Are off-premise channels a silver bullet for the casual dining segment?
Restaurants have experienced declining sales for the past decade, but delivery, catering and carryout are yielding positive results for major chains.
Casual dining's downward spiral has been a narrative that's dominated the restaurant industry for about a decade.
According to Restaurant Business, sales trends at segment leaders such as Ruby Tuesday's and Applebee's began to slip around 2006 and have continued to decline since. Coincidentally, that's about the same time the auspicious fast casual segment emerged.
But fast casual's honeymoon phase isn't the only factor that's caused this segment's struggles. Oversaturation, changing consumer preferences, higher price points (and tipping obligations) and increasingly busy consumer lifestyles are all significant stumbling blocks.
In 2017, this trend came to a head when the casual dining segment's footprint shrunk for the first time, dropping by 1.5%, according to Technomic data. Ignite Restaurant Group (parent company of Joe's Crab Shack) and Romano's Macaroni Grill filed for bankruptcy last year, while Applebee's, IHOP and Outback Steakhouse have significantly pared down their systems.
Simply put, things have been dismal in the casual dining space, and analysts and investors have questioned whether or not this trend is reversible, especially as younger consumers favor speed, convenience and value.
But the last wave of industry earnings reports suggest that the pendulum may be swinging in a positive direction for casual dining. The silver bullet causing this growth? Off-premise business, including delivery, carryout and catering.
Casual chains are starting to leverage consumers' growing demand to get their food whenever they want and wherever they are. Consider delivery, for example. Despite stagnation in the U.S. restaurant industry, foodservice delivery posted sizable gains in both visits and sales throughout the last five years, according to The NPD Group. The 20% increase in delivery sales and 10% gain in delivery foodservice visits have been supported in large part by the growth of digital ordering, which now represents more than half of all delivery visits.
"Delivery has become a need to have and no longer a nice to have in the restaurant industry," said Warren Solochek, NPD's senior vice president of industry relations, in a press release. "Restaurants need delivery in today's environment in order to gain and maintain share. It has become a consumer expectation."
Delivery is just one piece of a much bigger puzzle, however. Off-premise sales overall are estimated to account for 37% of total restaurant sales, or $209 billion, this year, according to the 2018 Takeout, Delivery and Catering Study conducted by CHD Expert. That number is expected to jump to nearly 50% by 2023.
Casual chains buy in
Casual dining has been losing share to limited-service fast casual and quick-service chains for years, simply unable to compete on speed and convenience. Off-premise business — facilitated through technology investments — levels the playing field for speed and convenience, and nearly every major casual chain is implementing these channels with mostly positive results so far.
During Dine Brands Global's second-quarter earnings call, for example, Applebee’s president John Cywinski said the company has experienced its best sustained performance in more than 10 years and is stealing share from competitors while outperforming all segments on both traffic and sales. He attributes off-premise as a major driver of this success — to-go sales, specifically, grew by 31% during Q2. Delivery is now offered in more than 500 Applebee’s restaurants, and Cywinski said the company expects that number to increase "meaningfully" by the end of the year.
Applebee's sister chain, IHOP, also experienced positive results from its off-premise strategy. President Darren Rebelez said the average check for online orders increased by about 8% during Q2, while to-go sales now account for 7% of total sales. To pad these off-premise numbers even more, IHOP is rolling out delivery and expects 1,000 restaurants to be on the DoorDash platform by the end of the year.
"Also, on delivery, we believe it's simply a transaction with the guest. We try to build a relationship with them and that's hard to do through delivery."
Senior director of communications and public affairs, Texas Roadhouse
These impressive metrics extend beyond Dine Brands Global. Olive Garden's off-premise channels now represents about 14% of total sales at the brand, while Brinker International — parent company of Chili's — experienced double-digit increases in traffic and sales from its off-premise channels. Brinker CEO Wyman Roberts said the company's strategy to elevate its technology platform to improve its to-go business is working, according to the company's Q2 earnings call. Delivery is a small component of the business at this point, but the company believes "leaning more aggressively into delivery" throughout the fiscal year will drive positive results.
The story goes on while the numbers go up. But not every casual dining chain is going all-in on this new path to growth. During Texas Roadhouse's Q2 call, CEO Kent Taylor said that while the company is paying attention to the different trends in the industry, "we kind of do it the old-fashioned way." Notably, Texas Roadhouse's comp sales were still up nearly 6% in Q2, including traffic growth of 4.3%.
Travis Doster, senior director of communications and public affairs at Texas Roadhouse, told Restaurant Dive the company has always taken a contrarian approach.
"We don't franchise, we don't do national advertising. We have butchers on site. We also sell experience, with our bread, line dancing, music, peanuts. We just don't think you get that same experience from delivery," Doster told Restaurant Dive. "We also don’t think steak travels particularly well and we don't want our food to become a commodity."
Doster adds that Texas Roadhouse also considers itself to be a value concept, and delivery muddies that approach.
"If you look at a lot of these deliveries, the price jumps at least 15% and suddenly it's not as much of a value anymore," he said. "Also, on delivery, we believe it's simply a transaction with the guest. We try to build a relationship with them and that's hard to do through delivery.”
That doesn't mean Texas Roadhouse isn't subscribing to off-premise all together. The company has grown its carryout business, which is now up to about 6% of total sales.
"We're not actively pushing carryout, but it has grown and it is convenience-driven," Doster said.
Next generation marketplace
Since Texas Roadhouse heavily relies on the in-store experience, the old-fashioned way may work for that brand specifically, but it's unlikely to translate across the intensely competitive food space — particularly as consumers' dining habits change.
"Technology has changed the ways consumers engage with brands, including their dining behaviors. If brands are not driving sales through catering, carryout and delivery, they are missing out on revenue," Jennifer Crawford, director of off-premise sales at Fazoli's, told Restaurant Dive. "Delivery and technology are key drivers to the stay-at-home economy."
"Technology has changed the ways consumers engage with brands, including their dining behaviors. If brands are not driving sales through catering, carryout and delivery, they are missing out on revenue."
Director of off-premise sales, Fazoli's
Throughout the past two years, dine-in traffic has declined or remained flat across the industry, Crawford adds. Fazoli's has responded to this shift in consumer behavior by investing more in its off-premise business. Consequently, sales through these channels are up 18.5% over last year for the company.
Not only are we in a new consumer-driven, stay-at-home economy, we’re also solidly in the next generation of the restaurant marketplace, where brands are realizing they can centralize their operations around takeout, delivery and catering, according to Erle Dardick, CEO of MonkeyMedia Software.
"It's an incredible time to be in the food business. The only way forward is to take control of your off-premise operations," he told Restaurant Dive.
Catering, Dardick adds, is one way to differentiate and add value. Brands can create a specific menu for catering, for example, such as a burger bar, which is what Red Robin has done.
"It's an incredible time to be in the food business. The only way forward is to take control of your off-premise operations."
CEO, MonkeyMedia Software
"They've differentiated. If you cater through them, a burger bar is the only thing you can get and the kitchens aren't overwhelmed and the solution is brought out into the community where they can create a direct-to-consumer business. That relationship is critical now," Dardick said of Red Robin.
Catering is estimated to be a $40 billion business for restaurants in 2018, according to the CHD Expert study. Sixteen percent of all off-premise orders are for catering, with 12% of those orders coming from businesses, the study said. Casual dining chains, including Olive Garden, are leveraging higher demand for catering.
“We like that [catering] business. And it's been very well received by the consumer set,” Gene Lee, CEO of Olive Garden's parent company Darden Restaurants, said during the company's last earnings call.
Off-premise is here to stay
What is perhaps most exciting for the casual dining segment is that it's on the ground floor for off-premise. Casual chains are mastering to-go/carryout and many have also offered catering for quite some time. But delivery is especially new, and growth is certain to keep rising as chains work out the kinks and figure out how to seamlessly implement delivery within their systems. Lee outlined some of those kinks during Darden's Q2 call: "How do we ensure that these delivery services will enhance our brands? Can it be flawlessly executed for our guests and our team? Can we create sustainable incremental growth at scale that's additive to our company? Can we agree on viable economics? Can we ensure we own the data?"
One company that has many of these questions answered already is Fat Brands. CEO Andy Wiederhorn said the company, which began delivery with Uber Eats three years ago, experiences close to 15% of orders via that channel.
Still, he adds restaurant companies have a long way to go to meet modern consumers' needs, whether through delivery or somewhere else.
"Consumers are busier. Their lifestyles have changed. They want to stay home and watch Netflix," he told Restaurant Dive. This is why he predicts delivery specifically will have a major impact on the casual dining segment.
"People like home-cooked meals and variety, but not everyone wants to go sit for an hour for a casual dining meal. Maybe fine dining, but not casual," Wiederhorn said. "If you could have a casual meal delivered, however, that is a win because it's more fulfilling than a fast casual or QSR meal. Delivery isn't going away and there is a lot of room to grow for casual brands.”
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