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Category: Net Lease Retail Tags: casual dining, Full-Service Restaurants



The casual dining industry, otherwise known as full-service restaurants, has felt the same adverse effects of e-commerce as traditional brick-and-mortar retail, department stores, and suburban mall centers. According to Bloomberg, consumer tastes have strayed from the sit-down experience model, evidenced by the rise and relative out-performance of local restaurants, fast food chains, delivery-focused companies, and fast-casual concepts. Full-service restaurants are desperately rethinking their business models to pivot and adapt, especially as cold weather limits outdoor dining. In this article, Matthews™ reviews how COVID-19 is impacting casual dining as well as the sector’s strengths and weaknesses.


The Casual Dining Landscape

Before COVID-19, investors had begun looking at the casual dining sector more skeptically for not keeping up with consumers’ changing tastes. Many attributed this to millennials, who prefer to visit fast-casual restaurants (limited-service restaurants), such as Chipotle or Panera Bread. Fast-casual restaurants often use fresh and locally sourced ingredients to prepare the same or better quality food than casual dining chains, only they provide the speed and price of a fast food chain. In many cases, limited-service restaurants have successfully marketed “healthier” menu options.


At full-service restaurants, slim or even negative margins on the sale of food items led operators to become fixated on selling high-margin items, such as alcohol. Meanwhile, technological advances in mobile ordering, delivery, or customer loyalty programs drew many to limited-service (fast-casual and fast food) restaurants. Delivery services, such as UberEats, Postmates, and DoorDash, make eating at home even more appealing, and these digital sales tend to favor limited-service restaurants. Furthermore, fast-casual meals hold much better in to-go containers for 20 minutes than more complex meals from casual dining chains, such as calamari or a Grand Slam breakfast.

Takeout and delivery are life rafts for all restaurants during dine-in bans as consumers dine in their homes more frequently. In many ways, major casual dining brands had the edge over the smaller competitors thanks to broader resources and brand-name recognition that took customers back to a simpler time. This trend is expected to continue, but alone, these sales are not enough to keep a casual dining location afloat. Many restaurants saw dramatic same-store sales decline during the height of COVID-19. According to Top Data, when the coronavirus pandemic began, casual dining restaurants saw 58 percent less traffic on average, compared to just a 30 percent decrease for fast food restaurants. As weeks went on, many restaurants that saw these declines began to see sequential improvements. However, same-store sales continued to decrease for casual dining brands, even as dining rooms were allowed to reopen. As a result, many casual dining brands have set out to change their brand to appeal more to millennials and adapt to new dining norms.


One would assume cost would be king during a pandemic; however, consumers’ definition of value during COVID-19 isn’t all about the price. It’s less about the deal and more about the food attributes. Growth in consumers taking advantage of BOGOs and digital discounts indicates that price is an important consideration. Other drivers of consumer decisions include food quality, variety, and “treating myself.” (Source: NPD).


Rebranding the Sector

Casual dining restaurants need to update their value offerings to attract consumers. Despite already having strong locations in many markets, the real variable of uncertainty is COVID-19’s impact on consumer behavior. Consumer expectations for casual dining have certainly changed; food should be high in novelty factor, healthy, and prepared fast. Ultimately, many established casual dining brands need to invest in a fresh rebranding strategy. Casual dining investors need to distinguish the safe harbor concepts, typically those located in profitable markets, in great locations, and tenants working towards revamping their brand.



Current On-Market Data

In Q1 2020, national asking cap rates in the casual dining sector increased to 6.59 percent. This is a 27-basis point increase compared to Q1 2019. However, cap rates didn’t increase evenly across the industry. Casual dining properties with corporate guaranteed leases generated cap rates of 6.25 percent, while franchisee leased properties had cap rates of 7.00 percent. Of course, this was almost entirely before the pandemic took hold in the United States.


COVID-19 has undoubtedly accelerated the problems that the weaker brands had to a large extent. The COVID-19 shutdown drove the softening in casual dining, and the casual dining sector is currently priced at a discount, 44-basis points, to the overall net lease retail market.


The table below shows NNN transaction data for full-service tenants, IHOP, Hooters, Denny’s, Chili’s, and Applebee’s. The exponential growth in days-on-market, cap rate, and sale discount, indicate a bearish outlook on future pricing. In 2020, 45 NNN properties were leased to the full-service tenants below and transacted with an average sale cap rate of 6.62 percent and 183 days-on-market. As of November 6th, 2020 there were 91 properties for sale leased to the same five full-service restaurant tenants with an average list cap rate of 6.63 percent and 212 days-on-market. By looking at these numbers, there is an apparent disconnect between buyers and sellers.



Lender & Financing

The lending markets for the restaurant and casual dining sectors have dramatically shifted in 2020. Already undercapitalized and with thin margins, restaurants cannot function profitably when foot traffic is down 50 percent, or even 35 percent, said Benjamin Sebraw, managing director for SMS Financial LLC. According to OpenTable, restaurant bookings in some states were down as much as 94 percent year-over-year at the end of Q2 and beginning Q3 2020. Locations without $4 to $5 million in sales do not have the margins to entice lenders or restaurant operators in the current market.


With dampened performance leading to a cycle of deteriorating liquidity and solvency, and the inability to secure additional financing, the sector will face challenges in the coming months. The largest U.S. lenders have significantly reduced their exposure to restaurant lending deals. Citizens Financial Group and Trust Financial Corporation, the nation’s second and third-largest restaurant lenders, decreased their $3 billion loan exposure by ten percent, collectively. Further, the top 20 largest U.S. restaurant lenders have reduced their exposure by as much as 15 percent. Lenders still considering new deals have dramatically shifted away from the “hunt for yield” notion, as pursued throughout the last decade; now they seek deals with less existing leverage, more equity contribution, and fewer borrower-friendly legal provisions or covenants. As of Q3 2020, Regions Financial Corporation’s management, the fourth-largest U.S. restaurant lender, identified 30 to 40 percent of full-service restaurants as “criticized,” and four percent were in a complete deferral. Maryland-based restaurant lender, Eagle Bancorp, works with restaurant borrowers to explore pivoting business models to restore cash flow to avoid defaults. However, despite their efforts, 42 percent of Eagle Bancorp’s total outstanding restaurant loans were also in deferral.


Operator Performance

Without liquidity, the undercapitalized industry is poised for further decline. Morgan Stanley analysts note that in their bear case scenario, the model indicates the best-capitalized restaurant companies, at current cash-burn rates, can exist for six months at best, and at worst, two months. Assuming pre-crisis balance sheets (not accounting for limited CARES Act funding), and with relative consideration to EBITDA forecasts, Brinker International, Bloomin’ Brands, Red Robin Gourmet Burgers, and The Cheesecake Factory will all face issues under existing covenants. Darden Restaurants and Bloomin’ Brands, two of the largest U.S. casual dining operators, have seen a deterioration of performance and short and long-term liquidity issues.


Casual Dining Outlook

John Gordon, a long-time restaurant analyst with Pacific Management Consulting Group, said in an interview that “locations that can’t reach sales of $4 to $5 million won’t have the margins to entice investors (or restaurant operators).” Diminished investment in real estate operations means that the net lease world is likely to observe an increase in stores going dark. Operators and parent companies are bearish on acquiring operations, or same-concept franchisees, in the hope of a value-add comeback. A combination of uncertainty and patience of a potential wide-scale modernization of full-service restaurants has left investors on the sidelines. Placing the pandemic aside, “raising money to buy distressed restaurants is tough, as casual dining traffic has been down in 65 out of the past 66 months,” said Michael Halen, senior restaurant analyst at Bloomberg Intelligence.


In 2021, investors in the sector will seek out restaurants that successfully navigate the many new dining restrictions. Some full-service casual dining chains have started implementing creative solutions, such as Shareable Family Packs from Denny’s and all-new virtual brands like “It’s Just Wings” from casual dining company Brinker International. The key metrics investors will look at as they decide whether to move back into the market include in-place rents, sales performance, residual real estate, and the lease guarantor and restaurant brand’s strength. Casual dining tenants must prove to net lease investors a sales trajectory of pre-COVID levels for transaction velocity and pricing to return to 2018 levels.


Casual dining brands with ongoing business models that can take advantage of increased curbside services offered during the current COVID-19 period will find success. Speed of service and convenience are becoming increasingly important for consumers; therefore, it is encouraged that casual dining investors lookout for brands moving in this direction. Corporately guaranteed leases or large franchisees with strong financials will remain in the highest demand among private investors.


A Look at 10 Casual Dining Brands

The Cheesecake Factory

According to The Cheesecake Factory, many consumers are eager to dine out despite the coronavirus pandemic. The restaurant is enjoying considerable wait times (up to 60 minutes) on the weekends at open units. With the large restaurant footprint (ranging from 5,500 to 10,000 square feet), The Cheesecake Factory allows flexible seating layouts, enabling the chain to recapture meaningful sales levels despite capacity restrictions. While same-store sales at The Cheesecake Factory restaurants were down 56.9% in Q2 2020 with the COVID-19 impact, Cheesecake units with reopened indoor dining rooms capture about 80% of prior-year sales levels in the quarter to date. The Cheesecake Factory, however, is a tenant that said they wouldn’t be paying rent in April because they have a lot of leverage. The units are so customized that it would have to be knocked down to be repurposed. The units are also large, so it would be hard for a landlord to fill that amount of space. According to Black Box Intelligence, full-service chains saw a 60% decline in same-store sales, but some brands beat the average. For example, The Cheesecake Factory experienced only a 46% decrease in same-store sales in March and had managed to boost off-premise sales by 85% since the final quarter of 2019.


Olive Garden

Olive Garden saw same-store sales drop by 39.2% for the fourth quarter in a row, ended May 31st, which CEO Gene Lee said was due to social distancing rules constraining the casual dining chain’s capacity. Lee said off-premise business helped the company reach positive same-store sales at about 10% to 15% of Darden’s units, the multi-brand restaurant operator. Olive Garden provided value by reducing delivery fees or rolling out value meal promotions. Promotional pricing was a strategy that casual dining chains relied upon heavily during the Great Recession and is likely to continue influencing the industry through the recovery.


BJ’s Restaurant & Brewhouse

At BJ’s Restaurants, same-store sales fell 57.2% in the second quarter ended June 30th. In late July, the number of units with open dining rooms fell to 70% from 95%, as many had to reclose amid spikes in the number of coronavirus cases.


Bloomin’ Brands (Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill, Fleming’s Prime Steakhouse & Wine Bar, Aussie Grill)

Combined same-store sales for Bloomin’ Brands’ four restaurant chains were down 63.9% in the second quarter ended June 28th. The company didn’t lay off any workers during the height of the pandemic, which it said was helping sales bounce back as restaurants reopened.


IHOP & Applebee’s

During the quarter ended June 20th, Dine Brands Global saw same-store sales fall 49.4% at Applebee’s and 59.1% at IHOP. Although the quarter was bad, it was not as bad as management expected, and CEO Steve Joyce said the challenging restaurant climate could provide the opportunity to acquire more concepts.



For the second quarter ended June 24th, Denny’s continued to see low same-store sales – down about 39% in June due to reduced operating hours. About 30% of the brand’s U.S. units were operating at the full 24 hours. The brand added Shareable Family Packs and streamlined menus to its toolkit.


Red Robin

Reb Robin Gourmet Burgers reported a same-store sales decline of 41.1% for the second quarter ended July 12th, with off-premise sales increasing 208.7% and accounting for 63.8% of total sales. The casual dining chain resumed its pre-pandemic turnaround plan, including remodels, a new prototype store, and expanded outdoor dining. They are planning to continue adding tents to restaurants, even as indoor dining resumes at most restaurants. Preliminary mid-year figures showed that the brand sees sequential same-store sales improvements, especially at restaurants open for on-premise dining. Restaurants with expanded outdoor seating are seeing improved sales results. For the week ended September 6th, company-operated restaurants reported a 21.9% drop in same-store sales. However, restaurants with limited indoor dining saw comps declining by 16.1%. Red Robin is undertaking the investment in technologies to improve the guest experience. These upgrades include a digital ordering platform and voice technologies to optimize the speed of service and improve the accuracy of online and phone order promise times.


Brinker International (Chili’s Grill & Bar, Maggiano’s Little Italy)

For the fourth quarter and fiscal year 2020 ended June 24th, Brinker International swung to a net loss of $49.1 million, or $1.20 a share, from net income of $46.7 million, or $1.25 a share, in the same period a year ago. Revenues fell 32.5% to $563.2 million from $834.1 million in the prior-year quarter. As of June 24th, Brinker owned, operated, or franchised 1,663 restaurants, including 1,610 Chili’s and 53 Maggiano’s Little Italy units. In June, the company introduced in 1,050 units the DoorDash-delivery-only “It’s Just Wings” virtual concept.


Buffalo Wild Wings

The brand opened its first “GO” concept restaurant in May in Atlanta, explicitly designed for takeout and delivery orders. This 1,800-square-foot facility featured a walk-up counter, digital menu boards, condensed seating, and TVs to entertain guests. Guests who call ahead can pick up their orders from heated takeout lockers for a contactless experience. Although launching a new restaurant may seem risky in the age of COVID-19, this takeout-focused format may position Buffalo Wild Wings to see substantial traffic.


The overall outlook for casual dining restaurant sales is meager. If brands do not pivot to changing consumer needs, there will be further consolidation in the industry. In 2021, full-service restaurants adapting to new-norms will closely mirror that of fast-casual, as many continue to incorporate delivery and new menu offerings. Investors in the casual dining space will either move out or trade into brands that address the pandemic’s restrictions accordingly and provide customers with a modernized dining experience.

For more information on the casual dining sector, please contact a Matthews™ specialized agent.






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