• Navigate This Market Turbulence: All Hedgeye Research → 3 Months 66% Off

    Preserve. Protect. Grow. Former hedge fund manager and CEO Keith McCullough has successfully navigated the Dot Com Bust, Great Financial Crisis and Crash of 2020. Get 66% off the smartest investing insights money can buy.

We all know same-store sales growth was weak for casual dining operators in 2008, but continued unit growth, albeit at a decelerated rate of growth, helped to support overall revenue growth.  As shown by the chart below, new unit growth has turned negative for the bar and grill segment in 2009 so achieving revenue growth will be increasingly more difficult this year as demand remains weak.  And, this chart only accounts for Ruby Tuesday, O’Charley’s, Applebee’s and Chili’s.  The total reduction in supply would look much greater if we could account for all of the mom and pop and privately-owned restaurant closures, including Bennigan’s.

Although the cut back in development could put increased pressure on revenues in the near-term, this rationalization of units will benefit all of the relevant players once consumer demand returns.  It is a well known fact that there was too much casual dining supply, particularly in the bar and grill segment, as same-store sales turned negative in early 2006, prior to the economic slowdown.  The economic slowdown only magnified the problem, convincing restaurant operators to curb their growth targets.   

As excess supply is removed, unit economics should improve across the board as there will be fewer seats to fill.  Restaurant operators cannot cut costs forever so as I said last week sustainable operating margin growth relies on business picking up, the timing of which is still unknown.  As almost all of the restaurant companies’ management teams have said (I am paraphrasing), “due to the economic slowdown, we have made changes that make us better positioned to outperform once sales return,” this is definitely true for the bar and grill segment as a whole.

RESTAURANT INDUSTRY - Supply Trends - bar and grill supply