Dining Deals Helping Traffic, But Sales A Concern

Restaurants are using deals to put diners in their seats, but may not be adding enough dollars to their cash registers.

Despite deals ranging from buy-one-get-one-free offers to $5 entrees, same-store sales at full-service restaurants fell 6.7% in May, according to Knapp-Track, which conducts the survey based on responses from more than 10,000 restaurants. Traffic fell a more modest 6%, making May the first month since Knapp-Track began tracking data in 1991 where traffic outpaced same-store sales in casual-dining, said Malcolm Knapp, who conducts the survey.

Restaurants did face a difficult comparison in May, since year-ago sales were boosted as consumers began receiving their stimulus checks, resulting in the only month of positive same-store sales since June 2007, according to a Raymond James & Co. client note.

Still, restaurant traffic outpacing sales gains could take its toll on profit margins, as deal-hungry customers seek limited-time deals without splurging on menu items at their full price. After a month where chains like the privately held T.G.I. Friday's offered nine new menu items for $5 each, some analysts think deep-discounting chains may rethink their promotional tactics.

The discounts have "failed to generate the level of increased traffic needed to make them 'work' from a profitability standpoint, which we believe will likely cause the deep-discounting culprits to alter their discounting strategies going forward," Raymond James analyst Bryan Elliott said in a note to investors.

Investors will begin to get more detail on casual-dining trends Tuesday when Darden Restaurants Inc. (DRI), owner of Olive Garden, Red Lobster and other chains, reports fourth-quarter earnings. Some analysts think that Darden is well-positioned since its value message is entrenched in its menu.

The promotional environment was most aggressive in the bar-and-grill segment, where the likes of DineEquity Inc.'s (DIN) Applebee's, Brinker International Inc.'s (EAT) Chili's Grill & Bar and Ruby Tuesday Inc. (RT) compete on price to stand out.

"That's the only way these bar and grill chains can differentiate themselves," MKM Partners LLC analyst Stephen Anderson said.

Casual dining chains have been paring back other expenses like labor and utility costs, and have also gotten relief on commodities, which can help buffet profits.

Attracting patrons who bounce between restaurants looking for the best deal can also disrupt the atmosphere in a restaurant by drawing in a crowd that clashes with the regulars, Knapp said.

"If you have a core block of customers and you bring in a block unlike them, the core doesn't like it," Knapp said.

Some chains are taking a different tack, offering everyday values instead of limited-time offers. On The Border Mexican Grill & Cantina, Brinker's Mexican restaurant concept, launched a new menu in April that emphasized permanent deals like choosing two items from a variety of staples like tacos, enchiladas and empanadas with beans and rice for $6.99, among other items.

"Most people don't want to be the coupon cutters. They want to feel value about the price they're paying," said Lisa Depoy, On The Border's senior director of marketing.

-By Paul Ziobro, Dow Jones Newswires; 212-416-2194; [e-mail]