Americans love The Cheesecake Factory. The eatery known for its massive 21-page menu, dozens of dessert options, and ancient Egypt-inspired decor was ranked as one of the top casual dining restaurants in the U.S. in 2019.
“We’re the doggy bag kings of the industry. No one goes home without a doggy bag or a second and third. We have no early birds in Florida, because everybody gets the value, and they have two or three more meals at home. And that’s really worked for us.” But the eatery popular with everyone from NBA stars to cheesecake aficionados has fallen on hard times as the coronavirus pandemic has wreaked havoc on the restaurant industry.
As of December 2020, about 17% of restaurants in the U.S. have shut down permanently due to Covid-19, according to the National Restaurant Association. The casual dining sector has been particularly hard hit. So, after 40 years in business, will the Cheesecake Factory be able to regain its momentum? And will the chain’s takeout and delivery service be enough to offset the decline of the dine-in restaurant experience?
The Cheesecake Factory roots reach back to 1949. For more than two decades in the basement of a small duplex in Detroit, Michigan, Evelyn Overton baked her signature New York-style cheesecakes. She had help from her husband, who handled sales and children who folded pink cardboard boxes.
By 1971, the couple had outgrown their underground kitchen and relocated to North Hollywood, California, to open a small bakery. Evelyn’s son and future CEO, David Overton, ran with the concept, and in 1978 opened the first Cheesecake Factory restaurant in Beverly Hills, California.
The menu quickly expanded in the 1980s to include everything from chicken tacos, meatloaf, pizza, baby back pork ribs and, of course, cheesecake. In the 1990s, the company grew, too, adding restaurants and debuting on the Nasdaq at two dollars and 63 cents a share on September 18th, 1992. In May 1999, the company launched the Grand Lux Cafe in the Venetian Resort Hotel Casino in Las Vegas.
“Well, we like to think of Grand Lux as a kicked-up Cheesecake Factory, one or two notches higher just with the products we use and the fanciness. It’s really like a grand European café.” By 2005, The Cheesecake Factory had 91 restaurants, 2 bakeries, and a billion dollars in sales. The company’s stock price hit an all-time high closing price of $67 on May 3rd, 2017, 32% higher than a year earlier. But the company was facing major headwinds: an oversupply of restaurants in the industry, a reluctance among consumers to spend, and increased competition from fast casual restaurants weighed on the brand, according to analysts.
“As people move from casual dining down, they also move from white tablecloth down to casual. And I believe, you know, it’s entertainment. It’s a meal. It’s easy. We think we’re doing fine. That’s why we have not stopped or slowed down our growth plan.” “The industry has largely, at least on the full-service side, been in secular decline for the last 10 or 15 years.
So, really struggled with traffic. You know, traffic has usually been down pretty consistently in the space. A lot of share within the restaurant industry has gone to limited service, which is more fast food or fast casual.” In 2018, the company also faced higher labour costs and legal fees. But the company doubled down on the full-service restaurant business, buying eatery North Italia and Fox Restaurant Concepts in October of 2019. As of January 2021, The Cheesecake Factory had a market cap of $1.7 billion dollars.
It owned and operated 294 restaurants in North America and had 27 franchises abroad.
Since its start, consumers have flocked to The Cheesecake Factory for its massive menu, featuring more than 200 items, including pizza, seafood, steaks, chicken, burgers, pastas, salads, omelettes and, of course, cheesecake. “Cheesecake Factory has over 200 items on their menu, which is far and above what anyone else has in the industry in terms of freshly made food.
And one of the reasons they’re able to do that is because they have a high percentage of cheesecakes, which are a high margin, a high percentage. And it’s a secret sauce that really no one else in this space has.” They also show up for the price. The average check per guest, including beverages and desserts, was $23.50 cents in 2019, 38% more than 2005.
As Americans shift to healthier diets and rivals trim their offerings to cut costs, could the Cheesecake Factory’s menu weigh on the brand? Each year, the Center for Science in the Public Interest, a non-profit group that advocates for healthier foods, announces the winners in its Xtreme Eating Awards. Most health groups say that the average person needs only about 2,000 calories a day or less.
In 2017, the Cheesecake Factory received two Xxtreme Eating Awards for a 2,300-calorie bowl of pasta that includes sausage, pepperoni, meatballs and bacon, and an alcoholic milkshake with nearly a thousand calories. And in July 2019, the restaurant’s 2000-calorie-packed Cinnamon Roll Pancakes won the Xxtreme Eating Awards, too. It was the 21st award the company had received since 2007.
The advocacy group said the dishes help explain why 2 out of 3 adults and 1 out of 3 children and teens in the U.S. are overweight or obese. And while the company is renowned for some of its more overindulgent offerings, it has a lower calorie option, too. In 2011, The Cheesecake Factory debuted its new Skinny-licious menu, featuring dishes with 590 calories or less. The restaurant also updates its menu twice a year, but shows no sign of paring back on the number of its offerings, according to one analyst.
“You know, a lot of restaurants did simplify during the pandemic. Cheesecake did not. I think if you are going to look at one differentiator for cheesecake, what their competitive holy grail, their big differentiator, it is that menu. I mean, there, I don’t think anyone else can execute the breadth of menu that they have. And I think they’ve been loath to give away that secret sauce. And it kind of dumbed down their menu because it might end up doing more harm than good.”
THE DECLINE OF CASUAL DINING
The casual dining business in the U.S. is a competitive one and includes restaurants like Olive Garden, Applebee’s, Chili’s, Outback Steakhouse, and of course The Cheesecake Factory. “We’re one of the few that are really in what we call upscale, casual dining. And that is the area that’s above all the casual dining and right below dinner houses. And it’s a very special niche.
I think we really understand it very well.” Prior to Covid-19, full service restaurants have been an onslaught of competition from quick service restaurants like Chipotle and Shake Shack. “So, if you think back maybe 20 years ago, there was a big difference between an Applebee’s, for example, and a McDonald’s. And, you know, in the last 20 years, there have been a number of different concepts that have come to play, whether it’s a Shake Shack or Chipotle or you know, McDonald’s has definitely elevated their offering as well.
So, you’ve seen less of a gap in terms of trade down. And so, from a consumer standpoint, the food can often be similar, sometimes even better, and it’s faster and limited service.” Covid-19 has only added to those problems. With new dining restrictions in place and business travel cancelled, during the quarter ending November 29th, 2020, the Olive Garden’s parent company Darden Restaurants said net sales fell by 19%.
Same-store sales at the company plunged 20% during the same period. It’s a similar story for Chili’s parent company, Brinker International. In the first quarter of 2021, sales fell 6% from the prior year, and same-store sales, system-wide, were down 11%. “But I think those companies that focused really on experience, whether it be entertainment or even fine dining, I think those are the categories where you know, again, it’s focused on experience.
They don’t have many to-go, delivery or takeout options. Those are the ones that are going to really struggle in this environment. And a lot of them are going to have to focus on reinventing themselves or the experience. For them, making sure that safety, consumer safety, is front and center is going to be a challenge in a lot of cases, because it’s going to deviate from how they’ve operated in the past.”
To combat the drop-in customers, full service restaurants like Brinker have been beefing up their delivery ground game. In June 2020, the company launched its first virtual restaurant, It’s Just Wings through a partnership with DoorDash. Brinker International expects the business to gross more than $150 million in sales its first year. “None of these restaurants were really built to be fast food restaurants, to focus on takeout or to focus on delivery, right? And so, I think that’s been the challenge for a lot of these guys is they just need to figure out how to do it.
” Bloomin’ Brands, the parent company of Outback Steakhouse and Bonefish Grill, have been making investments, too. The company said in May 2020, its takeout and delivery business tripled. That digital growth has helped. For the quarter ended October 23rd, 2020, Bloomin’ Brands saw third quarter sales decrease by 20% from the prior year, and U.S. same-store sales fall by 13%. And it might have been The Cheesecake Factory that has taken the hardest hit from Covid-19. At the end of March 2020, The Cheesecake Factory furloughed 41,000 workers and said it would not be paying its April 2020 rent.
In the quarter that ended September 19, 2020, the restaurants saw sales plummet by 12%. During the same period, same-store sales fell by 23%. And in December 2020, the U.S. Securities and Exchange Commission said it fined the Cheesecake Factory $125,000 for misleading investors about the impact Covid-19 had on its business. But it wasn’t all bad news.
In April 2020, private equity firm Roark Capital invested $200 million in the company, and according to analysts, like its rivals, the restaurant’s push into delivery and takeout has started to pay off. In 2018, the Cheesecake Factory signed a delivery agreement with DoorDash. By 2019, takeout and delivery at the Cheesecake Factory made up 16% of sales, 78% more than 2015.
And in October 2020, The Cheesecake Factory said from the beginning of the fourth quarter 2020 through October 27, restaurants with reopened indoor dining rooms captured on average 90% of the prior year sales levels supported by 40% of off-premise sales mix. CNBC reached out to The Cheesecake Factory, but they declined our request for an interview.
In July 2020, California Pizza Kitchen filed for bankruptcy. And in October 2020, Ruby Tuesday filed for Chapter 11 bankruptcy protection in a bid to cut debt and reorganize following a loss of customers due to Covid-19.
“Now, there’s no question, though, that with dine-in, in a lot of parts of the country gone until the end of the year, you know, casual dining is going to have a rough winter, and it’s going to emerge in 2021 a much smaller and leaner part of the restaurant and food service business for sure.” With consumers shifting to take out and ordering online, The Cheesecake Factory, along with the casual dining sector, has faced serious obstacles due to the pandemic.
And according to some analysts, an even bigger issue for the brand could be its locations. Around 80% of Cheesecake Factory restaurants are located at or near the mall. And according to Coresight Research, about 25% of America’s roughly 1,000 malls will shut down in the next three to five years. But not everyone agrees. “I would note that this dynamic between mall traffic and Cheesecake Factory sales has not been as linear as many investors believe it to be. And I think the most salient evidence of that is that the malls were closed in California throughout much of the state until recently.
And within that time frame, while Cheesecake Factory was only limited to outdoor seating, there were often waits for their patio seating. So I think that theory among investors is probably the most persistent knock on the company. But yet it hasn’t really manifested itself in a direct correlation to the performance and the PNL.” Despite these issues, with about 100,000 restaurants and bars in the U.S. closing permanently, the coronavirus pandemic, an unlikely accomplice, might just be the solution to the company’s problems.
“Clearly, this is an environment where the big are getting bigger, and we’ve already heard there are about 100,000 restaurants that have closed during the pandemic. It’s largely been independents; it’s largely been full service. And these larger chains like Cheesecake Factory can really capture share in an environment like we’re in today.”