Casual dining crunch

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Drive down almost any stretch of suburban US highway and you’ll find it – the uninspiring string of restaurants, each touting a slightly different version of fajitas or mozzarella sticks. These casual dining outfits are feeling decidedly sickly at the moment.

Five years ago, it was pretty tough to get a Thursday-night table at Applebee’s. Rapid expansion boosted supply and made casual dining restaurants more affordable for blue-collar workers. But a jump in petrol prices and the onset of the housing slump last year started to scare off diners, just as margins were being squeezed by rising labour and food costs. Cheaper fast-food chains are aggressively stealing customers at the low end. Starbucks’ disclosure that US traffic has slowed only worsens fears. Even expensive coffees, which some argued were recession- proof “affordable luxuries”, may well in the end be quite expendable.

A 44 per cent drop in Ruby Tuesday’s share price has led a 10 per cent slide in casual dining sector valuations this year, and there is no clear recipe for relief. The takeover premium that once supported shares has vanished, so companies have added leverage, sold assets or used cash left over from curtailed expansion plans to fund buy-backs. Generally active private equity firms have passed on Applebee’s and Rare Hospitality. With financial options growing scarce, many companies have turned to trying to make operational improvements to their businesses.

Pancake-pusher IHOP, which is buying Applebee’s, aims to generate more cash by franchising restaurants. Brinker has already done that with Chili’s, and others are weighing the strategy. Some are offering discounts to boost traffic, which hurts margins and does not necessarily build loyalty. They should focus on their take-away operations, about 10 per cent of sales, which could keep customers from trading down to fast food.

IHOP recently said it could not tell why traffic had weakened. But the recent push by McDonald’s and Burger King on breakfast items allows for an educated guess.

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