Soaring Food Cost, To Be Boosted Minimum Wages, and Sagging Consumer Spending Rattled Restaurant Business

The $558 billion restaurant industry is hitting rough times, squeezed by many of the same woes affecting other sectors of the economy: tightfisted consumers, scarce credit and surging commodity prices. Adding to the pressure is a big jump in the minimum wage starting this summer, which will boost wages by 12% in some states. That's sent the industry into its worst slump in decades. Many chains have scaled back expansion plans or cut costs by skimping on things like extra sauce and free sour cream. Some are shuttering sites and laying off workers. Private-equity firms, which plunged into the business earlier this decade using gobs of borrowed money, are now especially vulnerable as those debts come due. This week's earnings results, despite some glimmers of good news, paint a sobering picture. McDonald's Corp., the world's largest restaurant chain, saw U.S. sales at restaurants open at least 13 months fall 0.8% in March, the first decline in monthly same-store sales in five years. Brinker International Inc., parent of Chili's, says it lost $38.8 million in its latest quarter. Analysts expect that when Cheesecake Factory Inc. reports first-quarter earnings on Thursday, same-store sales will have dipped and profit will have been pressured by spikes in the cost of dairy products, a key component of the chain's 30 cheesecakes. Restaurants will be watching closely next week, when the first government tax-rebate checks go out, hoping people use that cash to eat out. The slowdown has broad implications for the economy. The industry employs 13.1 million people, making it the nation's third-largest employer, behind the U.S. government and the health-care industry, according to the National Restaurant Association, a trade group. Many of those jobs are held by the poor and immigrants who have few other options for work. Vicorp and Buffets Holdings Inc., which owns the Ryan's Steakhouse chain and filed for bankruptcy-court protection in January, together are closing about 110 restaurants and cutting 4,300 jobs. Both companies say more cuts could be in the offing. For consumers, the closing of their neighborhood restaurants may be one of the most visible signs of a slowing economy. The chains anchor strip malls and highway exits, busy street corners and suburban downtowns. Trying to ingratiate themselves with the community, many restaurants fill their lobbies with local high-school pennants and yearbook photos or sponsor little-league teams. Moody's Investors Service has downgraded seven prominent national and regional chains, including Landry's Restaurants and the parent of Pizzeria Uno, to its lowest liquidity rating -- the most restaurants to be given this rating at once since it was created in 2002. One in five companies that winds up on this list ultimately defaults. Representatives for Landry's and Pizzeria Uno declined to comment.