Cheesecake Factory (NYSE: CAKE) operates 162 upscale casual dining restaurants under its namesake in the United States. The company also includes 14 Grand Lux Cafes, a growing secondary chain with a more upscale design. Additionally, The Cheesecake Factory owns 1 restaurant under the RockSugar Pan Asian Kitchen mark. The company is unique in that it offers both a broader menu selection and more upscale experience than many of its more casual peers. It is also able to compete with more upscale restaurants, by pricing its selections on the lower end of the upscale casual dining spectrum. Because Cheesecake Factory restaurants operate near capacity, opportunities for same store sales growth are limited. Instead the company has achieved steady growth by increasing its number of stores. At the same time, the company has successfully established both Grand Lux and Cheesecake Factory as two distinct brands in the eyes of consumers, giving the company the opportunity grow both concepts without fear of cannibalization.
In a sluggish economy, even upscale restaurants can feel the effect of consumers tightening the grip on their wallets. The Cheesecake Factory feels this effect even more-so because of it's position as a low-price upscale restaurant. Because its position attracts inspirational middle-class and even lower class consumers, the consumers that feel the effects of a sluggish economy the worst, the Cheesecake Factory will feel the negative effects of these customers cutting back on spending. With lower traffic flow, the company's bottom line will suffer. As a result, in 2009 the company's comparable store sales growth at its restaurants was -2.6%.
The Cheesecake Factory operates 177 upscale, casual, full-service dining restaurants: 162 under the Cheesecake Factory name, 14 Grand Lux Cafes, and 1 RockSugar Pan Asian Kitchen. 96% of the company's sales come from its restaurants and the remaining comes from its bakeries (which are inside the restaurants).
Consumer spending on casual dining is discretionary in nature. In slow economic times, consumer's quickly decrease expenditures on services like dining. The Cheesecake Factory feels this effect even more-so because of it's position as a low-price upscale restaurant. Because its position attracts aspirational middle-class and even lower-class consumers, the consumers that feel the effects of a sluggish economy the worst, the Cheesecake Factory will feel the negative effects of these customers cutting back on spending. With lower traffic flow, the company's bottom line will suffer. As a result, in 2009 the company's comparable store sales growth at its restaurants was -2.6%.
Because the company's restaurants operate at full capacity, that is the restaurants are typically always full and customers usually have to wait to be seated, growth within already existing restaurants is extremely limited. Since the restaurants are open 7 days a week into the late hours of the night that area of growth has already been exhausted. The only way a full capacity restaurant can grow is if the company makes physical expansions to the building, more chairs and tables are added, or if they raise prices -- all of which are undesirable for the company. Instead, the company must grow by opening new restaurants which is costly and poses risks. The company plans to open three Cheesecake Factory restaurants in 2010.
Along with labor and rent costs, rising commodity costs will depress profits. The company will be forced to either absorb the impact of higher costs and suffer from lower earnings or pass on its costs to customers by raising prices and risking losing customers. Because the Cheesecake Factory has year-long contracts for many of their commodities, they are partially protected against this. For example, in 2009 the company's bakery business benefited from a year-over-year contracted price for cream cheese, which kept costs down.
The Cheesecake Factory competes in the casual dining segment, which is defined as full-service restaurants serving moderately-priced food in a casual setting. The Cheesecake Factory has lower prices than their upscale competitors.
Some of The Cheesecake Factory's competing companies are:
Darden Restaurants (DRI): Olive Garden, Red Lobster, Bahama Breeze
P.F.Chang's China Bistro (PFCB): P.F. Chang's China Bistro, Pei Wei Asian Diner, Taneko Japanese Tavern
Brinker International (EAT): Chili's, On the Border, Macaroni Grill, Maggiano's