As our comparable traffic data indicates, the demand for casual dining food service has been shrinking between 2015 and 2017, resulted probably from changes in such factors as falling mall’s traffic and consumers’ spending. However, there is a signal indicating a slower declining traffic after 2017. Consumers’ loyalty seems to be stronger in this sector and thus allows companies to aggressively raise price to offset the decrease in sales. 

Sector’s current, trend, causes behind trend, and future

Current and Trend

1. Generally, demand for casual dining restaurants has declined between 2015 and 2017 as indicated by the decrease in comparable traffic. The trend seems to be continuing in some of sub-sectors but we have seen positive increases in traffic from most of sub-sectors in 2018.
2. The loyalty seems to be stronger for restaurants in this sector and thus have helped them to generate better performance in sales, by raising the price to offset the declining traffic, than those QSR and fast-casual restaurants. However, it seems, it is increasingly difficult for those companies, which still experienced declining traffic in 2018, to further raise price to maintain a positive growth in sales.
3. Generally, it seems that in the challenging climate in industry of restaurant casual restaurants have received smaller and delayed impacts than those in fast-casual sector but worse than QSR as seen by the decrease in traffic that they had already.
4. Therefore, casual dining restaurants generated higher margin than fast-casual peers probably due to less costs caused by promotions as a result of higher demand/less decrease in traffic.
5. The extent to which business are franchised is much lower than that in QSR sector and therefore, their margins usually have smaller buffer than QSRs to mitigate impact from declining sales. This is actually why we have seen that margins of those companies in this sector have been down generally as their comparable sales went down but those in QSR did not. However, due to stronger loyalty of their consumers and higher menu price, restaurants in this sector present better ability to raise price to offset the declining traffic.
6. Increasing labor and commodity costs, coupled with pressure in traffic, have been hurting companies’ margin and cash flow. General rising menu price did not lift margin due to simultaneously promotion.

Causes behind the trend

We think the trend happening among restaurants in this sector has reflected changes in economy that influence consumers’ spending. Generally, benefiting from the recovery of economy, especially quantitative easing monetary policy and low borrowing cost, consumers’ spending has been on the high level, which probably has been the major reason why we have seen the favourable industrial environment in the years before 2015. However, this may have been negatively impacted by the recent change in monetary policies, which caused consumers’ disposable income to decline or caused them to feel that way.

Slowing down mall traffic resulted from changes in economy and in shopping habit (turned to online) may also be attributable to the declining traffic of restaurants in this sector.

Higher price products usually present higher sensitivity to declining purchasing power from the consumers with lower income. This is probably why QSRs had received smaller impacts than fast-casual restaurants and casual dining when facing the same consumer pool but charging lower prices/purchasing cost. This also explains why bar& grill, Mexican and pizza restaurants have worse performance than others types of restaurants in this sector but a better performance in QSR sector.

Another reason that may be attributable to the decrease in sales in this sector may be increasing competition as a result of increased new opening of restaurants. This is actually, based on our data, consistent with the expansion of new restaurants that happened in this sector before 2015. If this is the major reason that caused the decrease in comparable sales of this sector, we will be able to see a quick bounce back among existing restaurants as companies stopped opening new restaurants and shut down existing ones.

Size of consumer pool and margin seem to be the factors determining extent to which business can be franchised in every sector of restaurant industry. Francization rate is low because of low margin and small size of segment that casual restaurants usually have.

Industry Future

We think the accelerating recovery of economy will eventually help bring traffic back to restaurants after the temporary impacts from cease of quantitative easing policies. It may need less time for restaurants in this sector to deal with narrowed margins than those in fast-casual sector.

General Financial Performance of Companies In the Sector

It seems that significantly slowing down traffic is the major reason contributing to downturn in comparable sales of casual dining restaurants between 2015 and 2017. Data indicates the average increase in comparable sales all across this sector went down from around 1.7% of 2015 to around -0.6% of 2017: the average growth in comparable sales for bar& grill-sub sector went down from -0.9% to -2.4%, from 5% to -0.2% for American family sub sector, from 1.6% to 0.5% for Italian sub-sector, from 3% to -0.7% for Mexican sub-sector, from 1.7% to -0.7% for pizza sub-sector.  Correspondingly, what accompanied with declining sales is the decreasing traffic all across the sector during this period. For example, our data of casual dining sector indicates that the average growth in traffic for 2015, 2016 and 2017 was -1.1, -2.3, and -2.4% respectively including: 2%, -1.3%, and -1.3% for family dining restaurants; -1.6%, -3%, and -3.1% for bar& grill restaurants; -1.3%, -1.7% and -1.6% for Italian restaurants; -0.7%, -1%, and -2.3% for Mexican restaurants, -1.4%, -2.6%, and -2.7% for pizza restaurants.

Since 2017, it seems the downward trend in comparable sales (up by average 1.3% in first half of 2018 as compared with -0.6% of 2017) has been halted driven by slower decrease in traffic with rising price among almost all of sectors. In fat, for sectors experiencing continuing decrease in traffic, it has been increasingly difficult by rising price to offset the faster decreasing traffic/transaction. For example, in family dining sector, the average growth in comparable sales down to -0.4% in 2018 from -0.2% of 2017 as traffic went down further; For sectors experiencing recovery of traffic, we see increase in sales with slower rise in price. For example,  in Italian & steak sector, the average growth in comparable sales up to 1.3% in 2018 from 0.5% of 2017; in Mexican food sector, the average growth in comparable sales up to 0.3% in 2018 from -0.7% of 2017; in Pizza sector, the average growth in comparable sales up to 5% in 2018 from -0.7% of 2017; in Pizza sector, the average growth in comparable sales up to 5% in 2018 from -0.7% of 2017; in bar& grill sector, the average growth in comparable sales up to 0.7% in 2018 from -2.4% of 2017;

It seems, unlike in fast-casual restaurants, the difference in performance in terms of comparable sales and thus the traffic in this sector presents much smaller variations.

Generally, impacts of unfavourable climate of restaurants industry to traffic since 2015 seem to be less significant to casual dining than to fast-casual restaurants but bigger than QSR as indicated by changes in their growth in traffic. However, probably because there are more powers for casual restaurants than another two restaurants to raise menu price since their menu prices a higher, their sales have been better offset by increased menu price or product mix.

                                                        Growth in Comparable sales              Growth in Traffic

                                                         2018     2017        2016         2015               2018       2017           2016            2015

•  Quick service restaurants      0%         1.3%        2%           4.8%                1%         -0.9%         -1.3%           0.6%
•  Fast-casual restaurants          -1%       -2%         -0.8%        3%                  -5%       -3.5%          -1.5%          0.2%
•  Casual dining restaurants      1.3%      -0.6%      -0.9%       1.7%                -0.9         -2.4%          -2.3            -1.1%
•  Fine dining restaurants          1.2%       0%         -0.2%        1.7%                -1.5%     -1%             -0.5%          -0.5%
• QSR-Coffee, tea, and baked    0.8%      1.2%        3%           4.7%               -1%           0%

 

For companies in this industry, franchising seems not to be popularly accepted as compared with QSRs. Except for some bar& grill and family restaurants chains, most of companies are operating their own restaurants and their gross margins vary in similar range as those fast-casual restaurants. Typical gross margins for different sub sectors are:

(Bar& grill sub-sector): 13% (12-15%)     (Including company operating expenses mainly)

(American Family sub-sector):15%        (Including operating expenses mainly)

 (Italian sub sector):14% (13-15%)    (Including operating expenses mainly)

 (Mexican-sub sector): 12%         (Including operating expenses mainly)

 (Pizza-sub sector): 11%             (Including operating expenses and franchise expenses)

However, due to less spending in G&A of casual restaurants ( average 5.5% compared with 10%)  the average operating margins are higher (above 7.5%) than fast-casual restaurants (3%): bar& grill casual dining sector - 5.5% with a G&A as percentage of sales of 7.5%; family sector - 11% with a G&A as percentage of sales of 5%; Italian sector -  8% with a G&A as percentage of sales of 6%; pizza - 5% with a G&A as percentage of sales of 5%; Mexican - 6.5% with a G&A as percentage of sales of 5%.

Unlike in QSR where companies use franchise as buffer, companies’ margins in this sector declined as traffic and thus sales slowing down. However, with higher menu price the typical average gross margin of restaurants in this sector decreased by smaller percentage than those in fast-casual sector, which is about 100 basis points less since 2015.

The average cash flow/share of companies in this sector presents decrease of 8% and 4% for 2017 and 2018.  

 

According to our analysis, the current companies’ enterprise price/EBI ratios (or /sales) are:

 (All casual dining): average 29 with an interest/EBI ratio of 20%.      

 (Bar& grill): average 26 with an interest/EBI ratio of 29%

(Family): average 23 with an interest/EBI ratio of 20%.    

 (Italian): average 27 with an interest/EBI ratio of 18%.

 (Mexican): average 27 with an interest/EBI ratio of 0%.

 (Pizza-): average 33 with an interest/EBI ratio of 41%.

 

Average enterprise Price/EBI ratio (2017):

QSR: 31     

Fast-casual: 40 

Casual dining: 30

Fine dining: 21

QSR-Coffee& baked: 25

Average Enterprise price/EBI ratios (2018):

QSR: 29     

Fast-casual: 35 

Casual dining: 29

Fine dining: 24

QSR-Coffee& baked: 31

 

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