U.S. restaurants starved for business

With consumers and businesses keeping a lid on expenses, more and more small and mid-size restaurants are throwing in their dish towels and closing up shop.

Southern California lost nearly a thousand more restaurants than it gained during the 12 months that ended in March, representing a net 2% drop that was twice the national average, according to the New York research firm NPD Group.

Nearly all the closings were among independently owned restaurants: small, family businesses that just couldn’t hold on as customers held back. Earlier in the year restaurants reported modest increases in business, but the jumps in sales were too little too late for many.

“We were going in reverse,” said Ken Rausch, who last month made the wrenching decision to close his family’s 65-year-old San Gabriel Valley restaurant, Edward’s Steakhouse. The restaurant had weathered previous recessions, but this downturn drained the family’s resources — and showed few signs of letting up, Rausch said.

Other well-known haunts have also succumbed: Orso on 3rd Street near Robertson Boulevard, a trattoria popular with the entertainment crowd, closed last winter after a nearby movie studio laid off a big chunk of its employees; across the nation, Koo Koo Roo, Bennigan’s, Bakers Square, Tony Roma’s and other chains have shut dozens of locations.

Even in good times, the restaurant business is a difficult one. Many close simply because they fall out of fashion or favor, and most run on slim margins. But this downturn seems especially brutal.

“It’s been a miserable 21/2 years,” said Chuck Keagle, who has closed six of the 10 restaurants in his family’s Rancho Cucamonga-based Cask ‘n Cleaver steakhouse chain since the downturn began.

Customers began spending less when the economic crisis hit in late 2007, he said. Business started to stabilize this year but diners are still spending about 25% less than they did during the economic boom, Keagle said.

Overall, customers spent about 7% less in 2009 than the previous year, and business is still slow, said Darren Tristano, analyst with the food industry research firm Technomic Inc. The company expects consumers to spend just 0.5 percentage point more on restaurant food this year than last year.

California, with its high unemployment, has been disproportionately affected.

“Most restaurateurs are just living on the edge,” said Jot Condie, president of the California Restaurant Assn. Despite an uptick in business this year, prolonged unemployment and a rise in food prices could hamper any recovery, he said.

Matt DeMasi, who co-owns Zach’s Cafe in Studio City, figures he can make it through another 18 months of hard times before he has to shut the place down.

“We’re in survival mode — have been for a while,” said DeMasi, who is burning through savings trying to keep Zach’s afloat. “My employees are on bare minimum hours. It’s been really difficult.”

If hard times persist — or if the price of food goes up — the restaurant’s 20-year run may come to an end, he said.

Despite the economy, new restaurants also opened during the 12-month period analyzed and some are doing well. At downtown’s L.A. Live complex, where several eateries came on line last year, business is up considerably now that new hotels there have also opened, providing a supply of diners, according to spokesman Michael Roth.

But Bonnie Riggs, NPD Group’s restaurant industry analyst, said most companies are holding off opening new locations until the economy improves. “Restaurant owners stop building restaurants and close the underperforming stores so the can make the bottom line look better,” she said.

Restaurants are particularly vulnerable to economic cycles because their product is usually discretionary. When people cut back on expenses, meals outside the home often go first. Add to that the cutbacks businesses have made in their travel and entertainment budgets, and the drop in restaurant sales becomes severe.

At the flagship location of the Farm of Beverly Hills, business dropped dramatically after layoffs at big Hollywood agencies and other nearby entertainment companies, said owner Fran Berger. For years, the agents and producers have come as if on cue at 1 p.m. for lunch — sometimes waiting up to an hour for a table. In 2009 there was little or no wait, even at the most crowded times, she said.

“We were really affected by what happened with the businesses around us,” Berger said. Sales at the Beverly Hills location, one of three she owns, dropped about 10% last year, she said, although business has recently started to pick up.

Guy Gabriele, who owns three restaurants, including Cafe Pierre in Manhattan Beach, said regulars are coming in less frequently and spending less when they do come. To encourage more traffic, he said, Cafe Pierre has introduced a three-course dinner for $35 and a happy hour.

“This is the weakest that the restaurant business has been,” said Riggs, the NPD analyst. Year over year, the number of patrons coming to restaurants has declined for each of the last seven quarters — the most prolonged drop in the 22 years that the company has been keeping track, she said.

Nationwide, the number of restaurants dropped in 2010 for the first time in more than a decade, according to NPD, falling 5,202 to 579,416.

California accounted for nearly a third of that drop, Riggs said. Including fast food, there were about 73,800 restaurants in the state in March, down about 1,500 from a year earlier. Most of the decline was in the five-county Southern California area. Hardest hit were full-service restaurants, those where waiters take orders and bring food to tables.

NPD Group counts the number of restaurants operating across the nation twice a year, in March and September. It does not look separately at the number that closed or opened.

Almost all the losses were among independently owned restaurants; nationwide, the number of chain outlets dropped by just 111.

Chains can weather the storm better than mom-and-pops because they are better able to negotiate lower prices for food, labor and other needs.

At Grill Concepts, which owns the 28 Daily Grill restaurants, 2009 was the worst in the company’s 25-year history, said Chief Executive Bob Spivak. The Woodland Hills company closed restaurants in Boston and Long Beach.

“Some were hit really hard and some were hit hardly at all,” Spivak said.

The company’s Washington, D.C., and Texas locations were least affected by the downturn, he said.

For Mike Ilic, who owns the downtown lunch spot Gram & Papa’s in the garment district, it wasn’t difficult to figure out where his customers had gone: Many of them actually stopped by to show him the sack lunches they had brought from home.

The peanut butter-and-jelly sandwiches saved his clients a few bucks, but they really slammed his business, he said. “It’s been a real struggle to keep the doors open.”