Steakhouse Sales Fluctuate as Diners Digest Economic News

Sept. 19 (Bloomberg) -- A relentless news cycle of economic ups-and-downs is giving would-be diners at U.S. steakhouses indigestion. Julie Hyman reports on Bloomberg Television's "Money Moves." (Source: Bloomberg)

A relentless news cycle of economic ups-and-downs is giving would-be diners at U.S. steakhouses indigestion.

Revenue at these restaurants has been “more erratic” in 2012 than last year as eating out has become an “emotional” decision, even for affluent consumers and corporate customers, said Malcolm Knapp, a New York-based consultant who created the Knapp-Track Index of monthly restaurant sales and guest counts. “It’s a very uneven market” for these establishments.

There could be additional weakness ahead in the fourth quarter as news about the economy dominates headlines leading up to the November presidential election. “Waves of fear” about the health of the U.S. expansion have taken a toll on corporate spending, a key component of steakhouse sales, and further fears could have “a pretty sizable impact” on this industry, said Mike Englund, chief economist at Boulder, Colorado-based forecaster Action Economics LLC.

“It’s easy to go to a fancy restaurant if you’re spending somebody else’s money, but if your expense account is cut by 20 percent, you’ll go somewhere that costs less,” Englund said, adding that expense accounts are one of the first expenditures business owners will target if they become more cautious about the economic outlook.

This year “definitely has been more bumpy,” for the more than 100 fine-dining establishments owned by Landry’s Inc., which took Morton’s Restaurant Group Inc. private in February and also owns Vic & Anthony’s and Brenner’s steakhouses. While same-store sales are positive, they’re not “near the growth of last year,” Chief Executive Officer Tilman J. Fertitta said in an interview without detailing 2011 performance.

‘True Rhythm’

A “pervasive news cycle” is largely to blame, as would-be diners have been influenced by external events including Europe’s sovereign-debt crisis and risks associated with the looming U.S. fiscal cliff, said Knapp, who has monitored the industry since 1970 and frequently speaks with steakhouse operators. As a result, sales lack a “true rhythm.”

European Central Bank President Mario Draghi has promised to do “whatever it takes” to save the 17-nation euro, and the U.S. faces higher taxes and reductions in spending on government programs that will take effect at year-end unless Congress acts.

Sales at U.S. steakhouses, where the average check is more than $50 a person, have “bounced around” -- up 4.1 percent in August, compared with a year earlier, following a 1 percent gain in July, said Knapp, citing the Knapp-Track High-End Steak Chain Restaurants Index, which covers $1.5 billion worth of industry sales.

Slowest Pace

Same-restaurant results at The Capital Grille, owned by Darden Restaurants Inc. (DRI), grew 2.8 percent in the three months ended May 27 -- the chain’s slowest pace since 2010. The Orlando, Florida-based company is scheduled to release fiscal first-quarter earnings on Sept. 21.

Meanwhile, comparable sales at company-owned Ruth’s Chris Steak Houses rose 6 percent in the three months ended June 24, following a 3.7 percent gain the prior quarter, based on data from Ruth’s Hospitality Group Inc. (RUTH), which is slated to announce third quarter results Oct. 26.

Such “choppiness” has created an “odd duck year,” said Michael McNamara, vice president of Mastercard Advisors, a division of the credit-card company. While “decent” stock market performance -- including a 16 percent rally by the Standard & Poor’s 500 Index -- historically boosts luxury retail, that hasn’t happened so far with fine dining, he said.

Falling Revenue

Total U.S. revenue at these restaurants fell 3.2 percent last month and 5.4 percent in July, after increases of 4.6 percent in June and 5.9 percent in May, based on data from SpendingPulse, which estimates sales across all forms of payment including cash, checks and credit cards.

“Getting two to three months of consistent growth has been a challenge in 2012” as consumer confidence has been “under some pressure,” McNamara said. Sentiment among Americans earning more than $100,000, at minus 6.4 for the week ended Sept. 9, has swung from as low as minus 14.5 to as high as 10.3 this year, based on the Bloomberg Consumer Comfort Index. That compares with a pre-recession average of 35.9.

Shares of Ruth’s Hospitality are up almost 35 percent so far this year, while Del Frisco’s Restaurant Group Inc. (DFRG) has risen about 15 percent since the owner and operator of 32 steakhouses went public on July 26.

High Earners

People who are “high earners,” though not among the wealthiest demographic, are largely to blame for the pullback in discretionary spending that’s hit steakhouses, Englund said. Consumers at these types of restaurants “have a large pool of wealth,” and if they feel less confident, they’ll rein in their purchases.

Corporate expense-account diners, who make up about 65 percent of business for restaurants such as Morton’s, “took the biggest hit during the downturn,” Fertitta said. European tourists also are missing from American steakhouses, as travel from this region has dropped off, Knapp said, adding that these consumers are “very important” because they tend to fill up restaurants later at night.

In an effort to gain broader appeal, Morton’s was among several chains that introduced lower-priced menu items during the 18-month recession that ended in June 2009, Fertitta said. With “pockets of strength” throughout the country, there’s the opportunity to open more restaurants, though “you want to be cautious about where.”

Planning for restaurateurs is “far more complicated because of these undulations,” according to Knapp. Owners of these companies “can’t get euphoric” when his index goes up “and can’t get in the toilet when it goes down,” he said. “It’s very hard to know what the trend is right now.”

To contact the reporters on this story: Anna-Louise Jackson in New York at ajackson36@bloomberg.net; Anthony Feld in New York at afeld2@bloomberg.net

To contact the editor responsible for this story: Anthony Feld at afeld2@bloomberg.net

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