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Red Lobster Isn't Quite Dead Yet

PORTLAND, Ore. (TheStreet) -- When a rumor circulated last week that casual dining chain Red Lobster was going to close its more than 700 locations in North America, only its parent company's denials made such a thing seem implausible.

Even after Darden Restaurants (DRI - Get Report) assured everyone that all was well, there's still little to convince diners or investors that the strip-mall favorite has much of a future. Once occupying the "fancy" pinnacle of the casual dining world, Red Lobster has become the industry bottom-feeder its crustacean mascot would suggest.

Same-store sales slipped 4.5% last quarter and Darden has been making noise about spinning off Red Lobster into its own entity. Even in a Darden portfolio that includes the Olive Garden, Longhorn Steakhouse and Yard House chains, Red Lobster falls somewhere beneath the Capital Grille in the pecking order. Darden issued warnings as early as 2012 that its 2 for $25 meal deals were falling short of the 2 for $20 deals offered by its competitors. It's been fairly disastrous since.

Red Lobster's pain has been spread around the casual-dining world like a shared appetizer. One of its adversaries, Chili's and Maggiano's Little Italy's parent company Brinker International (EAT - Get Report), reported earlier this year that the end of those deals coupled with the end of a Social Security tax cut would force it to lower expectations for 2013. NPD Group wasn't surprised and noted that the number of restaurant visits driven by deals rose between 3% and 5% at the height of the recession in 2008 and 2009, but slumped 3% last year.

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What casual dining establishments are quickly learning is that nobody's going to buy their reheated food or pre-fabricated atmosphere if they don't feel it's a value. The cost of dinners out rose nearly 3% over the last year, according to the Consumer Price Index. That's more than the 2.2% overall rate of inflation and isn't helped when a $10 promotional meal jumps to $12 or $14, jacking up the price 20% to 40%.

In Red Lobster's case, it's just not the only game in town anymore. It was always billed as a premium seafood spot, which made it a laughable afterthought in coastal areas where options were more plentiful. In landlocked places where such offerings were in short supply, it was destination dining.

At least until recently. As Outback Steakhouse and Carraba's Italian owner Bloomin' Brands (BLMN - Get Report) added the Bonefish Grill seafood chain to its family more than a decade ago and even lower-tier casual-dining chains like DineEquity's (DIN - Get Report) Applebee's added seafood to their menus at reduced prices, Red Lobster's appeal diminished. As Matthew Yglesias at Slate pointed out, those changes made Red Lobster seem not only overpriced by comparison, but both costly and subpar.

In casual dining, where even fast-casual establishments like Panera (PNRA) and Chipotle (CMG) have gained an aesthetic upper hand over their slower table-service competitors, chains have been quickly moving away from the cheery, cheesy '80s and '90s pre-fab archetype. Ruby Tuesday (RT), for example, ripped out the Tiffany-style lamps, ferns and brass, de-emphasized the salad bar and bathed everything in black and red. The company's share price has dropped nearly in the last year, it has unloaded three non Ruby Tuesday chains and reported flat sales. Darden decided to change the menus and Red Lobster and Olive Garden, tear down Olive Garden's Tuscan decor and tear off its trademark white uniforms in favor of black and has even toyed with the idea of removing servers altogether and going with a pay-at-the-counter system. Sales and earnings still haven't recovered, largely because none of it matters.

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