Restaurants: Doing Well By Being Big

It's going to be eat or be eaten this year in the $246 billion food-service industry. A restaurant shakeout triggered by debt-laden balance sheets, an excess of outlets, and stiff competition from food stores will accelerate in 1991. Recessions tend to keep Americans in the kitchen, so restaurants that are on a shaky footing may fail. But for the strong, this 1990s Darwinism is an opportunity. "Regardless of what segment you're in," says Leonard H. Roberts, chairman of Shoney's Inc., a midprice restaurant chain, "if the consumer perception is of good price-value, you could probably pick up share in this market."

Still, even survivors "won't do business as usual," says Joseph R. Lee, president of General Mills Restaurants Inc., which owns the Olive Garden and Red Lobster chains. Increasingly, restaurants will dish up meal deals and giveaways to lure diners. The biggest chains will open new outlets as their weaker competitors fold. Some may make acquisitions: British hospitality company Allied-Lyons PLC has already snapped up Dunkin' Donuts and Mister Donut.

SMALL STEPS. While such strategies may not produce dazzling returns in 1991, they could improve the industry's performance compared with a disappointing 1990. Ronald N. Paul, president of food-service consultant Technomic Inc., thinks restaurant sales will grow an inflation-adjusted 1.3% this year, vs. 0.9% in 1990. Paul adds, however, that net profits for the largest 74 public companies will be flat, at 7% to 8% of sales.

With a few exceptions, the biggest chains will prosper most. Paul notes that the top 100 companies, led by McDonald's, PepsiCo, and Grand Metropolitan, now run nearly 50% of the nation's stand-alone eating places, up from 30% in 1972. Even the largest independents will have two strikes against them. They don't have the deep pockets of Grand Met's Burger King or PepsiCo's Taco Bell, Kentucky Fried Chicken, and Pizza Hut. And independents own 34% of the nation's upscale, white-tablecloth restaurants--which fare worst in a slump.

Companies that are loaded with debt will have an especially tough time this year. One is Al Copeland Enterprises, which, after adding Church's Fried Chicken to its Popeyes Famous Fried Chicken chain for $392 million in 1989, planned to cut its debt by selling some outlets. But the strategy fell short of expectations, and last fall, Copeland went into technical default on debt it owes to Merrill Lynch & Co. and the Canadian Imperial Bank of Commerce. It has hired First Boston Corp. to help develop a refinancing plan.

Also in shaky shape is Long John Silver's Holding Inc. The company has been able to meet interest payments since going private for $620 million in late 1989, says a spokesperson, partly by selling some units and limiting growth. But First Boston recently wrote off a $235 million loan to the company--money the chain apparently can't pay back.

Poised to take advantage of such wobbly rivals are midprice chains such as Chili's, Baker's Square, Cracker Barrel Old Country Store, and Olive Garden. Such restaurants offer bountiful portions served in comfortable surroundings. Their meals cost $5 to $7, compared with an average $3 or $4 at most fast-food outlets, and their sales growth has been outpacing that of fast-food chains for several years now.

Demographics will continue to favor the midprice chains in 1991. Baby boomers with kids seek out such eateries, which now see more room for growth as real estate prices soften and choice locations become available. General Mills's Lee says that he'll add at least 10% more Red Lobster and Olive Garden units than the 88 originally planned for 1991. To keep customers coming, he has introduced $4.99 dinners at both chains. Employing different versions of the same strategy, Sizzler Buffet Court & Grill has expanded its all-you-can-eat salad bars to include appetizers, soups, desserts, and Mexican foods. And Shoney's feeds kids free on Wednesday nights.

PRICE WAR. The fast-food titans aren't likely to let such moves go unchallenged. In fact, the price war that has been going on in that sector may escalate this year, threatening everyone's margins. To counter Taco Bell's 49~ tacos, for example, McDonald's Corp. plans to roll out 59~ cheeseburgers and $1.99 Happy Meals for kids. It recently announced two new products--a low-fat hamburger and a breakfast burrito--and may offer an encore of last fall's $40 million McMillions TV sweepstakes.

Other quick-service joints also have new products on the grill. With a test of breakfast sandwiches under way in Chicago, Wendy's International Inc. may soon be back in the morning market after bowing out several years ago. And rather than dilute the image of its sandwich chain, Arby's is wading into the lower-price segment of the fast-food business with Daddy-O's, a small, drive-through-only burger chain it purchased in October.

Home-delivery operators will also pick up the competitive pace this year. Domino's Pizza Inc. continues to loom over this part of its market, but Pizza Hut is adding delivery routes. And Levy Restaurants, which runs 25 upscale bistros in several cities, recently started free home-delivery from eight restaurants to customers in Chicago's Loop and nearby neighborhoods. President Larry Levy thinks this will add 8% to 9% to sales at participating restaurants within a year.

If the overall restaurant outlook seems less than mouthwatering, there's one bright spot for 1991: Labor and commodity costs should moderate as the recession kicks in. That could be a big break for restaurants, whose other key operating costs, especially for promotions, seem to be headed straight up.