Lean Times for Restaurants

(page 2 of 2)

Perceived Value at the Olive Garden

Still, if the U.S. enters a recession and menu prices continue to rise, analysts don't expect everyone to start eating off the McDonald's Dollar Menu, leaving more expensive chains empty. Customers will seek out not the cheapest food, but the places where they think they're getting the best value, Owens says. One example is Olive Garden, the Italian food chain owned by Darden Restaurants (DRI).

Olive Garden should be a classic victim of recent economic trends. "The people that were stretching their budgets to eat at casual dining restaurants are pulling back," says Owens. However, while rivals have suffered, Olive Garden's sales figures have held up well, because the chain makes customers "feel like they're getting a good deal for their money," he says.

Tarantino praises the "value proposition" at Chipotle, Panera, California Pizza Kitchen (CPKI), and Texas Roadhouse (TXRH). But, he adds, it might be tougher for more expensive, special-occasion chains like the Cheesecake Factory or P.F. Chang's China Bistro (PFCB) to raise prices or prevent sales from dropping if a recession hits.

For decades, restaurants have benefited from a shift of more consumer dollars toward eating out. Busy Americans are attracted to both the convenience of restaurant food and the entertainment of dining out, says Tarantino. He thinks restaurant companies have a bright long-term future, but he adds that in the short-term, the industry faces "incredibly strong headwinds."

Restaurant Relief

The National Restaurant Assn. expects the growth of restaurant spending to slow, but the trade group still expects record sales of $558 billion this year. However, restaurant spending could actually shrink this year if unemployment worsens, fuel prices stay high, home prices continue to fall, and restaurant price increases scare off customers.

First American Funds chief economist Keith Hembre expects a weak job market to persist throughout the year, even if a recession comes and goes quickly. However, some relief could be coming to restaurants and their customers, he says: The federal economic stimulus package will give consumers some extra cash in May and June. Also, inflation—and thus food commodity prices—historically drop quickly as recessions end, he says.

Whatever economic trends emerge this year, restaurants can expect a stomach-churning ride. Restaurant food may increasingly be a necessity to many Americans, but restaurant operators still feel consumers' economic pain far more acutely than almost any other industry.

Steverman is a reporter for BusinessWeek's Investing channel.