The Great Casual-Dining Upheaval

Andy Saarima says he hasn't been to a "subpar" restaurant such as a Chili's or Applebee's in more than a year. The 29-year-old Chicago bartender would rather eat at Five Guys Burgers and Fries: "There are just so many smaller, faster options with way better food."

American twentysomethings are snubbing the restaurant chains their parents took them to as kids. Chili's, Applebee's, Ruby Tuesday (NYSE: RT - News), and other so-called casual-dining chains are already struggling to revive sales in the wake of an epic recession. Now they risk losing an important consumer demographic group unless they remake themselves. "If you have a little bit of money and you're educated, you want a boutique feel, less chain," says Brad Swanson, who runs the restaurant group at KeyBanc Capital Markets, an investment banking and equity research firm.

The casual-dining chains, which serve reasonably priced sit-down meals, are losing customers to such "fast-casual" upstarts such as Five Guys, Chipotle Mexican Grill, and Panera Bread (Nasdaq: PNRA - News), which offer counter service, trendy menus, and not much else. Sales at full-service restaurants, which include casual dining, fell 1.3 percent, to $166 billion last year, vs. a 6 percent rise for fast-casual chains, says researcher Technomic.

Revenue at Chili's parent, Brinker International, has declined for four straight years. Sales at DineEquity (NYSE: DIN - News), which owns Applebee's and IHOP, have slid in nine of the last ten quarters (in part because the company has sold about half its Applebee's locations to various franchisees). With analysts projecting continued declines this year, the casual-dining chains are revamping their operations to remain relevant. DineEquity spokesman Paul Kranhold says Applebee's biggest threat isn't newer rivals but "consumers who may be choosing to dine at home." Brinker officials declined to comment.

Ruby Tuesday, which grew revenue in its fiscal 2011 for the first time in four years, is licensing and opening stores from Lime Fresh Mexican Grill, a Florida chain that looks a lot like a certain fast-casual competitor. Lime Fresh restaurants feature hammered copper countertops and earth-toned walls and sell the usual Mexican fare—guacamole, quesadillas, burritos—made from "humanely raised" food. The chain "plays on sustainably raised, better quality, more natural ingredients—not too dissimilar to what Chipotle has done," says Robert Derrington, a restaurant analyst at investment firm Morgan Keegan. "It's clearly positioned towards a younger demographic."

Greg Ashley, Ruby Tuesday's vice-president of finance, says he doesn't view fast-casual rivals "as a threat at all," and the tie-up with Lime Fresh is just another growth opportunity. The chain plans to open as many as nine Lime restaurants over the next 12 months, adding to the 10 that exist now.

Applebee's is rehabbing its aging outlets—at about $200,000 a pop. For years the restaurants were cluttered with nostalgic Americana such as Tiffany-style lamps and carousel horses. Those are being swapped out for photos of local little league teams and firefighters to better align with Applebee's slogan: "There's No Place Like the Neighborhood."

Millennials like to hit the bar after work. Hence Applebee's "Girls' Night Out" parties, which are advertised heavily on Facebook. Ruby Tuesday is pushing $5 cocktails made with açai berries, as well as craft beers. The fast-casual restaurants are doing the same. Chipotle serves beer and margaritas at most locations, while beer and wine is on the menu at select Five Guys stores.

Menus are getting a makeover, too. About time, says Sarah Perry, a 27-year-old arborist in Chicago who associates Chili's and Applebee's with "cheap food." Five Guys "burgers are really fresh," she says. "You don't get that stale, come-from-the-box sort of taste." Five Guys is also showing customers the origins of its veggies. At one of its Chicago stores, a sign notes that the outlet's potatoes are from Clawson Farm in Idaho. Not to be outdone, Ruby Tuesday is dishing up spaghetti squash marinara, while Applebee's sells entrees with fewer than 550 calories.

Will it be enough? Chipotle, with its stripped-down menu and industrial interiors, continues to attract long lines at lunch. Panera is winning over yuppie crowds with fresh salads and artisanal breads. And the upstarts are expanding rapidly. Five Guys plans to add 600 new locations in the next two years, for a total of about 1,400. Smashburger, which has 100 stores, is targeting Miami and Los Angeles for new locations. Says Smashburger Chief Executive Officer David Prokupek: "We're getting a lot of people from casual-dining chains."

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