Midprice Restaurants

Startup Journal:

For years, investors who own restaurant stocks have tended to feed on midtier names, knowing that moderately priced chains tend to draw steady customers regardless of broader economic conditions.

That conventional wisdom has been pulled from the menu.

While business remained brisk at both high-end dinner houses and inexpensive fast-food outlets in the just-completed second quarter, restaurants with midprice menus suffered sales slumps.

People who tended to frequent such places instead stayed home or downgraded their dining options to the burgers-and-fries joints, thanks to higher gas prices and other costs, according to Wall Street research. And the near-term outlook for these restaurant operators remains iffy, as the price of oil closed above $75 a barrel yesterday, a record for the most heavily traded crude futures contract.

The falloff in guest traffic at casual- and family-dining chains has turned up the heat on some operators and given their shareholders agita. It isn’t clear that the proposed solutions — which include intensified advertising pitches and menu rejiggering — will put more patrons at the table.

Widespread sales declines at such establishments also have ignited fears that discounting might reappear, which in the restaurant industry, like others, tends to mean a race to the bottom.

CKE Restaurants Inc. Chief Executive Andrew Puzder, on a recent earnings conference call, said low food commodity costs “make it more affordable for our competition to offer discounted products and value menus than has been the case for many years.”

Mr. Puzder, whose Carpinteria, Calif., company runs the Hardee’s and Carl’s Jr. hamburger chains, added that such a pricing strategy is “an unfortunate development for the entire industry after years of focusing on menu-quality improvements.”

In the hotly contested pizza category, Domino’s Pizza Inc. has been offering buy-one, get-one-free pies on Tuesdays. Rival Papa John’s International Inc. launched a summer-long promotion in which customers can win cars, camping equipment and other prizes.

Cheesecake Factory Inc., which has prided itself on not having to advertise, began running radio spots in several markets recently after noting a slump in sales. The eponymously named chain said it has been seeing fewer older diners during late afternoons and also fewer young revelers in the late-night hours. The company, Calabasas Hills, Calif., decided not to take a price increase with the introduction of its summer menu. And it added smaller portions and cheaper options to its lunch menu.