Patrons’ appetite to eat out drops

By BARRIE MCKENNA

Casual dining restaurants with meals priced between $10 and $20 were hit the hardest.

WASHINGTON — Tysons Corner in Virginia is typical of upscale, inner-suburb shopping hubs found in many North American cities.

Sitting conveniently outside the busy Beltway, which rings Washington, it’s home to office towers, apartments, strip malls and a large regional shopping center.

If you’re hungry, you can pick from more than 70 eateries within a half-mile radius, including several Starbucks, three McDonald’s, two KFCs and other culinary offerings — from pricey steakhouses to pizza joints.

But the American appetite for eating out has diminished as the economy has slowed, leaving the restaurant industry feeling bloated after a long expansion binge. Now, the inevitable purging has begun as high gas prices, tumbling home values and food inflation force consumers to stay home or find cheaper alternatives.

Four major U.S. restaurant chains have filed for bankruptcy protection this year, including a unit of Metromedia Restaurant Group, parent of the famed Bennigan’s and Steak and Ale chains. And experts predict it’s only the first course of a major industry cleanup that could stretch well into next year and see thousands of restaurants shuttered and tens of thousands of jobs lost.

“Everybody has been looking for a correction in supply, and I don’t think this is the last,” warned Chuck Sonsteby, chief financial officer of Brinker International Inc. Dallas-based Brinker owns the Chili’s, On the Border and Maggiano’s chains.

The credit crunch has meant banks aren’t interested in extending credit to businesses, including restaurants, while they try to sort out their problems in bankruptcy protection, he pointed out.

The shaky economy, the credit crunch, plus soaring food and fuel prices have combined to create the worst conditions for restaurateurs since 1991, explained Darren Tristano, executive vice president of Technomic, a Chicago-based food-industry consultant.

More than a third of Americans are eating out less than they did a year ago, with most citing tight finances as the key reason, according to a recent Technomic survey.

Compounding the grim economic environment, too many U.S. cities are populated with restaurants that look the same and offer similar fare, he added. Over the past five years, the 20 largest casual-dining chains increased their number of locations by 45 percent, far exceeding demand.

“Add it up and the entire U.S. restaurant industry is likely to record its first year with no after-inflation growth since 1990, he said.

And before the year is out, Tristano said, he wouldn’t be surprised to see another three or four major chains file for bankruptcy.

“Sit-down” casual-dining restaurants, with meals priced at $10 to $20, are the worst-hit segment of the industry. Less-expensive fast-food and take-out chains have fared better as consumers stretch their dining dollars.

When business sags, the natural response for restaurants is to cut prices. But the rising cost of many key ingredients makes that option virtually impossible. So restaurants are coping by trimming serving sizes, cutting back on free items, such as bread, or simply absorbing the higher cost of supplies — for now.

Starbucks, which has routinely forced its latte aficionados to pay more, is holding off on price increases this fiscal year. And other chains, such as McDonald’s Corp., are raising prices far less than the rate of inflation on their ingredients.

Over all, menu prices are up roughly 4 percent through July of this year. But the price of ingredients is up twice that much, squeezing already tight industry margins.

Pizza chain Papa John’s International Inc. said it is subsidizing franchisees, rather than letting otherwise healthy stores fail.

“We have to be very, very careful with the natural inclination to raise prices in the face of higher commodity costs,” Papa John’s President/Chief Executive Officer Nigel Travis told analysts on a recent conference call.

Executives of OSI Restaurant Partners LLC, which owns Outback Steakhouse, Carrabba’s and Bonefish Grill, said the company will be lucky to raise prices a “nominal” 1 percent to 2 percent next year.

But that won’t be enough to offset expected ingredient cost increase of as much as 4 percent.