Recession Tenderizes Steakhouses; Morton's, Ruth's Chris No Longer "Well Done"
Top steakhouse brands Ruth's Chris Steak House (RUTH) and Morton's (MRT) have struggled to fill empty seats in the down economy. So they either need to find new ways to connect with today's price-conscious diners -- or face extinction.
Sales at Ruth's company-owned stores open over a year sank 11 percent in the fourth quarter, the parent Ruth's Hospitality Group said last week. In the nine months ended last October, Morton's sales at stores open more than a year were down a whopping 22 percent. For comparison, the restaurant industry as a whole saw sales decline less than 3 percent last year.
When a restaurant sees double-digit sales declines, that's a four-alarm fire, given the industry's skinny profit margins.
More affordable steakhouse chains haven't seen anything like the declines of Morton's and Ruth's. Texas Roadhouse (TXRH) saw sales down 2.5 percent last year, and Darden Restaurants (DRI) reported its Capital Grill chain saw a similar small decline. Message: prices are critical now.
With the National Restaurant Association forecasting just 2.5 percent growth for the industry this year, the economy is not going to ride to upscale steakhouses' rescue -- that much growth won't put either chain back into positive same-store sales territory. Both chains may need to radically rethink what they're serving and how it's priced and promoted to turn around their sales slump.
For instance, either chain could maintain their quality reputation by serving smaller steak portions at more affordable prices. If one of the high-end steakhouse chains took this approach, it would gain a first-mover advantage and could also appeal to dieters and foodies who may now need to be more frugal. Since it's unclear if American diners' old free-spending ways will ever return, the sooner these chains reposition, the better.
Ruth's and Morton's are taking some steps to bring customers back, but so far haven't made much headway. Morton's, for instance, rebranded its bars with a separate 12:21 name, hoping to appeal to draw the next generation to the chain by offering cheap bar food such as $5 mini-cheeseburgers. If it's working, it's certainly not showing up in the chain's sales numbers.
Morton's CEO also resigned abruptly in early February, and his replacement is Christopher Artinian, formerly a regional vice president for the company. This might have been a good time to bring in an outsider who could provide a fresh perspective on updating the brand, rather than an insider steeped in the company's traditional way of doing things. The existing Morton's team seems unable to grasp the extent to which the chain is out of touch with current trends. For its part, Ruth's bought itself some breathing room by raising some fresh capital last week to pay down debt -- $25 million in a private placement and another $25 million in stock sales.
These two chains have similar brand identities as long-established spots for quality special-occasion dining. At over 30 years old, both have a loyal core customer base from their early days that is aging and, as the old joke goes, fast approaching the point of "average age deceased." Either one could break out and take the lead in the prime steakhouse niche with a bold repositioning effort. And if neither does, they both may simply end up charred to a crisp.
Photo source: via Flickr user DiscoverDuPage