The Shine Is off Applebee's, Among Others

Casual restaurants are fighting to hold on to cash-strapped customers

by Jacob Stokes

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Ruby Tuesday sales dropped 10.3% at its restaurants last quarter.

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For Cassandra Bovastro, 37, eating at Applebee's with her four children used to be a regular treat. But the rising cost of gas and food has forced the Chicago area ambulance driver to reduce her visits from a few times a month to once every three months. "Prices of everything are going up, but my wages sure aren't," says Bovastro. With higher living costs and another child on the way, a night out increasingly means dining off the dollar menu at McDonald's (MCD) instead.

As U.S. consumers struggle to hold down expenses, casual dining has become less essential. Restaurants that once thrived by offering midpriced menus loaded with potato skins and hefty burgers now find customers in short supply. The weakest players—Metromedia Restaurant Group's Bennigan's Grill & Tavern and Steak and Ale chains—filed for bankruptcy on July 29 and shuttered company-owned outlets. Ruby Tuesday, which saw sales drop 10.3% at its 721 company-owned outlets in the past quarter, just completed a $57 million overhaul to shed its bar-and-grill image in favor of a sleeker, more upscale look. The memorabilia-cluttered walls, Tiffany lamps, and mountains of french fries have given way to contemporary artwork, square plates, crab cakes, and a new slogan: "Simple fresh American dining."

Rival chains are stepping up their efforts to attract more customers, too. Applebee's (DIN), which has seen sales slip at its 2,000 restaurants nationwide, has brought in celebrity chef Tyler Florence to spice up its menu. Even privately owned T.G.I. Friday's, which says sagging sales have improved since a move last year to offer reduced portion sizes, recently enrolled 375,000 diners in a rewards program that offers a free appetizer or dessert for every $100 spent.

Still, the casual-dining sector faces challenges that extend beyond rising gas and food prices. There are too many locations, with openings outpacing sales growth by 17% over the past five years, according to restaurant consultancy Technomic. Many outlets were built on the urban fringe, which has suffered amid the housing downturn, while others are attached to malls that are seeing less traffic as consumer spending drops. Another culprit is what Ruby Tuesday Vice-President Steve Rockwell describes as "too much sameness in the category." That's why the chain set out to remake its image three years ago.

Whether Ruby Tuesday can win back business with earth tones and fancier food is another question. Rockwell concedes that "timing, from an economic perspective, could have been better." Technomic's Ron Paul argues the move has alienated regular customers while failing to woo new ones. In this tough economic climate, these restaurants are simply less of a draw. "We're gonna see more stores close," says Paul. "I would put money on that."

For more on the challenges facing the casual dining sector, watch a video report at businessweek.com/go/tv/dining

With Maggie Gilmour in Chicago