Gas Costs Eat Into Restaurant Sales

Angela Pierce and husband Nicolas used to enjoy a dinner date once a week. Now the Culver City couple patronize restaurants just twice a month, thanks to gasoline prices that are more than 70 cents a gallon higher in Southern California than a year ago.

Unfortunately for the $175-billion U.S. sit-down restaurant business, the Pierces aren’t the only ones staying away from their favorite eateries. In the last few months, restaurants such as Chili’s, Cheesecake Factory and Applebee’s -- what analysts call the “casual dining” category that offers table service and alcoholic beverages -- have recorded small but discouraging sales declines.

They are responding by offering discount burger specials and new menus featuring lower-priced items with smaller portions and by pushing the gift card business.

The culprit, restaurant chains say, is soaring gas prices. But rising interest rates and increases in the minimum payments that consumers must make on credit card debt have added to the problem.

“The Chili’s and Applebee’s of the world -- some of their customers don’t have all that much money,” said Michael Smith, an analyst with Oppenheimer & Co. “They get startled when they fill up their SUVs, so they stop dining out or they trade down to fast food.”

Sandra Contreras of Glendora said she was “picking places closer to home” when she ate out to save gas. Contreras also is choosing less expensive places such as Pizza Hut over a nicer sit-down meal at Chili’s.

Sales at Chili’s restaurants open at least a year, an important financial measurement known as same-store sales, fell by more than 0.5% in both May and June. The company hasn’t yet said how it fared in June, but analysts expect another decline.

Same-store sales at Macaroni Grill, which like Chili’s is owned by Dallas-based Brinker International Inc., are falling at an almost 5% clip.

Applebee’s International Inc., P.F. Chang’s China Bistro Inc. and even the typically successful Calabasas Hills-based Cheesecake Factory Inc. all have fallen victim to the same trend.

“The restaurants first started to see this in May. It was worse in June and the few numbers we have seen for July show that it is accelerating,” Smith said.

Almost 30% of respondents in a June survey of 680 Californians by BIGresearch said they had cut back on eating out in response to high gasoline prices. That’s up from 21% in the same survey a year earlier.

A May survey of 400 consumers nationwide found that almost a quarter of them reported spending less when they did eat out, according to restaurant consulting firm Sandelman & Associates.

The numbers were even greater for the people who said they earned $25,000 to $50,000 annually. Forty-one percent reported eating out less, and 29% said they were spending less, said Bob Sandelman, chief executive of the San Clemente firm.

Cheesecake Factory was one of the first to detect the trend. With an average guest check of $17, it has seen same-store sales slide by about 1% in each of the last two quarters.

“People are watching what they are spending,” said Howard Gordon, the company’s senior vice president for business development and marketing.

Although its restaurants remain packed during the prime dinner and lunch hours -- which is why the chain’s sales per store average $11 million, the highest in the industry -- traffic has fallen off in the early evening and late at night, Gordon said.

The company, with 107 Cheesecake Factory and seven Grand Lux Cafe restaurants, attributes the drop to a decline in the number of seniors patronizing the chain during the early dinner hours and fewer teenage diners coming in late at night. Both are demographic groups that may spend less than its other customers, Gordon said.

Although the chain is reporting revenue growth as it opens new restaurants, including 17 more by the end of this year, the drop in same-store sales has spooked investors.

Cheesecake Factory’s shares, which closed at $22.98 on Wednesday, have plunged 38% this year. The stock is on track for its first calendar year decline since 1996.

In a move to increase sales, the restaurant is offering smaller portions of popular dinner items such as a $10.95 Famous Factory Meatloaf for lunch, a $3 discount from the full-size meal. The chain is known for its large portions.

The initiatives are a response to “what’s happening in the restaurant world and how people are eating,” Gordon said.

The prospect of an industry slowdown has restaurant executives nervous, even if their own companies have not felt the effects.

“You are always concerned when people in our industry are reporting [financial results] with sad faces,” said Rick Rosenfield, co-CEO of Los Angeles-based California Pizza Kitchen Inc.

So far, the gourmet pizza chain has dodged the downturn. Last month, California Pizza Kitchen said its comparable-restaurant sales rose nearly 5% in the second quarter.

“We are a $12.80 average guest check positioned across America in generally upscale neighborhoods,” Rosenfield said. “We are still an accessible luxury.”

For some restaurateurs, a slowing economy might represent an opportunity.

“I can’t quantify the degree, but we may be getting some of those guests from the casual dining restaurants as money gets tight,” said Julia Stewart, CEO of Glendale-based IHOP Inc., which is considered a less expensive family restaurant. IHOP has an average guest check of $8.61.

Last week, IHOP reported a 3.1% jump in second-quarter same-store sales, the chain’s 14th consecutive quarter of growth.

IHOP is getting a boost from a strategic move made a year ago, when it persuaded the owners of its franchised restaurants to limit price increases.

“That really helped them,” said Michael Gallo, a restaurant industry analyst with C.L. King & Associates in New York. “It’s hard to get guests back if they feel they are no longer getting good value.”

Low prices, however, aren’t enough to keep a chain growing, Stewart said.

“There’s a real mix of winners and losers in every category of restaurants right now,” Stewart said. “When the consumer is so concerned about gas prices, the economy and world affairs, you need to have all the pieces working.”