Wednesday, July 15, 2009

Restaurants Burned by Deep Discounts

( I know many of our readers hold restaurant shares)

The deep discounts that restaurant chains have been offering to lure cash-strapped customers out of their kitchens are coming back to bite them.

Restaurant chains ranging from Denny's to Applebee's this year have been giving away food or offering deals to boost traffic slowed by the recession.

But as several chains prepare to report second quarter earnings in coming weeks, Wall Street is bracing for news that price cuts not only ate into profits but failed to bring in as many customers as hoped.

Same-store sales fell 8% at Yum Brands' Pizza Hut despite discounting.

Yum Brands Inc., whose Taco Bell and Pizza Hut brands have been emphasizing low-priced fare, reported Tuesday that earnings in its fiscal second-quarter ended June 13 rose 10%, excluding an acquisition-related gain. But same-store sales in the U.S. declined 1% due to an 8% decline at Pizza Hut, which has been offering discounts for online pizza orders and other deals.

"We've been hearing from a lot of restaurant management teams that discounting wasn't driving the traffic they hoped for," said Jeffrey Bernstein, an analyst at Barclays Capital.

Some bigger chains including McDonald's Corp. and Starbucks Corp. have avoided offering deep price cuts. But even they are boosting promotions. Starbucks has lowered prices on some drinks and McDonald's on Monday began a promotion called "Mocha Mondays," in which customers can get a free sample of iced or hot mocha from 7 a.m. to 7 p.m. every Monday until Aug. 3.