Pancake Chain Pouring It On as Gas Prices Batter Competition

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Walk into an IHOP these days and you’re likely to see newly decorated digs with brighter interiors and lighter-colored furniture. The hamburgers might taste better (the chain is using better meat), and you can finish it off with a popular new offering funnel cake topped with cherries and whipped cream.


The Glendale-based IHOP Corp. is moving fast to renovate its stores and roll out new items all to capitalize on a countertrend: Restaurants such as IHOP and its brethren at the lower end of the casual dining spectrum are eating the lunch of restaurants at the upper end of that spectrum.


“Based on the continuing impact of increased gas prices, we are seeing more trading down from full service to limited service,” said Darren Tristano, vice president of the Chicago-based research firm Technomic Inc.


Indeed, many restaurants at the top of the casual food chain companies like Calabasas Hills-based Cheesecake Factory Inc. are getting squeezed. The reason, simply put, is price. As gasoline expenditures tear through family budgets, more people look to economize.


The first to do so is what William Blair & Co.’s Sharon Zackfia calls the “aspirational customer,” or those who normally have to stretch their budgets to eat at a Cheesecake Factory or a P.F. Chang’s. Aspirational customers make up about 10 percent of a restaurant’s customers, but that 10 percent is more likely today to trade down to such segments as family dining or fast casual or fast food restaurants.


Overall, restaurants have been hurt of late. According to the NPD Group, which provides consumer and retail information, the week of July 28 was the first drop in total restaurant revenues in more than two years.


If lower-priced, casual-dining restaurants are doing well, fast-food restaurants are doing even better. Carpinteria-based CKE Restaurants Inc., parent of fast food chains Hardees, Carl’s Jr. and La Salsa, recently posted a big second quarter, for example.


For that matter, those at the top of the price scale are generally holding their own their patrons are more insulated from gasoline prices and the like. For example, high-end L.A.-based Grill Concepts Inc. is having a successful year, topping expectations in the second quarter.


But the squeeze is on restaurants at the upper end of the casual dining spectrum a segment that accounts for a big chunk of restaurant tickets.



Keeping it casual


On the Street, Cheesecake Factory and Scottsdale, Ariz.-based P.F. Chang’s China Bistro Inc., both leaders in casual dining, are having a tough summer. The Cheesecake Factory was trading near $24 last week, close to its 52-week low.


Cheesecake Factory has begun radio advertising for the first time in its 28-year history, which analysts say is a sign that Cheesecake is trying to drum up business.


The company, famous for its gynormous portions, made its biggest menu change in more than a decade this summer, adding a number of lunch items, including smaller salads and lunch portions, popular dinner entrees such as chicken piccata and beer-battered fish and chips.


The shift expanded the number of lower-priced offerings. However, Howard Gordon, senior vice president of business development and marketing at Cheesecake, said it also addressed consumer concerns.


“About 80 percent of our customers take food home from our restaurant,” Gordon said. “But we found that people didn’t want to do that at lunch. Now they can eat the entire portion and go back to work.”


Gordon added that the company has removed all of the trans fats from its regular menu items (that doesn’t, of course, apply to the cheesecake).


Chris O’Cull, vice president of equity research at SunTrust Robinson Humphrey Capital Markets, said that he expects the company to rebound on Wall Street more slowly than some of its rivals, but that it remains one of the best in its class.


“They’re one of the strongest in the industry, so the health is still there,” he said, “though the growth potential is going to have to be pared back from what expectations are today.”


Restaurants with slightly lower price points are faring somewhat better than the top of the food chain. The stock of Los Angeles-based California Pizza Kitchen Inc. traded around $28 last week. The price is down about 10 percent since the beginning of the summer, but is not like the 30 to 40 percent stock-price losses that Cheesecake and P.F. Chang’s sustained.


CPK’s revenues dropped in the second quarter, along with other casual dining restaurants, but the results beat analyst expectations.


More up-market casual restaurants like the Daily Grill are faring even better.


Tristano of the Chicago research firm said this is because there’s a hole between the casual dining sweet spot of $10 to $15 per plate and the fine dining restaurants with $20 to $50 plates. Termed upscale casual or polished casual, restaurants like the Daily Grill have entrees priced between $15 and $35.


Grill Concepts, which manages and licenses Daily Grill restaurants, posted solid sales for the second quarter, up 11 percent from the year earlier, and same stores sales were up 7 percent.


“Quality wins out in good times and bad times,” said Grill Concepts Chief Executive Philip Gay. “We’ve had a lot of strong momentum in the last year.”



Trading down


Besides the lower-priced sit-down dining sector, another beneficiary of the casual dining slump is the fast food sector.


CKE Restaurants reported blended seven-day sales rates for Carl’s Jr. and Hardee’s in mid-August up 4 percent from the year-earlier period. Second quarter sales were also up 4 percent.


CKE spokesperson Anne Hallock said, “We feel our quality positions us to give consumers a sit-down restaurant experience at fast food price,” she said. “And that’s been validated by people supporting the restaurants.”


For those who want a bona fide sit-down experience, family dining is the most frugal way to go. IHOP and Denny’s Corp. rule the family dining roost. But even family dining is getting a bit less frugal, partly because more refugees from higher-priced restaurants are coming in, and they’re willing to pay up a little.


Tristano said that what was a $5 to $6 item at IHOP or Denny’s is maybe a $7 to $9.99 item.


“But they tend to try to stay below the $10 price point,” he said.


Company Spokesperson Patrick Lenow said IHOP is striving to create the same quality experience one might find at Chili’s, Macaroni Grill or Red Lobster, with a slightly lower price.


That’s why the company is overhauling its outlets and by year-end will have remodeled about 500 of its 1,264 restaurants. Lenow noted that IHOP is leading the family dining category and performing better than some casual dining chains. The company posted an 8 percent increase in sales for the second quarter and a 3 percent increase in same-store sales.


Its stock was trading at around $46 last week. That’s well below the 52-week high of $53.80, but the stock has been trading between $45 and $50 since February.


The pancake purveyor has also made menu changes, in part because the influx of customers from upper-priced restaurants are asking for more. Among the revamps are the “better burger,” which uses a higher quality meat, and limited-time offers like funnel cake, which is now selling like well, hotcakes.


Responding to the demand may be the most important thing.


“I think restaurants have known for many years that responding to what customers are asking for is a key to success,” Tristano said, noting that the current circumstances are raising the stakes. “If customers are asking for something and you ignore it, it’s very difficult to have success.”

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