Chains rely on business from lunch and dinner customers to succeed, but during the rushed lunch hour, workers often have little time to wait for food to arrive at chains like Red Lobster and Applebee’s. Adding to this is the fact that lunches at both of these chain restaurants can easily cost $10-$20 per person, including tip.
As American consumers have tightened family budgets, these daily lunchtime outings have become too expensive. Restaurants have attempted to compete by offering weekday lunch specials and “2 can dine” deals, but the total bill still manages to clock in at more than $7. All of this causes consumers to search for a less costly option–usually at a dining establishment that doesn’t require a tip.
Darden Restaurants, Inc. (NYSE:DRI), parent company of Red Lobster and the Olive Garden, recently reported a drop in annual profit of 12%. The company expects these numbers to remain dismal, as costs from Obamacare will cut into the company’s already-strained profits.
As Darden Restaurants, Inc. (NYSE:DRI) has struggled to continue to attract budget-weary customers, food costs have continued to rise, with the latest challenge coming from a disease impacting shrimp farmed in Asia. The lower prices have brought customers in, but the company still struggles to lure in the lunchtime crowd, looking to spend within the $5-$7 price range rather than the $8-$15.
DineEquity Inc (NYSE:DIN), which owns more reasonably-priced chains Applebee’s and IHOP, also gave shareholders bad news at the conclusion of its most recent quarter. Profits for the restaurant chain dropped from $28.6 million to $18.8 million, with revenue dropping an alarming $83.6 million in one year’s time. Part of the reason for the decline is that the company is selling its franchises off to franchisees, but the decline in profits can be chalked up to the same problems plaguing competitors.
Both Applebee’s and IHOP are ideal choices for the lunchtime crowd, with affordable prices and fast turnaround. Like competitors, Applebee’s is aggressively courting customers with its “Pick N Pair Lunches” and lunch combos, but prices still edge up to $10 when the tip is figured in.
Fast casual winning
By contrast, Panera Bread Co (NASDAQ:PNRA) and Chipotle Mexican Grill, Inc. (NYSE:CMG) are thriving. Panera Bread Co (NASDAQ:PNRA) reported a 34% earnings increase and a 15% rise in revenue in its most recent quarter. Chipotle enjoyed a 13.5% increase in revenue, reporting more than $726 million in sales.
Chipotle Mexican Grill, Inc. (NYSE:CMG) is currently on a winning streak, having clocked earnings growth of more than 20% for the past five years. The company is expected to enjoy an earnings increase between 17% to 19%, giving it a chance to reach 20% for the sixth year in a row.
The only downfall to Panera Bread Co (NASDAQ:PNRA)’s stock is its price. But with more than 100 new locations opened in 2012 and more than 100 planned for this year, the company’s ability to expand while still logging a 34% earnings increase is impressive. In fact, the company regularly sees earnings growth of more than 20% in a quarter, making it seem like its worth its cost.
Both Panera Bread Co (NASDAQ:PNRA) and Chipotle offer lunchtime-friendly meals with no tip required. While neither chain is immune from rising food costs, consumers know they can still pay less than they’d pay at a casual dining franchise and both companies have thrived during the recession.
Fast casual restaurants generally benefit from a higher-income clientele than regular fast food restaurant chains like McDonald’s Corporation (NYSE:MCD) and The Wendy’s Company (NASDAQ:WEN). Diners are aware they can get the same quick service with higher-quality food items like Panera Bread Co (NASDAQ:PNRA)’s sandwiches or Chipotle’s burritos. For that reason, analysts see fast casual as a promising industry with expected growth in the coming years.
Luring lunchtime crowds
For chains like Darden Restaurants, Inc. (NYSE:DRI) and DineEquity Inc (NYSE:DIN), lowering prices to compete, while still earning enough profit to survive will be the big challenge. If Obamacare and other changes drive prices up, neither chain will be able to compete with fast casual dining.
For casual dining establishments, an improvement in the economy may be the only way to win back free-spending customers. Another solution for these restaurants may be to take the server out of the equation. Chains like Chili’s have been experimenting with table-side tablets to allow customers to place their own orders, directly at the table. Food trucks and lunchtime kiosks could be other options for casual chains.
As investors continue to keep an eye on rising fast casual restaurants, chains like Red Lobster and Applebee’s will need to find ways to reach out to hurried, cost-conscious customers. One thing is clear: customers like dining out, but the closer a single meal gets to $10, the less likely it will be able to reel in the lunchtime diner.
The article Is Fast Casual the New “Dining Out” Norm? originally appeared on Fool.com and is written by Stephanie Faris.
Stephanie Faris has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill (NYSE:CMG) and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill, Darden Restaurants, and Panera Bread. Stephanie is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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