Chain restaurants struggle, compete for customers

Fortunes at chain restaurants are tumbling, the fallout from a strategy of slashing menu prices in the hopes that a cheap meal will be enough to entice diners back to their booths.

Instead, diners are ringing up smaller checks, or simply staying home.

And the deep discounts, like the two meals for $20 being offered at places such as Chili's and Applebee's, come with a high cost for sales and profits. Some worry the chains are creating a culture of diners looking only for a cheap meal.

"These companies are competing any way they can to get customers in the door," said Morningstar restaurant analyst R.J. Hottovy.

While the discounts became prevalent earlier this year, the problems restaurants are facing stem from when the U.S. economy was flush, people were eating out more and developers could get easy credit for construction projects.

Since 2001, the number of so-called "casual dining" restaurants in the U.S. has grown 14 percent, according to market research firm NPD Group. The number of chain restaurants in the category has grown by more than 26 percent.

That growth may have been simply too ambitious, and now there's quiet speculation that some chains may not survive the economic downturn.

"We don't think this trend is sustainable," Hottovy said of the efforts among the faltering restaurant chains to lure in new customers.

Brinker International, which reported first-quarter results Tuesday and owns 1,700 restaurants, most of them Chili's Grill & Bars, said customer traffic fell for the 21st consecutive quarter.

Meanwhile, revenue skidded 21 percent and profit sank 34 percent, despite efforts around its three-course meal deals for two, priced at $20. That sent shares down more than 11 percent Tuesday, and the stock continued to decline Wednesday, falling 48 cents, or another 3.3 percent, to $14.17 in late-afternoon trading.

Despite the roughly 5 percent decrease in customer traffic, the offer is bringing in customers, temporarily. But Stifel Nicolaus & Co. analyst Steve West said the deal is cutting into profits for diners whose dollars will be fleeting - a trend that was apparent in September already the company temporarily shelved the promotion and saw fewer customers.

"Customers are conditioned to 'shop the discounts,' as sales declined when promotions were absent - a dangerous line to walk, in our view," West wrote to investors in a research note.

On Wednesday, Asian-themed eatery P.F. Chang's China Bistro Inc. delivered disappointing results, too. Even as net income rebounded from last year when it was weighed down by a one-time charge, customer traffic was off as much as 7 percent.

Its shares fell $2.49, or 7.4 percent, to $31.14 in late trading Wednesday.

Late Tuesday, Japanese steakhouse owner Benihana Inc. said sales in locations open at least a year fell almost 10 percent during its most recent quarter. That comes after the measure fell 6.5 percent the year earlier. Its shares sank 34 cents, or 6.2 percent, to $5.19 in late afternoon trading Wednesday.

And earlier this month, Ruby Tuesday said its revenue fell 7 percent. It attributed the sales decline to operating 45 fewer restaurants this year and said customer count actually managed to grow during in the quarter - something analysts partially attributed to its offer of offering a $10 entree free with the purchase of another entree.

But sales in locations open at least a year, an important restaurant measure, fell 3.1 percent, showing diners were spending less when they did come in.