A Texas-sized restaurant hurt?

The Fourth Ring of Hell, once thought to be California or Michigan, may turn out to be Texas, at least for restaurants, according to officials of the Sonic drive-in chain.

In true Texas fashion, the Lone Star State had largely fended off the economic downturn that gut-punched restaurants in most other places, the executives explained during a conference call with financial analysts.

Most of those investors were likely well aware of the recession’s impact on places like southern California or the greater Phoenix area, and especially Michigan. Unemployment and a drop in economic activity, from car manufacturing to buying a restaurant meal, had turned those locations into locales right out of a Steinbeck story. Restaurants had suffered accordingly.

But in Texas, “the economy seemed to hold up longer,” observed Sonic CFO Stephen Vaughan.

Not any more, he and his colleagues lamented. The state
“is now possibly suffering more on a trend basis in terms of increasing unemployment rate” than the regions that went off the cliff long ago.

President Scott McLain noted that sales taxes collected in Texas during October had fallen 12% from the level of a year earlier, and the total had dropped by 14% in November. Economic activity is clearly down, he suggested, and that’s having more impact on Sonic’s sales than competitor’s moves like cutting breakfast prices, he suggested.

That’s very bad news for Sonic, which has a very big presence in Texas. But, with the state second only to California in the number of restaurants it hosts, the late and severe downturn could prove awful for a lot of restaurant operators.

Of particular concern is unemployment, since that’s having a direct impact on the breakfast sales of restaurant chains. If people don’t work, they’re no longer buying a muffin and coffee on the way to the salt mines. They may not have that money altogether.

For Sonic, a chain known for its burgers and custom-mixed soft drinks, morning traffic “has actually held up relatively well,” said Vaughan. “It has not been a growing day part for us but it has not been one of our weakest day parts, either.”

Don't bogart that financial statement

This week's earnings reports are giving the restaurant industry a new riff for its all-night blues jam. And, man, it's a killer. If the business could find enough green shoots, its best shot at solace might be to smoke 'em.

Consider, for instance, the meltdown at the high end of the casual market. The comp sales figure provide the slide work on this one: Morton's, down 26.1%; Ruth's Chris, down 23%; McCormick & Schmick's, down 17.3%; Benihana, down 13.1%. Keep in mind that several of those big-ticket players have already armed themselves with steep discounts relative to their usual prices. There's just not enough expense-account and top-ticket tourism business to avert a sales plummet. Ruth's Chris, for instance, said a continuation of its comps trend would cost each store about $1 million a year in sales.

But that's casual dining, and the top drawer at that. Surely it's a different story for fast-food.

Sure enough, comps ebbed only a little more than a percentage point for company-run Jack in the Box restaurants, and the damage wasn't much worse for the burger concept's little sister of a brand, Qdoba.

But in analyzing the factors for the benefit of investors, Jack in the Box CEO Linda Lang acknowledged that breakfast, one of the areas of growth for the whole sector, had been weak.

"We also saw some fall-off in sales [of] side items, carbonated beverages, and shakes," added Lang. Throw coffee in there, and you have the key profit drivers of fast-food.

Jack's solution: Discount deeper. The chain recently added a head-turner called the Big Deal, a cheeseburger, taco, fries and a drink, for $2.99. And, says Lang, "We currently have additional value-priced product or promotions in test elsewhere in our system." She described them as "margin neutral or margin friendly," without revealing specifics.

BurgerBusiness, Scott Hume's site devoted to all things burgers, noted in a recent posting that $2.99 is the new $5, the rockbottom threshold where everyone wanted to be earlier this year. As he pointed out, White Castle and Sonic are already offering meals at that price level.

Even Hardee's, a proponent of heft, is dabbling with bargain-priced snacks, vis-a-vis its new biscuit holes.

Product giveaways have become a routine way for chains to flycast for more customers. But if an everyday meal costs a mere $2.99, will that hook stay as irresistible? Or might "cheap" become irreversibly associated in the public's mind with "quick-service"?

I don't know, but I bet we're going to find out.