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 labor 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 nonprofit 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 Skinnylicious 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 loathe
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 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 canceled, 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
a 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."
