Moderately priced restaurants, from Shake Shack to Cheesecake Factory, are losing their edge as diners seek out even cheaper alternatives, such as fast food.
Price-conscious consumers are more likely to turn away from the so-called fast-casual and casual-dining segments of the restaurant industry they may have frequented in the past.
"The burger guys, the pizza guys, the chicken category, the Mexican category — they’re all on fire," said Nick Setyan, a senior vice president for Wedbush Securities. "You have positive growth in the restaurant industry but concentrated in quick-service restaurants,"
Instead of spending $8 to $20 for a meal in a nice restaurant, famished customers are seeking out fast-food counters where they will pay $4 to $8.
Last week, Seytan told his investor clients he doesn’t expect the stock performances of Shake Shack, the Cheesecake Factory and Habit Restaurants to stand out in the next six-to-12 months compared to other restaurant stocks covered by the firm.
Darden Restaurants, whose brands include Olive Garden, LongHorn Steakhouse and Bahama Breeze, posted slightly higher sales at its eateries open at least a year in its latest quarter, though they fell short of analysts' estimates.
Brinker International, with the Chili's Grill & Bar and Maggiano's Little Italy chains, reported last month sales at locations open at least a year were off 1.8%. It's making big changes at Chili's, reducing the number of menu items by 40% and focusing more on its core offerings, such as burgers, ribs and fajitas. Among the items axed: the Smoked Chicken Quesadilla and the Prime Rib Fresh Mex Bowl.
Why Setyan says midpriced restaurants are under pressure:
Higher food cost: Food prices are on the rise, but restaurants may not raise their prices. Instead, they are offering promotions. "In that environment, fast-casual loses" because they operate on such narrow profit margins.
Tight labor market: Unemployment is so low now — even in areas without a lot of minimum wage increases, such as Texas and Florida — chains are having a tough time finding people to hire. Though they have to pay staffers more, the restaurants are absorbing, rather than passing along to customers.
Expanding fast-food menus: Some of these chains are branching out to more premium food, such as McDonald's line of upscale sandwiches called Signature Crafted Recipes. Others also are remodeling their restaurants. "They start to (copy) the look, feel and talking points of fast-casual but still offer lower prices," he said. Plus, "it doesn't help when the trailblazers of the category, like Chipotle," which is still recovering from fallout from its E coli scare two years ago, "get their halo taken away."
Rebounding economy: The economic upswing has now trickled down to lower-income people, who now have more discretionary income to spend at fast-food restaurants.
Popularity of delivery services: When people decide to order in, they tend to opt for local eateries, rather than chains.
CFRA Research continues to give Darden stock the second highest of its five ratings. Moody's also remained positive about the company.
As moderately priced restaurants have stumbled, analysts have gotten more bullish on fast-food chains such as McDonald's. Longbow Research's Alton Stump expects total return to exceed 20% over a 12-month period. He lauds the chain's "ongoing turnaround story both in the U.S. and internationally," including its discounted drinks promotion and new food introductions.