Restaurant customers aren’t tapped out. They’re just bored

The restaurant business has been through a volatile stretch. Restaurateurs battled through the early days of the COVID-19 pandemic (when no one was eating out); the “reopening” period (when everyone was eating out, but there weren’t enough workers); and the inflation surge (when ingredients and other input costs surged). Overall, restaurants prospered despite the turmoil, thanks to innovation and nimbleness at every turn.

Today, the good times aren’t necessarily over, but many once-popular companies are struggling. Often, it’s because they failed to evolve as consumers demonstrated a growing preference for bigger flavors and swifter service. Olive Garden, in this new environment, is old and slow, when what people want is fast and more interesting Chipotle.

Industry-wide same-store sales have slumped for most of 2024. The popular narrative is that lower-income consumers appear to be trimming their spending in response to years of high inflation and elevated interest rates. Lower-earning households have certainly faced their struggles, and you see the evidence in surveys, rising auto delinquencies and credit-card troubles. According to Morning Consult’s monthly survey of 2,200 adults, respondents in households making under $50,000 reported having cut back on restaurant spending by 21% (1) in July from a year earlier. But their very real plight has become a handy excuse for a lot of restaurant companies that haven’t been able to pass muster in a world of shifting consumer habits and tastes.

Notably, personal consumption expenditures overall continue to grow at an impressive nominal rate, signaling that consumers are still spending money, even if a smaller slice is landing in restaurateurs’ pockets. A greater share is going toward must-haves like health care, but they’re still opening their wallets for discretionary purchases, including live entertainment and sports.

Evidently, it’s not that consumers don’t have money, but that they would prefer to spend it elsewhere.

The fact of the matter is that the U.S. restaurant industry is still serving up too much casual sit-down dining, when Americans want fast-casual. Meanwhile, restaurants are still trying to figure out how to stay relevant in the takeout and delivery business without giving away too much profit in commissions to the likes of Uber Technologies Inc.’s Uber Eats and DoorDash Inc. and forfeiting precious customer data.

Consider the cohort of losers among the publicly traded restaurant companies: Denny’s Corp., Outback Steakhouse owner Bloomin’ Brands Inc.; Applebee’s owner Dine Brands Global Inc.; Cracker Barrel Old Country Store Inc. You don’t have to know much about these companies’ cash flows or balance sheets to guess that their stocks aren’t setting the world on fire. Indeed, their shares have all retreated more than 20% this year and are trading below 2019 levels. They’re old brands that have failed to adequately reinvent themselves in a competitive economy in which consumers are no longer shelling out for any old plate of pancakes. These firms aren’t dead in the water, but they’re evolving too slowly.

People want food that’s fast, interesting and — this is absolutely critical — served with an optional side of guacamole or queso blanco. With its stock up 246% since 2019, Chipotle Mexican Grill Inc. is obviously the model, which may be why other food service businesses are either stealing their talent (Starbucks Corp. just hired away Chief Executive Officer Brian Niccol) or acquiring competitors specializing in similar fare (Darden Restaurants Inc. just bought Tex-Mex restaurant operator Chuy’s Holdings Inc.).

There are other successful business recipes beyond aping Chipotle, including, for example, Texas Roadhouse Inc.’s sit-down Texas-style steakhouses featuring line-dancing servers. But companies that hope to compete have to walk an extremely fine line: They should provide good value, but not so much value that they crush their own margins.

Darden, which also operates Olive Garden and Longhorn Steakhouse, among others, is a particularly noteworthy example of recent efforts to adapt, even if it’s coming a little on the late side. It recently reported revenue that disappointed Wall Street analysts, but its stock still jumped on the announcement of a new partnership with Uber Eats.

Together with new menu items and other changes, the partnership “finally showed a sense of urgency,” my colleague Michael Halen at Bloomberg Intelligence told me. Under the terms of the deal, Darden will use Uber Eats drivers but funnel orders through its own portal rather than through the regular Uber Eats marketplace. Although the full terms weren’t disclosed, the deal allows the restaurant company to keep control of its customers’ data, and investors hope that it also means Olive Garden will dodge the sky-high commissions that have bedeviled so many food-service firms that dabble in delivery. I doubt that will turn Olive Garden into the next Chipotle, but it has to help that they’re out there fighting for market share.

There was a time three years ago when the simple act of going out to eat seemed like a revelation because millions of Americans had been hunkered down during the worst of the pandemic. The surge in customers probably led a lot of restaurant companies to rest on their laurels. Now the old chains have failed to meet busy consumers where they are and shake up menus to appeal to their changing tastes. In this new phase, they’ve become too boring.

While tighter budgets have certainly played a role, they aren’t the whole story. I have little doubt that this consumer economy still has something left in the tank. It’s up to restaurants to earn their piece of the pie if they want to stay in business.

(1) Morning Consult calculates this by using the trimmed mean of the response data.

Jonathan Levin is a columnist focused on U.S. markets and economics. Previously, he worked as a Bloomberg journalist in the U.S., Brazil and Mexico. He is a CFA charterholder.