Eating out is getting lonelier
Lisa Johnson would be happy to eat IHOP’s strawberry waffles every morning. Her husband, Steve, is such a fan of the omelets and taco salads served by Glendale-based IHOP Corp.’s restaurants that he paid homage on his website, Junk Food Blog.
The Johnsons of Riverside County, an area racked by high home-foreclosure rates, once dined out daily, usually at the nation’s biggest pancake-house chain. But lately, the couple have been indulging only once a week.
“We’re just cutting back, trying to save money for gifts for the family for the holidays,” said Steve, 41, a website publisher with about 20 clients. “There are just a lot of people here worried about higher costs and debt, people we know who are trying to save enough just to make their house payments.”
The slowing economy is giving restaurants heartburn, with experts calling this the worst period for eateries in years. That’s because consumers are having their pockets picked by high energy prices, declining home values, tightening credit from the sub-prime real estate bust and the falling value of the dollar, which makes imported goods more expensive.
“It’s a perfect storm, with the industry being bit by several negatives at the same time. And we don’t think gas prices are at the top of that list. Mortgage payments for people with adjustable rates are already higher. Couple that with higher interest rates for people who are maxed out on their credit cards and you have an immediate squeeze on income on a monthly basis,” said Ron Paul, president of Chicago-based Technomic Inc., a food industry consulting firm.
Examples abound.
P.F. Chang’s China Bistro Inc. recently reported a nearly 20% decline in third-quarter profit from a year earlier. Panera Bread cafes predicted that fourth-quarter earnings were unlikely to surpass those of 2006. Brinker International Inc., owner of Chili’s Grill & Bar and other chains, reported a 21% drop in fiscal first-quarter profit.
IHOP fell short of Wall Street expectations last month when it reported an $11.6-million third-quarter loss, contrasted with an $11.3-million profit a year earlier. Its conference call with analysts and investors included repeated references to the “difficult economic climate” faced by the restaurant industry.
Sales at eating and drinking establishments grew 5.6% during the first 10 months of the year, the Commerce Department said, the slowest pace since 2002.
“We are all facing the same pressures,” IHOP Chief Executive Julia Stewart said in an interview. “There are things you can’t necessarily control: the rising cost of gas, commodities, concerns about the war, concerns about layoffs. What usually winds up happening is that people look more selectively at their trips out of the house, and we are fighting for the same dollar.”
National restaurant chains aren’t the only ones feeling the pinch. Some smaller, local chains complain that business is even slower than it was in 2001, when the 9/11 terrorist attacks brought dining out to a crawl for about two months.
“We are doing about 30% less business than we ordinarily do. Since June, it has really fallen off,” said Fernando Lopez, owner of Guelaguetza, a chain of four Oaxacan-style Mexican restaurants in the Los Angeles area that thrive on a strong following of customers from as far away as San Francisco and Las Vegas. On a recent afternoon, Lopez looked over too many empty tables at his 300-seat restaurant on Olympic Boulevard.
“Families are coming less often, and so are all of the gardeners and small-business contractors we used to see so often,” he said. “People still have money in their pockets, but they have less of it to spend.”
One is Deisy Marquez, 33, an event production manager for the entertainment industry who lives near downtown L.A. and is raising her 13-year-old son and a 13-year-old nephew.
Marquez says she has done all she can to reduce costs, even switching from a car to a motorcycle for her daily commute to work.
“I take the kids out to dinner at Guelaguetza once every two weeks now,” Marquez said, down from at least three times a week. “Now when we go out, it’s a luxury. It has to be a reward, one of their birthdays, for getting good grades.”
Still, she can’t always keep up with the appetites of two hungry teenage boys. Instead, she turns to cheaper places. “If I don’t have time to cook, we don’t go to restaurants now; we go to fast food.”
That trading-down strategy has become more common recently among middle- and lower-income households, said Jerry Nickelsburg, an economist with the UCLA Anderson Forecast.
“It’s much more difficult to limit your use of gasoline than it is to limit your purchase of hamburgers and fries. As gasoline prices and other costs go up, something has to give,” Nickelsburg said.
Higher-end restaurants remain relatively unaffected by the more difficult economic climate, experts said. As Randall Hiatt, a Costa Mesa restaurant consultant, put it: “The cream of the $5-million homeowners whose homes are now worth $4 million -- they really aren’t feeling this pinch.”
But the chains that appeal to a less affluent crowd are feeling it, and they were not prepared to weather a sudden challenge.
“These chains need to be rejuvenated and given a new life. Their menus are too similar. In discussions with consumers in focus groups, you often hear that they can remember a commercial advertisement, but they couldn’t remember whether it was for an Applebee’s or a TGI Friday’s or a Ruby Tuesday. It was a sea of sameness,” said consultant Paul of Technomic.
Stewart, who is trying to close a $2-billion purchase of Applebee’s International Inc. before the end of the year, said IHOP’s challenge was to capture diners who might try it as an alternative to more expensive restaurants while not losing customers to cheaper competitors.
The chain is unveiling new menu offerings, a new national advertising campaign and a push on gift-card and carry-out sales.
“In tough times, the chain that is best able to take from both ends of the spectrum as well as the middle is absolutely going to win,” Stewart said.
For Guelaguetza owner Lopez, the challenge is similar but waged on a local level that includes a direct cultural appeal. During the recent Day of the Dead holiday, his restaurants installed elaborate shrines decorated with flowers and gifts.
“For Oaxacans, if we do not deliver the real thing, they are not going to come to our restaurant,” said Lopez, whose mobile telephone number is clearly displayed near the entrance to field any and all complaints, even for something as innocuous as a hostess not smiling sweetly enough when greeting guests.
“It’s not enough to try to win the customer with your food,” he added. “You have to win their hearts.”
