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Fine-Dining Chains Hit by Real Estate Pains in Pandemic

Photo Courtesy of CoStar.

Fine-dining restaurant chains are the latest sector of the restaurant industry to face closings and real estate pullbacks during the coronavirus pandemic, despite loyal customer followings throughout past economic ups and downs.

Popular upscale steakhouse chains Ruth's Chris, Morton's The Steakhouse and Fleming's Prime Steakhouse have all suffered significant sales declines because of capacity restrictions on their high-cost dining rooms, and they are responding by pivoting to carryout and delivery services, permanently closing some locations and seeking breaks on leasing arrangements at other sites. But it turns out carryout has its limits, because these customers don't think of these eateries when they think of takeout.

The upscale steakhouses typically tend to have customers who are "older boomers, which would be the most susceptible generation to COVID-19, due to their age and health risks,” Darren Tristano, CEO of Chicago-based restaurant consulting firm Foodservice Results, told CoStar News. Those restaurants are also at risk because of their elevated focus on full service, which "has had the most closures and constraints around dining room capacity,” he added. Unlike more casual restaurant chains, “fine-dining, high-quality product is best consumed on premise and is not top of mind for third-party delivery.”

Fine-dining restaurants, with a focus on upscale ambiance and average meal tabs north of $50, have generally held up comparatively well nationally during past economic downturns, in part because their core customers have more money to spend and are less disrupted by recessionary conditions. But capacity restrictions or dining room closings from the pandemic and the older demographic of the steakhouse restaurant customer base are creating different challenges for local, regional and national operators of the chains in a property-driven twist on the struggles hitting other parts the restaurant industry.

Executives of Ruth’s Hospitality Group, which operates more than 150 nationwide locations of Ruth’s Chris Steak House, said five company-owned restaurants closed in the second quarter because of lost sales and reduced capacities spurred by the pandemic.

Chief Financial Officer Arne Haak told analysts on a recent second-quarter earnings call that a 74% drop in total sales from a year earlier, to $28.4 million for the three months ending June 28, also prompted the Winter Park, Florida-based company to terminate leases at two locations out of seven where that it had been planning to open before the pandemic.

“We continue to actively negotiate with our landlords,” Haak said. “There are at least five additional locations that could potentially be closed if the pace of recovery slows or if we are unable to secure sufficient landlord concessions.”

Recent coronavirus case spikes in Ruth’s Chris’ two biggest markets, Florida and California, have spurred reconsideration about the long-term viability of some locations, especially those where the company was nearing the expiration of existing leases, said CEO Cheryl Henry. California has implemented strict regulations on dining, including closing most indoor dining rooms, and Florida has restricted capacity at indoor dining rooms.

“We were able to negotiate and get some abatements and other concessions around the leases,” Henry told analysts. “There are some we’re still talking to and there are areas where the markets are potentially the most difficult and [we] will try to understand what that looks like and restructure the partnership for the long term.”

More Patio Dining

Executives said Ruth’s Chris is deploying carryout and delivery services and reconfiguring locations to allow for more outdoor patio dining, and it is monitoring local regulations that would impact capacities, which range between 25% and 50%, depending on jurisdiction.

“The biggest question mark as we look forward is getting everyone comfortable with eating inside again in California,” Haak said, adding the company is also closely watching what happens with tourism in Hawaii, its third-biggest region for sales after Florida and California.

Local and regional media reports indicate that Morton’s The Steakhouse, among several brands owned by Houston-based Landry’s, has closed at least eight locations since the start of the pandemic, in cities including Denver, New Orleans, Philadelphia and Richmond, Virginia. Officials of the privately held Landry’s did not immediately respond to CoStar News’ request for a comment.

At Tampa, Florida-based Bloomin’ Brands, same-store sales at the upscale Fleming’s Prime Steakhouse, with 70 locations nationwide, declined 56.3% in the second quarter ending June 28, an even steeper decline than the 32.9% drop experienced by its mid-priced flagship brand, Outback Steakhouse, with more than 1,000 locations. The company said it closed 30 restaurants across multiple brands during the latest quarter, including 25 company-owned locations and five franchised locations.

“In California, where we have a large Outback franchise presence, as well as 20% of our Fleming’s locations, we are seeing more of a sales impact as that state is largely open for off-premises only,” Chief Financial Officer Christopher Meyer told analysts on a second-quarter earnings call.

Bloomin’ Brands saw total companywide revenue decline 43% from a year ago to $578 million in the second quarter, with same-store sales down 39.4%. Conditions have forced the company to pivot increasingly to pickup and delivery for all of its brands, which also include Carrabba’s Italian Grill and Bonefish Grill.

The company said it has had less sales disruption and need to make real estate adjustments in states that remained fully opened for much of the latest quarter before cases spiked, including Tennessee and Georgia. More than half of the company’s 129 locations that posted gains in same-store sales from a year earlier during the last week of July were in the South, Meyer said.

However, the Northeast and West, particularly California, remain challenging. The company reported 92% of its dining rooms nationwide are now opened in some capacity, posting 55% of sales on site and 45% off premises.

Bloomin’ Brands CEO David Deno told analysts the company as of June was paying all rents but was still in talks with landlords in order to make pandemic-related real estate adjustments. “We are taking the opportunity to restructure leases and reduce our cost structure,” Deno said.

Bloomin’ Brands said it plans to use the pandemic situation to scout and acquire new locations for future post-pandemic growth. “We don’t want to wish misfortune on any restaurant company, but there will be changes in the restaurant footprint and we’re going to have a chance to reposition assets, relocate restaurants, which was so successful for us prior to this,” Deno said.

“But there’s going to be more opportunities,” Deno told analysts. “So we’ll be able to put our restaurants in a more convenient place, the more updated restaurants. We’re certainly going to pursue that.”

2020 CoStar News.

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