Predictions for a strong 2011 abound, from operators feeling that sales have started to return to analysts looking toward a slow but steady consumer and economic recovery.
It seems to me that all signs of late for the industry, whether third-quarter conference calls from the largest of restaurant companies or expectations of resumed growth at regional chains, point to better days ahead.
The most recent consumer restaurant spending survey from analyst Larry Miller at RBC Capital Markets shows a record-high number of respondents who plan to spend more at restaurants in the next 90 days. A record-low number of respondents said they would be spending less at restaurants. Miller has been doing these surveys since 2008, or “not far from ground zero of the economic meltdown,” he says, and the two-year high is encouraging.
“The greater appetite for restaurant spending may have been fueled by the results of the mid-term elections, which restored a more normal balance of power in Washington, and by stronger equity markets,” he said. “Either way, the trend is clear — consumers’ spending plans have been and continue to be on the rise.”
There’s more good news: Commodity costs are expected to increase in 2011, but at a much lower rate than originally thought. While inflation was a big concern at the mid-point of the year, most predictions now call for average increases in the low-single digits for total commodity buckets. That’s a very manageable rate for most operators, whether through minor price increases or improved total sales.
And even more: Banks and lenders are more vocal than they have been during the past few years, saying they are open for business and ready to lend again. At November’s Restaurant Finance & Development Conference in Las Vegas, a production of Franchise Times, deals were being made; money was on the table; and spirits were again high. Wells Fargo said it was more active than ever. GE Capital said it was getting back to normal. And CIT Group said Small Business Administration lending would indeed be helped by the government’s latest moves to increase total loan amounts and to guarantee up to 90 percent.
The money flow hasn’t returned to pre-recession levels, but the credit freeze is over. John Hamburger, president of Franchise Times and the Restaurant Finance Monitor, said in his latest newsletter after the Las Vegas conference that there is “more money out there chasing deals than there are deals.” Strong words from a veteran journalist who is plugged into the financing world better than most.
Are we all just asking for a holiday hangover in 2011? It depends on what you look at.
Technomic’s prediction for industry sales shows an improved performance across all segments. The Chicago-based firm calls for a growth rate of 1.6 percent for U.S. restaurants and bars, up from a growth rate of 0.1 percent in 2010. In real terms, when you back out menu price inflation, Technomic’s predictions still call for an industry decline in 2011, but at a rate of 0.4 percent, which betters the negative growth rate of 1.4 percent in 2010.
Still, the market research firm also points to a potential for a double-dip recession, citing consumer sentiment that is still stuck in pessimistic territory and the facts that one in six Americans is either unemployed or underemployed, and disposable personal income is basically flat.
Many analysts continue to remind the U.S. restaurant industry that there still is a meaningful supply-demand imbalance, especially for the mature quick-service and casual-dining segments. More locations will have to close to match the lower levels of demand from the U.S. consumer, they say.
And Malcolm Knapp, a watcher of restaurant sales trends and longtime industry observer, describes the recovery the industry may see using the pit master’s mantra “low and slow.” He has not yet decided to wear rose-colored glasses.
But if the best way to predict the future is to revisit the past, 2010 has given the industry a lot to be positive about:
• A return of private-equity investment in the sector, from Papa Murphy’s double-digit purchase multiple to Burger King’s $4 billion price tag;
• Rising stock valuations, from more than 10 stocks hitting annual highs just this month to the NRN Stock Index reaching highs that trump pre-recession levels;
• An NRN same-store sales chart that logs more positive numbers than negative results across all segments;
• A renewed market for franchise deals, with completed buying and selling at such chains as Applebee’s, KFC and Jack in the Box;
• And a pulling back on loss-leading discount marketing and free food offers.
Given the positive momentum as the year closes out, I’d put my money on a better 2011.
Contact Sarah E. Lockyer at slockyer@nrn.com.
