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Does Size Matter When It Comes to Restaurants?

By Rich Duprey – Mar 27, 2014 at 5:00PM

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The largest chains continue to report growth, but which ones really excel depends on a few factors.

Bigger is better when it comes restaurant sales, but it might not be good enough. According to the results of a just-released survey by Technomic, the 500 largest restaurants in the US saw a 3.5% rise in sales in 2013, certainly better than one might expect considering all the doom and gloom heard about the industry. Despite the numbers being positive, however, they still represent a slowdown from the 4.9% increase achieved the year before.

As you might expect, fast-casual leader Panera Bread (PNRA) was one of the top performers in its category, with sales running 11.8% ahead of 2012, as that particular dining segment continues to represent one of the true bright spots in the industry. It also explains why so many other concepts are vying to go fast casual-lite.  McDonald's (MCD 0.65%) suffered a virtual halt in its growth as sales rose just 0.7% year over year, which is indicative of the troubles that fast food chains are witnessing.

What may be surprising is the heady growth achieved by certain full-service chains, such as steakhouses, which enjoyed overall growth of 6.4%, but saw individual concepts like Darden Restaurants' (DRI -0.35%) LongHorn Steakhouse jump 12.8%, and Texas Roadhouse (TXRH -1.26%) rise 11.1% in 2013.

Again, these are the largest restaurants in the business, and though overall sales were higher, they still suffered from a slowdown, which may even be more pronounced than what we're seeing here, as same restaurant sales -- sales that occur at restaurants open for at least a year -- continue to suffer. 

According to a different survey published earlier this year by Black Box Intelligence and People Report, restaurants saw comps turn slightly negative in 2013, inching down 0.1%. This represents a 1% decline from the 0.9% increase reported for 2012, and makes it the first time since 2010 the survey's index turned negative for the year. That was caused, however, by a sharp 2.1% drop in restaurant traffic, down 1.1% from 2012, and off 1.3% from same-store traffic in 2011.

What this suggests is that the only way restaurant chains are able to keep revenues rising is by opening more restaurants. For example, even though LongHorn saw revenues almost 1% higher year over year, its comps in the fiscal third quarter were up just 0.3%, or 2.9% on an adjusted basis to account for the "snow in winter" excuse many businesses are using, as well as a calendar shift for Thanksgiving week. Previously, though, it saw stronger results heading into the holidays, with 5% comp growth in the second quarter and better than 3% growth in the first. Overall Darden said third quarter sales at LongHorn jumped over 9%, driven higher primarily from the addition of 37 net new restaurants.

It's illuminating that steakhouses are doing so well, particularly since beef prices soared 25% to 30% between May and December. It suggests that, just as in retail, whereas high-end goods continue to weather the storm, companies catering to a middle-class consumer are getting crushed along with their customers.

Where Darden's steakhouse is doing yeoman's work in carrying the chain, its Olive Garden and Red Lobster concepts stumble on, leading to a rift with investors who want the restaurateur to shed these declining chains. It's only willing to spinoff the seafood shop however. 

Despite rising revenues, restaurants today find themselves in a difficult position, and it seems we'll see a further erosion in growth in 2014. Competition remains tight as concepts angle to differentiate themselves to gain customers, meaning investors might want to stick with those that have established a clear identity and successfully exploit their niche, while eschewing those who thrash about from one idea to the next in hopes that something works.

Panera Bread would be a good example of the former; McDonald's of the latter. With the table so crowded, you'll have to choose your chairs wisely if you want to join in the buffet.

Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends McDonald's, Panera Bread, and Texas Roadhouse. The Motley Fool owns shares of McDonald's and Panera Bread. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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