed companies in the restaurant sector is the longest it has been since the height of Covid, said Jay Weinberger, a managing director in Houlihan Lokey’s financial restructuring group.
Among executives, stress is apparent.
Over the past eight quarters, US executives in the consumer discretionary and consumer staples sectors used the phrase “caution” near mentions of their consumers 53 times during earnings calls, according to data compiled by Bloomberg. That compares with 10 mentions the prior eight quarters.
Craving Lobster
Red Lobster closed dozens of restaurants this month, but its Times Square location remains open.
Customers there who spoke with Bloomberg on Tuesday detailed several reasons they wanted to eat there: familiarity, affordability, bar specials, shrimp scampi, its famed Cheddar Biscuits. A couple visiting from Chile had gone to a Red Lobster in Ecuador 24 years ago, an experience that drew them back.
“I fell in love,” said Ximena Flores. “It was such a long time ago but I remember the restaurant was beautiful and delicious.”
However, patrons were waiting extended periods of time for table service despite a mostly empty dining room. Maria Palacios, who had never been to a Red Lobster before, was one of them.
“I was craving lobster,” Palacios said, “but I’ve been sitting here for 30 minutes without getting seated; the wait time is too long.”
Then she walked out the door.
--With assistance from Reshmi Basu, Daniel Neligh, Alex Tanzi, Samantha Stewart and Neil Callanan.
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