What Happened to Table Service?

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Burger King [7], Carl's Jr. [8], Chipotle [9], Cinnabon [10], Denny's [11], Hardee's [12], McDonald's [13], Panera Bread [14], Qdoba [15], Schlotzsky's [16], Wendy's [17]

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In many cases, it’s a different consumer out there today deciding where to dine when the urge hits. Throughout the recession, full-service restaurants offered so many fire-sale bargains that those little affected by the economy could almost feel guilty for practically stealing meals when they would have just as willingly paid regular price.

The meal deals that spelled survival for sit-down restaurants were like Black Friday to consumers, says David Morris, author of the report Dinner Trends in the U.S. Foodservice Market for Packaged Facts. The upshot was giddy guests (higher guest traffic) with lower guest checks. Great for the consumer, but depressing for operators who are now trying to unwind themselves from the spiral.

Brinker-owned Chili’s stands as the poster child for the casual-dining dilemma. It offered a three-for-$20 two-person promotion featuring a shared appetizer, two entrées, and a shared dessert. Crowds came. But once the promotion went away, the love was lost and the crowds moved on. With traffic down, the promotion came back in some locations. And after some pencil sharpening, the deal was revised, sans dessert.

Traffic increased, but profits did not. Brinker revenues for the first quarter of fiscal 2011 were down 6 percent year over year. Comparable restaurant sales were down 4.2 percent. And that’s only one casual-dining story.

The good news is that brighter days for casual dining are emerging, Morris says. “Look at the increase over time of discretionary income consumers have enjoyed,” he says. “It parallels growth of casual dining.” He looks to economic indicators like the recent increase in consumer savings, improved loan performance, stabilization in housing prices, and a positive stock market. It adds up to more discretionary income and spending among typical casual-dining customers, who skew to the middle to upper-middle income demographic.

Consumers overall aren’t quick to say they are ready to go out and spend a lot of money at restaurants any time soon. According to the report Dining Out: A 2011 Look Ahead put out in January by Chicago-based Mintel, only 10 percent of the 1,725 survey respondents who had been to a restaurant in the previous month said they were willing to spend more at restaurants this year than they did in 2010. In fact, nearly a quarter (24 percent) said they would be spending less at restaurants in 2011.

Part of the reason might be that consumers are conditioned for deals. How to wean them off the promotions while maintaining and building guest traffic and improving margins is the question of the day.

“Hopefully, these chains haven’t been sitting around doing nothing with new menu development,” says Eric Giandelone, director of research for Mintel Foodservice. “There should be a pipeline of new things to introduce when they can—new items priced higher than what’s on the menu now for a time when consumers are more willing to spend for it.”

That pipeline is one of the focal points at Cracker Barrel, which introduced new products to build variety and eliminate the veto factor, says Julie Davis, senior director of corporate communications with the company. Without discounting, revenues from continuing operations were up 1.6 percent, and comparable store restaurant sales increased 0.8 percent in 2010.

Cracker Barrel chose to focus on the deeper question coming out of the recession—how to define and convey value.

Prerecession, value never meant low prices for full-service brands, but necessity changed that for many. “Our competitors resorted to discounting and all sorts of deals. We have maintained the value proposition we have always offered,” Davis says. That is, offer quality, maintain portion sizes, and focus on service and hospitality. The company’s new “Seat to Eat” program aims to have customers seated and eating in 14 minutes or less. Making that happen required an investment in the kitchen: changing equipment and streamlining procedures to allow the servers more time with guests, which goes toward hospitality, Davis says.

“Operators really want to focus on the broader picture—the environment and fresh-prepared wonderful recipes. But we don’t underscore that when we say, ‘Come on in, this thing only costs $5,’” says Leslie Kerr, president of Intellaprice, a Boston-based pricing advisory company.

She notes worthy efforts of table-service restaurants to take the value focus off price: small plates, late-night happy hour menus, tasting events, menu makovers, social media marketing, and loyalty cards.

The Cheesecake Factory, Mimi’s Café, and California Pizza Kitchen are a few that have come on board with chic, more affordable smaller-portion menus.

As for loyalty cards, Kerr says they are “the pot of gold at the end while not coming across as a hard-driving message to come in for a low price point.” Besides Starbucks and Dunkin’ Donuts, quick serves and fast casuals like Denny’s, Qdoba, Hardee’s, Carl’s Jr., and, most recently, Panera Bread have wooed customers with such programs.

But inevitably, the way out for table-service restaurants is higher checks. “Commodity costs are going up and input costs in terms of labor are going up. They are going to have to raise prices,” Giandelone says. “And the thing is, they can’t raise prices without a good reason. There has to be something behind it to justify it. That has to come through the menu with better ingredients and better items that consumers can justify spending more for.”

It’s a light that Chili’s has seen. According to the company’s annual report, the brand’s “strategy is to balance value and innovation and enhance [the] menu at Chili’s to improve quality, freshness, and value by introducing new items and improving existing favorites.” Going forward, it plans to modernize the brand by remodeling many company-owned stores this year.

Meanwhile, as table-service restaurants were reeling, quick-serve and fast-casual restaurants gained some competitive ground, partly because low price is a reasonable part of their value.

The barbell menu strategy took hold at quick serves as they doted on their $1 menus while introducing premium-priced products on the other end. “The $1 menu is a way to make sure people are coming in, and the premium product is there to attract those trading down [from table service] but don’t want to lose too much in quality,” Giandelone says. Burger King, McDonald’s, and Wendy’s have each worked both ends of this equation.

That strategy, as a way to protect check averages, is here to stay and is likely to grow, Giandelone says.

In fact, while casual dining was focused on keeping up guest traffic, quick serves and fast casuals were quietly improving quality. Think of how McDonald’s is testing chicken wraps with aioli sauce, Giandelone says. “How many casual-dining restaurants have aioli sauce? It started in fine dining, and now McDonald’s is taking the lead, not casual dining. Casual needs to look more at what’s happening in fine dining and see what they can do to raise the value proposition to quality.”

Fast-casual restaurants are finding their place in the spotlight in the area of fresh, healthful options, Morris says, citing Chipotle and Panera Bread.

Menu refreshment was part of what helped Panera Bread through the recession, says executive chairman Ron Shaich.

The company went into the recession deciding not to deploy any different strategy than what it had done for the past two decades, which is to invest in the quality of the food, marketing, and its employees, he says.

Shaich owes the freedom to not reduce prices to the sound financial condition the company went into the recession with. “Many of our competitors didn’t have that, and they had pressure from banks and their boards to pull costs out of their P&Ls,” he says. “The only way to do that was to rip labor out of the P&L, and who pays for that? The guests, with longer wait lines, people serving who are more frazzled, and the table next to you is dirty. It taxes guests.”

During the recession, Panera Bread, which had only one fiscal quarter with slightly negative sales results during the past few years, rolled out a range of new salads, sandwiches, and soups.

Schlotzsky’s, another fast-casual concept, took a daring approach during the recession. “When everyone else zigged, we zagged,” says company president Kelly Roddy. He saw how other operators cut costs by cutting portion sizes and lowering food quality. Knowing that customers trading down from casual dining were still discriminating about where to go, the chain decided to spend some money to rebrand itself.

“Our goal was not to cut prices, but add value. So we worked on how we could give a better experience. We added table service in the restaurants,” he says.

In doing so, the units are starting to look a little more like casual dining. The new prototype has new packaging, an updated color scheme, cushioned seating, and shares cobranded space with sister company Cinnabon. Existing stores started the makeover in mid-2010 with expected completion by the end of 2011. The company has managed to maintain positive comparable/same-store sales throughout the recession.

“Our average restaurant that has been doing this full-blown has seen a 28 percent sales increase, on average,” Roddy says.

The stores also offer free Internet access. “Customers are coming in in the afternoon for the snack daypart to spend time and have a Cinnabon and coffee and work on their laptop. That’s part of our reimage,” Roddy says.

But quick-serve and fast-casual restaurants shouldn’t get too confident in their problem-solving successes, because consumers are fickle, as the recession has taught. They may be just as happy eating somewhere previously unthought of. Look at food trucks, and don’t forget about the expanding prepared food sections of grocery stores—with seating areas.

The dark horse galloping in to compete is convenience stores that are hungry for profits to replace declining fuel and cigarette sales.

With the expected rise in electric cars, vehicles with better gas mileage, and individuals who got used to cutting back on travel at the peak of the fuel-price crisis of 2008, gas is not the business it once was at c-stores. Plus, “motor fuel has a low margin,” says Jeff Lenard, vice president of communications for the National Association of Convenience Stores (nacs) in Alexandria, Virginia. “You try to find ways to encourage customers to come into the store. Food is the perfect way to do that. Foodservice done well has a robust margin.”

In-store sales at c-stores increased 4.9 percent in 2009 when overall retail sales dropped 7 percent, according to NACS data. Lenard attributes the growth to the increase in fresh-prepared food many stores are offering.

Some c-stores are even beginning to add seating areas. Others are running television commercials, encouraging consumers short on time to stop in and pick up a meal.

But c-stores aren’t top of mind when consumers think of getting something to eat. “No marketing campaign will change that perception. What will change the perception is customer experience,” Lenard says.