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Unemployment Makes IHOP-to-Red Lobster Target Higher Incomes

Red Lobster Restaurant in Times Square
Red Lobster Restaurant in Times Square, New York. Photographer: Robert Caplin/Bloomberg

Red Lobster is trying to create the ambiance of a small, seaside town in Maine as it rolls out a three-year remodeling plan for its 700 U.S. and Canadian restaurants.

The seafood chain is the latest eatery to spruce up its menu, décor and architecture to lure consumers who can afford to eat out more frequently. With economists trimming growth forecasts and unemployment at 9.1 percent, restaurants are becoming increasingly dependent on households earning more than $70,000 to keep sales growing, according to Malcolm Knapp, a New York-based consultant who has monitored the industry since 1970.

“We’ve really become an ‘allocation nation,’ where every month, people look at what’s left from their paycheck and decide how they’re going to spend that money,” said Knapp, creator of the Knapp-Track Index of monthly restaurant sales and guest counts. “Restaurants are re-conceptualizing their brands to appeal to a broader demographic.”

Americans in lower-income brackets have been forced to cut back on dining out to live within their means, according to Robert Dye, senior economist at PNC Financial Services Group Inc. in Pittsburgh. Real disposable incomes, the money left over after taxes and adjusted for inflation, are essentially flat since December 2010, he said. Meanwhile, more-affluent households are benefiting from higher dividend payments and earnings from rental properties, which have grown 10 percent and 20 percent, respectively, since the September 2009, Bloomberg data show.

“More and more, restaurants are competing for a slice of a pie that’s not getting any bigger,” Dye said.

Spending on Takeout

Households that earned more than $70,000 in 2009, about 32 percent of the U.S. population, accounted for 55 percent of spending on takeout and food away from home, according to the most recent data available from the Bureau of Labor Statistics.

Consumers making less than $40,000 -- or “aspirational diners” -- cut back on eating out about five years ago and have yet to rebound much, Knapp said. This “erosion of frequency” among lower-income households forced executives at quick-service and casual-dining restaurants to figure out how to broaden their appeal as the market began to weaken in 2008, he said. Now, many of their plans are becoming reality.

Red Lobster, part of Darden Restaurants Inc., is redesigning all of its Tampa Bay restaurants in Florida with a “Bar Harbor” theme, complete with ship lanterns and Adirondack chairs, according to an April 26 statement.

Spaghetti-Squash Marinara

Ruby Tuesday Inc. recently rolled out menus with entrees under 700 calories such as a spaghetti-squash marinara, Chief Executive Officer Sandy Beall said on an April 6 conference call. Meanwhile, Denny’s Corp. launched a new campaign -- “America’s Diner is Always Open” -- to position itself as an eatery with “great hospitality and great comfort food at a great price,” Chief Executive Officer John Miller said on a May 3 conference call.

San Diego-based Jack in the Box Inc. is wrapping up a five-year program to re-image its more than 2,000 restaurants. Changes include ceramic-tile floors, a variety of seating options in the dining area, landscaping and a new logo that was adopted in 2009.

DineEquity Inc., owner of IHOP, recently completed market research for its pancake-eatery chain and the findings will be incorporated into operations, menu, ambiance, décor and advertising changes, Chief Executive Officer Julia Stewart said on a May 3 conference call.

These companies are following the lead of McDonald’s Corp., the world’s largest fast-food chain, which has boosted sales by as much as about 7 percent at its re-imaged locations, according to Steve West, an analyst at Stifel Nicolaus & Co. in St. Louis.

Healthier Options

The Oak Brook, Illinois-based company set the tone about 10 years ago when it spruced up its menu to include healthier options and remodeled its stores to provide a more inviting dining space, West said. More recently, McDonald’s redesigned its counter space to make room for more coffee and frozen beverage selections through its McCafé concept, he said.

The fast food chain’s revenue grew 69 percent during the past decade, while its stock has nearly tripled in value, Bloomberg data show.

The Standard & Poor’s Supercomposite Restaurants Index, which includes McDonald’s, Ruby Tuesday and 25 other companies, has risen by 44 percent since Dec. 31, 2007, while the S&P 500 Index has declined by 13 percent.

If done correctly, consumers will more than pay for such investments, West said. If not, the gamble can be costly. “We’ve seen the rest of the industry try to replicate what McDonald’s has done with mixed success,” he said.

Pulled the Plug

Chili’s Grill & Bar, owned by Dallas-based Brinker International Inc., tried to remodel its stores prior to the recession and didn’t achieve desired sales gains, so it pulled the plug on the initiative, West said. The casual-dining chain, known for hamburgers and baby-back ribs, hasn’t significantly revamped its menu amid increased competition from rapidly expanding chains including Five Guys and In-N-Out Burgers, he said.

“The mistake comes when companies try to sell the same old, boring food out of a spruced-up box,” West said.

Brinker is “still in the test phases of our re-image project and currently evaluating results,” according to Danielle Smith, a spokeswoman for the company.

The restaurant industry isn’t alone in pursuing higher-income customers, according to Maggie Gilliam, president of retail consultant Gilliam & Co. in New York. Many retailers also are reinventing themselves in the face of increased competition from low-priced alternatives and online shopping by offering exclusive merchandise, she said.

‘Distinguish Themselves’

Kohl’s Corp. and J.C. Penney Co., often considered mid-tier department stores, are trying to “upgrade their image with better brand names and merchandise to distinguish themselves from the mass market,” Gilliam said. Menomonee Falls, Wisconsin-based Kohl’s sells an exclusive line of clothing and home goods by designer Vera Wang, while J.C. Penney, based in Plano, Texas, now has in-store Sephora cosmetic shops.

Still, companies must balance how much change their regulars can stomach, according to Knapp.

“Restaurants have to have a more contemporary and elegant interior, as well as exterior, to appeal to a higher demographic,” Knapp said. “At the same time, they have to make sure it’s not too nice to deter their other customers.”

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