Restaurants Face Lean Times in the Economic Downturn

As the credit crisis and the economic downturn begin to bite on Main Street America, restaurant row is in for a shake-up. For the first time in nearly two decades, the $550 billion restaurant industry has suffered stagnant sales this year, creating painful cash-flow problems for restaurateurs who can't get credit lines to cover investment and operating costs even as food and labor costs have risen sharply. That's made it harder for chains and independent eateries alike to upgrade equipment, hire new staff and renovate facilities. "The credit crisis is having a devastating effect on nearly every segment of the industry," says Aaron Allen, CEO of the Quantified Marketing Group, an international restaurant-consulting firm. "This is the death knell for a number of restaurant chains."

Beyond the already bankrupt Bennigan's, Steak and Ale, and Village Inn, Allen expects a rash of closures in the American restaurant industry. Ruby Tuesdays, Chili's, TGI Friday's and other full-service casual-dining restaurants are "in desperate times," says Allen. Restaurants are struggling to find banks' support to cope with short-term cash crunches caused by double-digit price increases for commodities ranging from wheat and flour to rice and corn. And the tightening of credit also precludes many restaurant chains from undertaking direly needed overhauls. Those creaky bar stools, cheesy pennants and outdated waiter outfits just keep getting staler, leaving those unable to finance the revamping of their facilities and menus contemplating oblivion in the face of the challenge from "fast-casual" rivals.

The growing success of the waiter-free fast-casual brands, such as Panera Bread, comes at the expense of higher-cost casual chains, from which cash- and credit-strapped consumers are trading down. Industry analysts expect the fast-casual sector to explode from $12 billion in revenues this year to as much as $100 billion in a decade. Instead of spending $18, on average, at T.G.I. Friday's, they're happy to spend $9 at Panera or Chipotle, with no tip and faster service. McDonald's and other fast-food outlets are also positioned to gain from the decline of the $170 billion casual-restaurant sector. Backed by deep pockets, Mickey D outlets have been able to spring for thousands of espresso machines, even as other chains hunker down with their old-fashioned coffeepots.