When it was announced that the American economy was in recession, it surprised absolutely no one. In fact, certain segments of the economy had already seen the approaching storm.

Ron Paul, president and chief executive officer of restaurant consultancy Technomic Inc. says that the restaurant sector was seeing evidence of problems long before most of the economy really felt the pinch.

“The restaurant industry is a leading indicator,” he says. “In general, it comes back sooner.”

Parts of the restaurant industry were already facing serious challenges even without the economy taking a dive. Paul says that casual restaurants, where consumers choose from entrees and are waited on by staff, are facing the strongest challenges.

Restaurants such as Applebee’s, Chili’s, Ruby Tuesday and the like, have expanded rapidly in the past few years. In fact, according to Paul, they’ve grown faster than that market can really support. He says that before the downturn, many chains had grown at a rate of 3 to 5 percent. However, the market was only growing at 1 to 2 percent.

Another problem is lack of diversity. Many chains don’t have trademark entrees or ways to build consumer loyalty. Those that do, such as Italian-cuisine chain Olive Garden, are doing well. In fact, Olive Garden’s parent company, Orlando, Fla.-based Darden Restaurants Inc., saw an increase in sales for its fiscal second quarter ending November 23. The company also owns Red Lobster, LongHorn Steakhouse, The Capital Grille and Bahama Breeze, all of which tend to stand out and did well in the last quarter.

Adding insult to injury, there is also increased competition, not just from other restaurants, but from grocery stores that have made strides in offering restaurant-quality ready-to-eat meals (RTE). According to Paul, retailers have raised the bar on RTE. And it gets worse the higher up the hierarchy you go, with the high-end chains feeling the most pressure.

“We recognize that consumers are under incredible pressure and are more discerning about how and where they spend their discretionary income,” says Clarence Otis, chairman and chief executive officer of Darden.

One segment doing well is quick-service restaurant (QSR) chains such as McDonald’s. The Oak Brook, Ill.-based company recently reported increased sales and profits when companies in all industries are struggling.

“McDonald’s is hitting on all cylinders,” says Paul. The company has made effective use of advertising, menu choices and price points to keep its business going strong.

Other chains, especially those serving the ever-popular hamburger, are doing well. CKE Restaurants Inc., parent company of the Carl’s Jr. and Hardee’s brands and based in Carpinteria, Calif., recently reported strong profit and an increase in same-store sales for its fiscal third quarter.

New trends

According to a recent report from the Foodservice Research Institute Inc. (FRI) in Oak Park, Ill., the economy will encourage more share-of-plate gains for prepared entrees compared to center-of-plate entrees. Right now there is a more than $5 difference between the average price of a prepared entrée ($8.95) and a center-of-plate entrée ($14.33). Menu items such as chili, macaroni and cheese, spaghetti with meatballs, stir-fried rice, chicken alfredo, pot pies, stew, carnitas bowls, pad thai, lasagna and others frequently come to the restaurant already prepared or they are easy to prepare in advance, in both cases lowering costs. With 2 to 4 ounces 1ess protein than a center-of-the-plate item and a lot more carbohydrates, prepared entrées will maintain their price advantage but will edge up in price, according to the report.

Bowls, which made their debut in 2006 with KFC’s Famous Bowl, could get more popular, the report states.

“Bowls offer the convenience and portion control of prepared entrees and they easily cross cultures,” the FRI says. “Jack in the Box re-introduced its Chicken Teriyaki Bowl in 2008 with steamed white rice, broccoli florets, carrots, all-white-meat chicken with teriyaki sauce. New in 2008 from El Pollo Loco is a Tamale Bowl, which is a chicken tamale accompanied by Spanish rice and pinto beans topped with Monterey jack and cheddar cheeses, Colorado chili sauce and creamy sour cream.” The most recent is the Big Easy Chicken Bowl from Popeye’s, featuring red beans, rice, pulled chicken and Cajun gravy, shredded cheese, Louisiana brand hot sauce and sour cream.

The bowls offer a lot of what are the rising trends. They use diced or cubed meats, can serve as prepared entrées and can be adapted to many types of cuisine, from Asian to Mediterranean. Meat will be a requirement for them. According to the FRI, bowls without protein of some type will be thought of as side dishes.

Bowls also offer a lot of carbs, which will become more of a mix in entrees. “Instead of a 6- or 8-ounce protein portion, look for 3 to 4 ounces and expect to see sides and accompaniments to make up the difference with lower-costing beans, rice, pasta and potatoes,” the report states.

Menu diversity may take a hit for a couple of reasons, “both as a comfort thing and [because of] the strides that other cuisines have been played out,” says Joe Brady, president of FRI. “People need some reassurances. American-traditional is so prevalent already; other cuisines are a much smaller part of the market.”

The organization’s report says flavor experimentation has proceeded at a high pace the past five years, and many people have tried sushi, edamame, babaganoush, falafel, jerk chicken or potstickers among other formerly exotic dishes. Now consumers are moving to familiar items such as cheeseburgers, deli sandwiches, skillet breakfasts, chicken fried steak, baked potatoes, grilled cheese sandwiches, onion rings and roast chicken. Chains such as Chili’s, Bakers Square, Eat ‘n Park, Atlanta Bread and others present menu items from six to 10 various cuisines, mainly American-traditional, Italian, Mexican, Southern, Southwestern, American-BBQ, American-Spicy/Hot. This will continue, but American-traditional and Southern cuisine will be paying the bills.

One of the new and less expensive items being introduced by CKE is along those lines. Called the “Little Thickburger,” it was developed before the current downturn and went on sale just as things turned sour.

“In our research, we found that consumers love Thickburgers, love the quality, but size and price limited the frequency they could buy them,” says Brad Haley, executive vice president of marketing for Carl’s Jr. and Hardee’s. “The new ones are smaller than the originals, but still bigger than premium sandwiches at other chains.”

He also says that CKE has no plans for increasing limited-time offers (LTOs). Haley continues that after a certain point, in a time of limited media budgets, the diminishing returns don’t justify the effort.

According to FRI, the number of items like the Little Thickburger being added to menus of chains could start declining in the coming year. In recent years, the average number of new items added to menus of the largest chains has steadily increased from 5.3 items in 2005 to 6.1 items in 2006 to 6.8 items in 2007 to 7.3 items in 2008. However, when a new item is added to the menu, there is an 85 percent chance that another item gets taken off simply because of the limits of how big the menu can be. The upcoming year will still see the average chain introduce seven items, FRI says, but they will be dropping eight to 10 items. Menus at chains have expanded to the point where in 2003 the average chain had 48 non-breakfast items on the menu and now has 56 items.

LTOs industry-wide could see an increase, FRI says. The number of LTOs at chains has increased but, according to the report, chains have offered only one or two per year. LTOs are holiday- and event-oriented rather than spaced randomly throughout the year. Papa John’s Big Movie Meal Deal, offered during the “Dark Knight” movie’s run in theaters, is a recent example of an event-oriented LTO as is Starbucks Gingersnap Latte or McDonald’s Egg Nog Shake or Krispy Kreme’s Red Peppermint Iced Yeast Doughnut, all introduced as LTOs in December 2008. Earlier in the year, Wendy’s Baconator as well as KFC’s Smokey Chipotle Crispy Chicken Sandwich and IHOP’s Cheesecake Pancakes drew attention, customers and dollars. Sometimes LTOs are returning items, such as McDonald’s McRib Sandwich. FRI says some chains may publicize four to six LTOs next year, but most will do two to three. About 40 percent of chains, however, will not engage in any sort of LTO promotion.

Protein flavors, as evidenced by items like the increasingly popular Angus beef burgers, will become more important during the downturn. Protein flavoring as a process is increasing and will continue to do so, mainly for items that are simply “smoked” such as smoked ham, smoked bacon, smoked sausage, smoked chicken, smoked turkey or smoked baby back ribs.

Flavor specificity next year will continue to increase with meats that are hickory smoked, mesquite grilled, applewood smoked, oven roasted, honey barbecued, parmesan crusted, honey mustard coated, peppered, beer battered, tempura battered or coconut breaded. Currently, 9 percent of chain and independent menu items advertise a protein flavoring, but it is estimated that a far larger percentage actually are flavored.

Flavors imparted by the cooking process are powerful persuaders and sales will increase for menu items that are advertised as wood grilled, country fried, chargrilled, golden fried, brick oven baked, rotisserie roasted, pan fried, flame broiled, braised or blackened.

Rough road

Even with the success CKE is having, the company is still taking steps to ensure its place in the market.

Haley says the company doesn’t have a full value menu like those of Burger King and McDonald’s. The company has made more of a focus on its signature items such as the Thickburger, which are premium quality. However, he says that they are looking into bringing in more less-expensive items. Perhaps not the full value menus of its competitors, but more than what’s already available at other chains. The company is taking other steps as well.

“We’re dropping coupons more now,” Haley says. The step brings in incremental consumers, people who may not have come in before, but are taking advantage of the coupons. It also allows CKE to improve the quality of its premium sandwiches and provide more incentive for people to come in.

But that doesn’t mean successful chains are completely immune to the effects of the economy.

CKE has seen some trends with its customers. “The main one is we have seen the value products, the sales on those go up a small amount,” Haley says. “Coupon redemptions have gone up. There have been several research studies showing that people are clipping and using them more to save money.”

Also, while CKE is still planning to expand, how fast it expands may be pulled back a bit. With the drop in home construction, locations that offer good traffic potential are becoming harder to find.

“The quality sites aren’t as available as they once were,” says Haley. Since CKE’s brands are regional, they do still have some room to grow. He says that the Carl’s Jr. brand will be expanding into Texas and the company just signed an agreement for a franchisee to open new Hardee’s locations in Kazakhstan. He also says that CKE has kept food costs under control.

Other companies are also taking steps to keep profits up in the tough economic climate. Paul says that casual-dining chains are doing everything they can to save money. Lower- priced items are appearing on menus. Combo meals are becoming popular, allowing a restaurant to get more value out of a single visit. Discounting and couponing even with sit-down restaurants are becoming more common.

“They’re reducing costs, some are reducing hours,” he continues. “They’re sending servers home between 2 and 5 (the lull between meal times). There’s more shopping for supplies and getting more supplier labels. They’re doing lots of things to improve their margins.”

Even companies that are doing well now are preparing for harder times that could still be ahead. Darden said in its quarterly report that it expected a 1.25 to 2.25 percent decline of U.S. same-store sales in fiscal 2009.

“Given the challenging economic environment and rising unemployment, we think it’s prudent to plan for appreciably softer same-restaurant sales results at Olive Garden, Red Lobster and LongHorn Steakhouse in the second half of our fiscal year,” says Otis. “So, we are revising our financial outlook accordingly to incorporate the expected level of negative same-restaurant sales trends. On a positive note, we have seen some improvement in our cost environment and this, combined with the aggressive cost management that’s been underway for some time now, should partially offset the adverse margin impact of the anticipated sales weakness.”

Casual-dining chain Red Robin, based in Greenwood Village, Colo., has also had a challenging year.. In a conference call for the fiscal third quarter, Eric Houseman, president and chief operating officer, said that there was a comp store sales decrease of 2.2 percent.

“This consisted of a 3.8 increase in price and mix, which was more than offset by a 6 percent decrease in guest traffic,” he said in the call. “For comparison purposes, we reported a 4.8 percent comp store sales increase in the third quarter of 2007, which was driven by a 3.7 higher price and mix and a 1.1 increase in guest counts.”

He went on to say that over a two-year period, the company still saw a rise of 2.6 percent in comp trends, but the most recent numbers do show the difficult economic climate. The chain, known for its hamburgers, was also increase total revenues 10.6 percent.

“The third quarter of 2008 was unusually challenging for Red Robin and for the casual-dining industry as a whole,” said Denny Mullen, chairman and chief executive officer of Red Robin. “The shock effect of the financial crisis on the capital markets intensified pressure on consumers who are already feeling pressure from higher energy costs, food and other costs, along with declining home values. These events have caused us and many restaurant operators to reassess our business and operating plans.”

Paul says Technomic’s expectations are that a pickup in business won’t start until the second half of 2009, and even then the increase won’t be the high growth seen in recent years.

Haley of CKE didn’t make any predictions for how the hamburger franchiser views next year. He does think that it will be like the company’s last quarter, but that doesn’t include wild cards such as continued layoffs across the economy.

“My personal opinion: Chains that operate with low profit margins will be under pressure for the coming year,” Haley says of the industry as a whole. “I think you’ll see some franchisees throwing in the towel, some companies going away in the next year. That’s part of any contraction. But at the end, there’ll be less competition for the companies that survive.”