Restaurants eye sales growth in dining drought

LOS ANGELES Mon Mar 8, 2010 3:07pm EST

A pizza is removed from a wood-burning oven in this August 27, 2008 file image. REUTERS/Ciro De Luca/Agnfoto

A pizza is removed from a wood-burning oven in this August 27, 2008 file image.

Credit: Reuters/Ciro De Luca/Agnfoto

LOS ANGELES (Reuters) - Amid signs of thawing consumer spending, U.S. restaurants are starting to walk a fine line between turning diners on with new lower-calorie dishes and tapas-style small plates and turning them off with creeping price increases.

The course change comes as cost-cutting opportunities dwindle and restaurants try to wean still-skittish diners off discounts and special offers.

"2009 was strictly cost-reduction focused. ... It seems like there's a transition" afoot, said Adam Werner, a director in the food service practice at advisory firm AlixPartners.

"The conversations we have are focused now on 'How do we grow same-store sales?'"

The special deals that helped lure diners into restaurants during the worst of the recession won't disappear any time soon, but rock-bottom discounts that squeeze profits are becoming rarer as well-funded restaurant operators get smarter and more nimble with their value offerings.

Fitch Ratings director Carla Norfleet Taylor expects same-store sales trends to improve from last year's dismal levels, but the gains will be hard fought since spending on meals away from home is expected to remain constrained for many months.

"While we are not predicting a rapid upturn in same-store sales growth, we do anticipate modest improvement by the second half of 2010," Taylor said.

FIRST IN, FIRST OUT?

Starbucks Corp (SBUX.O) saw its same-store sales deteriorate before many other restaurants and made some of the industry's earliest and deepest cuts, including closing nearly a thousand stores.

In January, the coffee chain posted its first rise in quarterly U.S. same-store sales in two years -- results that were boosted by redirecting traffic to remaining stores, the debut of its Via instant coffee and selective price increases.

Its growth strategy was a complicated recipe that also included money-saving coffee and breakfast food pairings and a reworked loyalty program that removed discounts for paying members in favor of a free program that gives out free drinks when members hit certain purchasing thresholds.

Raising prices is a quick way to boost same stores sales, but only a few restaurants are in the position use them.

Panera Bread Co (PNRA.O) is planning to modestly raise prices on the heels of a more than 7 percent jump in quarterly sales at established company-owned restaurants, but Chipotle Mexican Grill (CMG.N) -- which got some push back to previous price hikes -- says it is holding off.

"We haven't done it for the very important reason that we want to remain accessible," Chipotle Chief Executive Steve Ells, whose popular burrito chain serves naturally raised meats and hormone-free cheeses, said in a recent webcast.

While it waits for a signal that its customers can stomach price hikes without a revolt, McDonald's Corp (MCD.N) is pulling out all the stops in its bid to boost sales.

It expanded its U.S. Dollar Menu to include breakfast, has rolled out mid-priced snack wraps that cost around $1.50 and encourage splurging, and unveiled $4 premium Angus burgers.

"We are constantly looking at the marketplace to see, do we have opportunities to raise price without negatively impacting the traffic?" Pete Bensen, McDonald's chief financial officer, said on the company's latest earnings conference call.

IMITATION ABOUNDS

Other operators are imitating the Cheesecake Factory (CAKE.O), which increased some prices on its summer menu and introduced smaller-sized dishes that are too small to replace entrees and encourage multiple orders for tapas-style sharing.

Change is afoot even in the hard-hit and fiercely competitive bar and grill segment dominated by DineEquity Inc's (DIN.N) Applebee's and Brinker International Inc's (EAT.N) Chili's Grill & Bar.

Applebee's is rotating the offerings on its "2 for $20" offer that gives diners one appetizer and two entrees for $20 and introducing new menu items like a selection of dishes that have fewer than 550 calories -- a novel idea for the segment.

"Value is an important part of talking about our brand, but never underestimate the value of having something that nobody else has in the industry," Julia Stewart, CEO of Applebee's parent DineEquity, said.

Chili's is rethinking its special offers, including one that initially dented profits, as it reworks its strategy.

"The gradual reduction of discounting, as evidenced by Chili's backing off its '3 Course, 2 People, $20' promotion, is a welcomed relief," J.P. Morgan analyst John Ivankoe said in a client note.

(Reporting by Lisa Baertlein; Editing by Richard Chang)