IS MARKET SHARE SHIFTING?

Earlier this week, I commented on the sequential improvement in February same-store sales and traffic trends at casual dining restaurants. Although Malcolm Knapp reported that “the bottom” could be in for casual dining, I continue to be concerned about restaurant margins as companies are offering significant discounts in order to drive customer counts. These discounts will put increased pressure on average check and will partially or wholly offset the positive impact on traffic, which is one reason why I don’t think we will see a material improvement in casual dining sales trends from the -3% to -5% levels in 2Q09.

Yesterday, I even read an article that said a bistro in Sydney is hoping to combat the recession by allowing its customers to decide what they want to pay for each menu item. Diners fill in the price they want, and the bill is calculated accordingly. Although this type of discounting seems a bit irrational, the prices being advertised at major casual dining chains in the U.S. continue to surprise me as they move increasingly lower. On a positive note, these lower prices have to help casual dining restaurants’ value perception relative to the QSR players. It is these low price casual dining offerings that cause me to believe that now is a difficult time for QSR players to push their more premium menu items.

CKR is one of those QSR players that has continued even in this tough environment to maintain its focus on more premium, quality products, which it states will allow the company “to attract those consumers looking for premium quality products as they trade down from more expensive dining options.” Management has criticized its competitors for aggressively discounting and selling “margin-impairing products.” Despite its claim, however, that CKR’s menu offers a strong alternative to casual dining, CKR has experienced a slowdown in same-store sales, particularly at its Carl’s Jr. concept. Fiscal 4Q09 comparable sales turned negative at Carl’s Jr. and remained negative in period 1 of FY10, down 3.6%. Today, CKR stated on its 4Q09 earnings call that period 2 same-store sales will likely be down mid single digits. Although the company is facing its most difficult comparison from FY09 in period 2, management attributed the continued weakness to industry discounting and the fact that its competitors are literally giving away food.

CKR is right to be concerned about margins, but a QSR menu strategy that relies primarily on premium priced products is going to suffer, particularly in light of the significant discounts also being offered by casual dining restaurants. Earlier this month, I said with regard to CKR that holding the line on value becomes harder to do as the decline in traffic trends begin to accelerate. To that end, with Carl’s Jr. same-store sales having turned negative during the fourth quarter and 2-year average same-store transaction growth trends negative for some time now, management said just this morning that it will be testing some value menu items on its Carl’s Jr. menu, such as 1/8 lb. burgers and some other mid-tier priced items that have been successful at the company’s Hardee’s concept. Management is not calling this “discounting” because these items will not be supported by media campaigns or promoted at specific price points. Instead, these new items are expected to offer a value option to its customers. Management can call these new lower priced items whatever it wants, but the fact that the company had to change its tune somewhat by offering more value items highlights just how difficult it is to push premium priced menu items in this environment. The casual dining operators have known this for some time now and have, therefore, adapted their menus and price promotions. Some QSR players, however, continue to maintain that this premium strategy will work as an alternative to casual dining. I am not yet convinced.

Here's who's doing what within Casual Dining:

• Chili's. On April 6, the chain will offer a "10 meals for under $7" deal. Officials declined to discuss details until closer to rollout.

• T.G.I. Friday's. This month, Friday's began a promotion featuring eight entrees priced at $9.99 — in some cases a 29% price cut. "We need to offer deep value to drive traffic," says Andrew Jordan, marketing chief.

• Applebee's. Since mid-November, the chain has offered a "2 for $20" special of two entrees and one appetizer. "While we can't fix the economic challenges, we are offering … value," says Shannon Scott, marketing chief.

• Outback Steakhouse. For months, the chain has marketed 15 meals for under $15. "We decided to get back to the DNA of the brand," says Dan Dillon, marketing chief.

• Texas Roadhouse. The chain recently launched an "Early Dine for $7.99" promo on weekdays. "We're trying to drive early-week traffic," says marketing chief Chris Jacobsen.

• Cheesecake Factory. A "Small Plates and Snacks" menu includes a $4.95 Pizzette, a flat, football-shaped pizza some folks are ordering as a meal. "We're making Cheesecake Factory more accessible," says Mark Mears, marketing chief.

• Morton's. Even Morton's has got a $99.99 steak and seafood dinner for two and $6 mini-burgers at the bar (Average check at Morton's is $97 per person). The goal, says CEO Tom Baldwin, is to drive sales. "These are unprecedented times."

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