Cost-conscious customers wreaking havoc on ailing restaurants

From the corner diner to elegant Westside eateries, restaurants in Southern California are shrinking portions, slashing wine prices, cutting employee hours and reducing staff. Some chain restaurants and fast-food purveyors are shutting unprofitable branches, and experts say some may not survive.

Many large dinner-house chains are reporting some of the largest drops in same-store sales -- an important measure of a retailer’s financial health -- in recent history.

After the stock market closed Thursday, Southern California chains Cheesecake Factory Inc. and California Pizza Kitchen Inc. both reported plunging same-store sales and profits.

“It is a very tough environment out there,” said Richard Rosenfield, co-chief executive of CPK.


Not long ago, accountant John Rubi would join his work buddies for lunch at a Chili’s Grill & Bar in Foothill Ranch on Monday and move on to a nearby Daphne’s Greek Cafe the next day. They wouldn’t give a second thought about checking out an Asian eatery later in the week. After work, the Aliso Viejo resident would take his girlfriend to dinner at Mama D’s Italian in Manhattan Beach and spend $70 to $100, depending on the wine.

No more. Rubi lost his job in the auto-lending division of an Orange County financial institution last year and now works for a different firm in a lower-paid accounting position.

“I eat at home more. I pack my lunch. I cut out Starbucks, and when I do go to a Burger King or McDonald’s I get the 99-cent burger,” Rubi said.

Parsimonious consumers are why even once hot brands such as Starbucks and Pinkberry are closing restaurants. Experts see more ahead.


“When you look at what some of these brands are doing to stay profitable, closing money-losing stores is going to be the next shoe to drop,” said Brian Moore, a restaurant industry analyst with Wedbush Morgan Securities in Los Angeles.

Last month ARG Enterprises Inc., the Los Altos, Calif., owner of 69 Black Angus Steakhouse restaurants, filed for protection from its creditors in U.S. Bankruptcy Court and said it would seek a buyer.

Other franchisees of major chains also have filed for bankruptcy, and more failures are expected.

“There is going to be a shakeout in this industry,” Rosenfield said. “It is going to get worse before it gets better.”


Restaurant traffic is expected to fall this year at least 1%, and the casual dining segment -- which includes chains such as CPK, Chili’s and P.F. Chang’s China Bistro -- could have its worst year in several decades, said Bonnie Riggs, a restaurant industry analyst with NPD Group in Chicago.

Cheesecake Factory said its revenue fell 1.5% to $400 million in its fourth quarter ended Dec. 30, compared with the same period in 2007. Same-store sales decreased 7.1%, and company profit plunged 47% to $7.1 million. Shares of the Calabasas Hills company fell 7% to around $9 in after-hours trading.

CPK said its revenue decreased 0.7% to $161.8 million in its fourth quarter ended Dec. 28. Same-store sales slid 7.2%. CPK lost $5.3 million in the quarter, compared with a profit of $3.5 million in the year-earlier period. Shares of the Los Angeles chain were unchanged in after-hours trading after rising 23 cents to $10.98 earlier in the day.

People are eating out less -- and when they do visit a restaurant, they are taking a minimalist approach.


Customers are ordering entrees but skipping appetizers and desserts, Riggs said. Some surveys show that fewer people are ordering drinks and alcoholic beverages with their meals. Many are trading down, substituting chicken entrees for steaks or other more expensive meals. Others, meanwhile, are forgoing sit-down restaurants for fast-food establishments, taking advantage of the $5 foot-long sandwich special at Subway or the Jack in the Box “Jumbo Deal” offer of a Jumbo Jack, two tacos and a small order of natural-cut fries for $2.99.

“People are looking for more calories per dollar,” said Harry Balzer, also an analyst at NPD Group.

That’s certainly the way Rubi is operating. Dinner out with his girlfriend is far less frequent, and when they do go, the check rarely tops $25. Rubi stays on the lookout for promotions and special deals such as the free meal that Denny’s advertised during the Super Bowl broadcast.

Sure enough, Rubi and a friend made a point of visiting the chain the Tuesday after the big game to eat a free Grand Slam breakfast.


Patrick Robbers, a Christian minister who lives near downtown Los Angeles, still takes his family of four to the Olive Garden and Red Lobster “because they have good deals” but has cut “more expensive culinary” restaurants from his budget.

To be sure, companies are still opening new restaurants. In the last few months, about a dozen opened in downtown Los Angeles -- including eight at the L.A. Live entertainment center. But the overall number of restaurants in the U.S. is declining slightly and stands at about 575,000, according to NPD Group.

Brinker International Inc., the owner of the Chili’s, On the Border Mexican Grill & Cantina and Maggiano’s Little Italy chains, is bracing for a rough year, Douglas Brooks, the company’s chief executive, warned investors during a recent conference call.

“Brinker and the entire restaurant industry remain challenged by a highly competitive environment and an uncertain economy,” Brooks said.


The Dallas company is moving to close nearly three dozen underperforming locations, and last year it sold its Romano’s Macaroni Grill division to focus on the three other brands. But even excluding Macaroni Grill, Brinker’s comparable-restaurant sales fell 4.5% in its second quarter ended Dec. 24.

Denny’s Corp., headquartered in Spartanburg, S.C., said same-store sales at its company-owned and franchised restaurants dropped a combined 6.1% in its fourth quarter ended Dec. 31. Guest counts fell 7.5%.

Even fast-food chains aren’t immune. CKE Restaurants Inc. of Carpinteria said same-store sales at Carl’s Jr. fell 0.6% in its fourth quarter ended Jan. 26, compared with a 1.4% gain in the same quarter in 2008.

“A decline in consumer spending combined with our competitors’ deep discounting strategies has impacted sales,” said Andrew Puzder, CKE’s chief executive.


“We have declined to engage in such deep discounting to maintain our premium quality food positioning and our profitability.”

Even when the economy starts to improve, it’s not clear how quickly consumers will give up their newfound penny-pinching habits.

“It wouldn’t be enjoyable to go out and spend $100 on a meal,” said Rubi, the Aliso Viejo accountant, “because I would be worrying about the money.”