'Sorry, We're Booked': The Restaurant Slump Ends Rebound Means Fewer Deals But Discount Sites Remain; 15% Off at the '21' Club

By KATY MCLAUGHLIN
Staff Reporter of THE WALL STREET JOURNAL

Americans are dining out again, putting an end to the worst downturn in the restaurant business in a decade.

After a sharp downturn in sales growth that lasted three years, customers are returning to the table as a result of a healthier economy and an uptick in consumer confidence. The largest chains are reporting 5% to 6% sales growth in January and February compared with the year-earlier period, says market research firm NPD Group. Traffic is also increasing slightly -- up 1% in January, meaning not only are diners spending more money, but more people are going out to eat.

Fast-food establishments and major chains like Olive Garden, a unit of Darden Restaurants, are rebounding the fastest. But even fine dining restaurants, a segment of the industry that was particularly hard hit by the drop-off in business travel and expense-account spending, are reporting an uptick in sales. Smith & Wollensky, a chain of 15 pricey steakhouses, says sales are up 7% in January and February compared with last year.

The turnabout is already changing the landscape for diners. Last year, when the slump was at its worst, restaurants were scrambling to lure back customers with special discounts and new products like fast-food versions of Cobb salad and more recently, "low carb" menus. High-end restaurants flocked to participate in a new crop of discount programs tied to credit-card use or that rewarded people for booking online.

At a minimum, the uptick in sales will probably mean hearing "sorry, no tables" more often. Some restaurants also say the deals they offered last summer won't be back this year. In the height of the slump, for instance, the Morton's of Chicago steakhouse chain sent out a direct mailing to 600,000 customers offering a five-course meal for two for $75. The chain has no plans to repeat it.

But one key feature of the restaurant recession shows no sign of disappearing and in fact appears to have become a fixture in the industry. Restaurateurs have learned that even in flush times, online and credit-card-related discount programs -- once seen as a sign of distress -- can help book tables in off-peak times.

Sales are up 30% at San Francisco's Shanghai 1930

Even restaurants that are now doing well are sticking with programs like opentable.com, which lets patrons book online and get points that can later be redeemed for discounts, and dinnerbroker.com, another booking service that sometimes gets you a 20% discount. Dinnerbroker.com says it has added 23% more restaurants in the past year. Today, half of the restaurants in its roster offer the discount option, compared with 30% to 40% last year.

San Francisco restaurateur George Chen recently signed up his restaurant, Shanghai 1930, to offer a discount for people booking travel on Expedia.com in spite of the fact that sales at the restaurant are up 30% from last year. Mr. Chen, who in the past three years closed three restaurants in San Francisco due to the downturn, says he learned through the lean times that "we have to aggressively find really creative marketing to increase our market share."

Participation in another discount program, Rewards Network, formerly known as iDine, is also high. The program added 11% more restaurants in 2003, and changed its format so that nearly all restaurants offer 20% off at all times of the day. (Previously, many offered various discounts but only during off-peak times.)

It may seem logical that in good times restaurants would pull out of discount programs like these. But it some cases, they can't. Rewards Network, for example, works by loaning money to a restaurant, which then pays back the debt by offering discounts to program members. It takes restaurants an average of 10 months to pay off their debt. Also, the reality of the industry is that "through good and bad times, restaurants need access to capital," says Rewards Network chief financial officer Kenneth Posner. The "21" Club in New York says sales have bounced back 15% from last year but restaurant still offers discounts through dinnerbroker.com and Rewards Network (15% off the total check), as well as its own Web site, 21club.com.

Some analysts calculate that the rebound is even stronger. The Food Institute, which tracks the industry, says sales by food and drink companies rose an impressive 11% in February from a year earlier, based on number-crunching of data from the U.S. Commerce Department. (Those numbers reflect business activity at a broader range of companies beyond just restaurants and bars, such as caterers, airline-food contractors and in-house cafeterias at hospitals and other institutions.)

Restaurants are hiring more staff this year than they have in any of the three years since the downturn began, says Hudson Riehle, an economist at the National Restaurant Association. The strongest month for job growth in the past year was this January, a traditionally slow month for the industry.

While the strong numbers indicate a rebound, it's important to remember that growth now is being measured against unusually low numbers last year.

Last year, the average American dined out or grabbed fast-food-to-go 200 times last year, a decline of 4.3% from 2000. Some 3% of the nation's restaurant workers lost their jobs from May 2001 to May 2003.

Even though the industry is now rebounding, sales growth still isn't back to what it was in the late '90s. Back then, restaurant industry sales were rising about 3% a year, adjusted for inflation. That rate fell to less than 1% during the slowdown in 2001 and 2002, according to the National Restaurant Association. The growth rate has roughly doubled since then, but that's still a far cry from the boom years.

The overall sales rebound also partially reflects higher prices, because many restaurants have raised how much they charge for a hamburger or cheese platter as a result of higher costs for beef and dairy products. Tony Wannone of Greco & Sons in Carol Stream, Ill., a company that supplies restaurants in the Chicago area with food supplies, says his beef costs are 80% to 90% higher than last year, while his dairy costs have shot up 50% to 80%.

Part of that is due to last year's mad-cow scare, which stopped imports of beef from Canada, a major supplier. Restaurants that serve a lot of beef, like steakhouses Morton's of Chicago and Smith & Wollensky, raised prices in 2003 as a result of higher food costs. But pricey steaks don't appear to be deterring customers. Sales rose nearly 15% at Morton's in the last quarter of 2003.

THE DISH ON RESTAURANT DEALS

Many restaurants are doing a lot better this year than last, but diners can still benefit from discounts and deals.

Restaurant:Shanghai 1930, San Francisco
Change From Last Year:Sales are up 30% from a year ago.
What's Different:The restaurant joined dinnerbroker.com and offers a discount on Expedia.com.
Deals:Reserve an off-peak table (6:30, for example) on dinnerbroker.com and get 20% off.

* * *

Restaurant:Smith & Wollensky, 15 locations
Change From Last Year:Sales in January and February were 7% above year-earlier period.
What's Different:The menu is about 3.6% pricier because the restaurant is paying more for beef this year.
Deals:The VIP card can get you a table when the restaurant is crowded, and occasional free drinks. The restaurant gives the card to regulars, though customers can also ask for it.

* * *

Restaurant:South Water Kitchen, Chicago
Change From Last Year:New name, new concept, same owners.
What's Different:Last year it was called Mossant Bistro, served French food, and cost about $25 an entree. Now it's a $20-an-entree American home-cooking joint.
Deals:Each day of the week, the bar offers discounts on different drinks, like $5 martinis on Mondays and $4 bourbon Wednesdays.

* * *

Restaurant:Morton's, 60 U.S. locations
Change From Last Year:As of the last quarter of 2003, sales up 15%
What's Different:During the slump, Morton's sent out direct mail offering a two-for-one deal. The chain has no plans to repeat it.
Deals:Some branches offer complimentary wine tastings with hors d'ouvres. Look on mortons.com under "events" for a listing.

* * *

Restaurant:McDonald's
Change From Last Year:U.S. sales are up 20% this February from the year-earlier period.
What's Different:In 2003, McDonald's introduced a line of "premium salads," which drove a resurgence in sales.
Deals:Recently said it will phase out the "super size" option (which lets people increase order size cheaply). But the Golden Arches is still pushing its "DollarMenu."

* * *

Restaurant:'21' Club, New York City
Change From Last Year:Since the first of the year, sales are up 15% from a year ago.
What's Different:Restaurant has done direct mailings to up to 20,000 people about a $37 dinner deal plus free parking.
Deals:Members of Rewards Network (formerly known as iDine) can get a 15% discount.

Write to Katy McLaughlin at katy.mclaughlin@wsj.com