Steakhouses Lack Sizzle as U.S. Business Diners Tighten Belts

July 8, 2015 10:08 AM
Steakhouses Lack Sizzle as U.S. Business Diners Tighten Belts

High-priced U.S. steakhouses are seeing lackluster sales this year as some corporate diners curb their appetite for porterhouse and rib-eye.

While sales are “running a little bit ahead of last year,” this “incremental improvement is not dramatic,” said Malcolm Knapp, a New York-based consultant who created a monthly index for high-end steak restaurants. The gain masks a wide variation in sales growth across different companies and locations.

That’s been the case at restaurants such as STK, Morton’s and Ruth’s Chris, as some consumers are spending more freely than business diners. This reflects broader trends: Household spending has been rising since February, while business investment fell in four of the first five months of 2015, government figures show.

Demand at steakhouses fluctuates with the pace of business activity and consumer confidence, so these companies provide an interesting way to gauge the pace of economic growth, Knapp said.

Sales at these restaurants, where checks average $50 to $125 a person, rose 2.7 percent in January-May from a year ago, according to the Knapp-Track High-End Steak Chain Restaurants Index. That’s up from a 1.7 percent gain in the comparable period of 2014, though early readings suggest June was weaker than last year.

The most expensive restaurants, including steakhouses, have seen “more subdued” growth this year than their less expensive competitors, said Sarah Quinlan, a senior vice president at MasterCard Advisors in Purchase, New York. Spending at fine- dining establishments has risen more than 3 percent in the U.S. this year from 2014, roughly half the gain for all restaurants, according to data from MasterCard SpendingPulse, which tracks total sales via all payment forms.

Business Caution

Behind the numbers: Businesses appear to be “holding back on their spending a little more” than individuals, Quinlan said.

That’s underscored by two sentiment gauges. Confidence among Americans earning more than $100,000 has risen for four straight weeks and was at a nearly eight-year high in April, according to the Bloomberg Consumer Comfort Index. Meanwhile, business-leader sentiment remains lackluster, falling for the second straight month in June, from an eight-year high in November, according to Chief Executive magazine’s confidence index, which is based on an e-mail survey about the outlook for business conditions one year out.

Oil Industry

While some U.S. industries are “flourishing,” there are “pockets” of weakness for Del Frisco’s Restaurant Group Inc., primarily in locations with a lot of oil-and gas-related businesses, Chief Executive Officer Mark Mednansky said in an interview. Corporate diners have “cut back somewhat this year” -- such as reducing the size of events -- in places like Baton Rouge, Louisiana, and Anchorage, Alaska, he said.

At Ruth’s Hospitality Group Inc.’s steakhouses, business diners are demonstrating “more fiscal discipline” than they did before the 18-month recession that began in December 2007, Chief Financial Officer Arne Haak said at a June 24 conference hosted by Jefferies Inc.

Steakhouse sales are “a little choppier” this year, though that’s also true of the broader restaurant industry, said Tilman J. Fertitta, chairman and owner of Landry’s Inc. in Houston. Comparable sales at Morton’s are up 2 percent to 3 percent this year, after growing 4 percent to 5 percent on average last year.

Severe Winter

There are signs of some sizzle within the industry. The second quarter brought a “good rebound” at One Group Hospitality Inc.’s STK steakhouses after the New York-based company “suffered pretty heavily” in the first quarter, Chief Executive Officer Jonathan Segal said in an interview. Several winter storms that hit during the work week cut down on the number of business diners, he said. As much as 75 percent of meal tabs on Mondays through Thursdays are charged to corporate credit cards, he said.

Same-store sales now are near the top end of the New York- based company’s forecast of 2 percent to 3 percent growth, Segal said. “It’s like somebody turned the light switch and everybody came out to play again.”

After “an overhang of uncertainty has held back spending,” there’s reason to be optimistic again, Knapp said. Merger and acquisition activity is picking up, which should bring more businesspeople into high-end steakhouses, he said.

Prices of beef, including steak, were up 10 percent in May from a year earlier, according to figures from the Labor Department. Even amid these increases, many steakhouses contract their meat purchases to lock in their costs, so the increase has yet to affect their menu prices, Knapp said.

Pricier Items

Guest checks are up about 4 percent at Del Frisco’s Double Eagle steakhouses, more than double its 1.8 percent price increase, as many diners are even trading up to more expensive menu items like bone-in steaks, Mednansky said. Similarly, Segal “didn’t see any resistance” to some selective price increases at STK locations in the first quarter, as demand for unusual or high-end dishes “remains strong.”

Still, these restaurants must appeal to Americans who are increasingly focused on a “sense of value,” Quinlan said.

Among consumers and companies, there’s still some persistent “nervousness” about the economic recovery, Knapp said. As a result, many steakhouses are running promotions to lure in occasional diners, Knapp said.

“Their sales are really a function of what’s going on in the world at the moment,” Knapp said.

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