Slashing prices lures customers, pummels profits at restaurant chains

Many struggling restaurant chains are endeavoring to reignite growth as they work to spur Americans to spend more money on food.

The New York Times reports that a number of restaurant chains have been victims of the financial crisis. The U.S. restaurant industry has stagnated in the wake of the recession, and aside from high-end fast food chains such as Panera and Chipotle, growth has all but stalled in the formerly profitable sector.

Sbarro, Perkins, Chevys and Friendly's have all witnessed eroding profit margins and a decline in revenue over the past few years, spurring all four chains to file for bankruptcy protection in 2011. In an effort to drive growth, experts assert such fast food chains are reorganizing spend management and indirect spend, implementing cost reduction programs and working with procurement agencies.

However, for at least some restaurants, it might be too little, too late.

Some chains are barely scraping by, with many posting meager profits barely sufficient to cover food sourcing. Increased competition and a drop in the amount of money Americans are spending on dining out has hurt their profitability, Technomic executive vice president Bob Goldin told The Times.

"There's a lot of walking dead," he said. "A lot of chains, they hang in there and they're hard to kill off."

The weak business environment is affecting formal dining establishments as well. Darden Restaurants, which owns Red Lobster, LongHorn Steakhouse and the Olive Garden, posted weak quarterly results this month. Company executives said while revenue rose 6.1 percent from the same period in 2010, net income plummeted by 28 percent to $54.1 million. Volatile food prices caused a retrench in customer spending, Darden chief executive Clarence Otil said.

"Strong sales growth this quarter at Red Lobster, LongHorn Steakhouse and our Specialty Restaurant Group was offset by below expectation sales results at Olive Garden, pressure on check averages as guests continue to be cautious about spending and unfavourable year-over-year food costs," Otis noted.

Just as retailers have courted customers by slashing prices, so too have many restaurant chains. While such aggressive price-cutting helped drive revenue at many eating establishments - and retailers, for that matter - it eroded profit margins. Restaurants have been loath to close stores, but in its bankruptcy protection filing, Friendlys said it would shutter 63 of its underperforming stores.

Nevertheless, many restaurant chains are confident growth will rebound in 2012, as economists project food prices to stabilize.

"Fortunately, with reduced cost inflation in the second half of this fiscal year, the strong momentum at our other brands enables us to anticipate solid earnings growth for the remainder of the fiscal year even as Olive Garden makes the changes needed to get back on track," Otis affirmed.