Casual dining chains could be one of the hardest-hit segments of the U.S. restaurant industry as it suffers from a massive drop in customers during the outbreak of the new coronavirus, experts say.

The restaurants, which have long counted on in-person traffic, are ramping up their delivery and curbside takeout offerings as stay-at-home measures and business restrictions keep diners away. Sit-down restaurants have long experimented with their own delivery services or partnerships with third parties like Uber Technologies Inc.'s Eats service, Grubhub Inc. and Postmates Inc. But experts say those full-service chains will be more challenged by a switch to drive-thru or delivery as their takeaway offerings are less robust than their quick-service peers.

"It's hard to suddenly ramp up delivery options," David Henkes, a senior principal at Technomic, a restaurant research and consulting company, said in an interview. "A lot of restaurateurs I think are trying to pivot and pivot hard and quickly into the delivery space."

Bigger public chains like Darden Restaurants Inc., which owns Olive Garden and LongHorn Steakhouse, and Texas Roadhouse Inc. likely have enough cash on hand to weather a drop in business, experts said. While the companies — in addition to other casual chains The Cheesecake Factory Inc. and Brinker International Inc. — are accelerating their to-go services, the uncertainty of how long the deep sales declines will last and whether more fundamental changes to the industry are in the works remain key challenges to how full-service restaurants manage the crisis.

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"There is a little bit of a cushion here, and they've taken deep cost control measures," Andrew Strelzik, a BMO Capital Markets analyst, said in an interview. "But to a large extent, this is going to depend on the duration and what a recovery looks like."

Before the outbreak, consumers were already opting for quick-service dining options. Limited-service restaurants, such as McDonald's Corp. and Starbucks Corp., reported $343.51 billion in sales in 2019, up from $271.25 billion in 2015, according to U.S. Census Bureau data. Full-service restaurants, meanwhile, reported $326.38 billion in sales in 2019, up from $273.11 billion in 2015.

The recently passed federal stimulus, which includes small-business and corporate lending, should help the restaurant industry manage some of the short-term pain of the crisis, though many are calling for further financial aid. Food service employers shed more than 450,000 jobs in March and experts expect continued layoffs for the industry as millions continue to seek unemployment benefits.

'Everything is on the table'

In-person visits to dining rooms have all but stopped during the outbreak of the virus. Seated dining across the U.S. remained at near-zero levels in April after dropping off in mid-March, according to reservation platform OpenTable, which tracked walk-in traffic in addition to phone and online reservations on its service.

Casual-dining chains had dipped into delivery and take-out before the outbreak, but the current pullback in in-person dining has them ramping up efforts to give customers their food.

Darden is exploring all its options for partnering with third-party delivery operators, but felt the company could do better with its own staff, Darden President and CEO Eugene Lee said during a post-earnings call March 19.

"Everything is on the table," Lee, who is going without a salary during the crisis, said during the call.

Darden did not respond to a request for comment but the company said it closed its dining rooms and shifted to to-go only sales March 20. More than 99% of the chain's 1,812 company-owned restaurants remained open, with the rest temporarily closed because of "limited demand or other operational constraints," the company said in an April 7 business update.

"While we have fought to find a new normal, we cannot ignore the fact that how we serve our guests will be different for longer than we had hoped," Lee said April 7.

Darden's same-store sales, which the company uses for locations open at least 16 months, declined 71.2% for the week ending April 5. Meanwhile, to-go sales at Darden's Olive Garden more than doubled for the week ending April 5 to $39,133 per restaurant, compared with the $16,191 posted for the week ending March 1. LongHorn Steakhouse had to-go sales more than triple in the same period to $19,858 per restaurant for the week ending April 5.

"With Olive Garden showing that The Cheesecake Factory and Chili's aren't the only casual dining concepts that can turn a parking lot into a restaurant – we are reducing the magnitude of our estimated SSS declines in coming quarters and raising our EPS estimates," Jeff Farmer, a Gordon Haskett Research Advisors analyst, said in an April 7 report.

The Cheesecake Factory Inc. is offering a limited menu along with online ordering, curbside service and delivery services and said April 2 it expects comparable restaurant sales to be down about 13% for 2020's first fiscal quarter. Of the company's 294 locations in the U.S. and Canada across Cheesecake's various brands, 30 are temporarily closed. The Cheesecake Factory did not respond to a request for comment.

Meanwhile, Brinker International Inc. said April 2 its brands — Chili's Grill & Bar and Maggiano's Little Italy — had adapted their business models to take-out and delivery because of coronavirus and that off-premise sales have grown. The company did not respond to a request for comment.

"We expect the combination of increased take-out sales plus further cost reductions to help drive the cash burn rate lower, but not to zero given the magnitude of sales declines," Peter Saleh, a BTIG analyst, said in an April 2 report on Brinker. "We expect larger chains such as Brinker to take share from independents given this disruption."

Skipping delivery

Texas Roadhouse, meanwhile, is skipping delivery altogether. Most Texas Roadhouse locations do not offer delivery and the company has not partnered with third-party operators, something that is unlikely to change even after the pandemic passes, company spokesman Travis Doster said in an interview.

Texas Roadhouse will likely continue to offer curbside pickup especially if consumers remain wary of public spaces.

"It's not made us think we're missing on delivery," Doster said.

The restaurant chain expanded its to-go program for company-owned restaurants to include curbside pickup and family value meals in response to states pushing dining rooms to close. Locations are also offering raw steaks that customers can take home to cook, Doster said. The company and its franchisees had 611 locations open as of Dec. 31, and have since closed two locations, Doster said.

Texas Roadhouse had been growing its to-go business in response to customer demand but was trying to do so without "impacting the dine-in experience," Tonya Robinson, Texas Roadhouse CFO, said during a Feb. 20 post-earnings call prior to the coronavirus pandemic. To-go sales made up about 7% of Texas Roadhouse's $2.76 billion in sales for 2019, which represented growth of about 10%, Robinson said.

Liquid courage

About two-thirds of consumers said they decreased visits to casual dining restaurants for the week ending April 3, according to a survey by Gordon Haskett Research Advisors.

In response to lower demand, companies are taking steps to shore up their balance sheets.

Darden said April 7 it entered a new $270 million loan agreement, bringing its total available cash to more than $1 billion. The company also cut back on marketing expenses and deferred almost all its capital spending.

Texas Roadhouse said March 19 it was drawing down $190 million under a revolving credit facility to give it more than $300 million in cash on hand with the option to add on another $200 million. The increased borrowing was taken as a precautionary measure to provide better financial flexibility for the "uncertain market conditions" brought by the pandemic, the company said.

"You're basically trying to survive on this very small slice of what used to be your total revenue," Henkes of Technomic said, adding the recently passed CARES Act could play a role in helping companies patch up shortfalls.

The federal stimulus provides small businesses with funds to use for payroll, rent, mortgage interest and utilities under the Paycheck Protection Program. The loans are designed to help companies keep workers on staff, and the U.S. Small Business Administration will forgive loans if all employees are kept on payroll for eight weeks.

The CARES Act was initially applauded by the restaurant industry but the National Restaurant Association said April 9 there are increasing warning signs more relief will be needed. The trade group said the COVID-19 crisis has cost 3 million restaurant workers their jobs and revenue losses for March and April are projected to approach $100 billion.

"A growing number of restaurant owners are concluding that the [Paycheck Protection Plan] is not going to prevent them from permanently closing operations in local communities," Sean Kennedy, executive vice president at the National Restaurant Association, said in an April 9 letter to congressional leaders.