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Prime locations, calm commodity prices may offer some relief in ’09

Prime locations, calm commodity prices may offer some relief in ’09

Restaurant operators nationwide are arming themselves with value promotions, new menu offerings and continued cost cutting to fight against what is shaping up to be a challenging 2009.

The year ahead is not likely to provide the industry with its much-needed sales turn around, according to both operators and new data from the National Restaurant Association. Some relief could be found, however, in more favorable real estate and lease trends, more stable commodity costs, and the recalculation of more operator-friendly supplier contracts.

“This is a tough year to handicap,” said Rick Carucci, chief financial officer at Yum! Brands Inc., one of the largest companies in the industry. “You have to assume in 2009 that the consumer is still weak and you’ll need to be on your ‘A’ game.”

In current dollars, foodservice industry sales are expected to increase 2.5 percent in 2009 to $565.9 billion, the NRA said. Backing out a projected 3.6-percent rate of menu price inflation, however, industry sales are expected to fall 1 percent, marking the second consecutive year of contraction in real sales growth and the first time a two-year drop has been posted since NRA data became available in 1971. Full-service sales are expected to total $182.9 billion in 2009, up 1 percent from 2008 but down 2.5 percent when adjusted for menu price inflation. Quick-service sales are expected to total $163.8 billion this year, up 4 percent from 2008 and up 0.4 percent when adjusted for inflation.

Macroeconomic factors contributing to the weak outlook for 2009 include an expected drop of 1.2 percent in real gross domestic product, the first projected decline since 1991; a projected 0.2-percent uptick in real disposable personal income; and a projected drop of 2 percent in U.S. jobs, according to NRA research. The restaurant industry itself is expected to post its first workforce contraction since 1991, with an expected 0.5-percent reduction in 2009.

The forecast comes on the heels of a difficult 2008. During the year foodservice industry sales rose 3.3 percent to $552.17 billion but fell 1.2 percent on an inflation-adjusted basis, and wholesale food prices posted an 8-percent jump, the largest increase in nearly three decades, according to the NRA. Consumers also cut spending to the tune of a 3.7-percent, inflation-adjusted annual rate in last year’s third quarter, as the recession firmly took hold. It was the largest spending decline in 28 years. Pundits and operators alike blamed 2008’s woes on such industry factors as rapid unit development and lack of concept differentiation and such economic factors as the financial and credit market meltdown and consumer cutbacks.

“The combination of industry overcapacity and a very weak macroeconomic backdrop is likely to keep industry competition at a heated pace, particularly in the historically weak early months of the New Year,” said securities analysts Bob Derrington and Destin Tompkins of Morgan Keegan & Co. Inc. “We believe the biggest winners in early 2009 may be consumers who find plenty of dining deals as chains fight to hold onto whatever customer traffic they may have.”

The majority of survey respondents to an online Nation’s Restaurant News questionnaire last month said they intended to discount menu items to spark sales, cut operating costs, and increase menu prices and spending on marketing and advertising. Of the 122 respondents, 41 percent said they expected their sales would be lower than in 2008, and 31 percent said they would be about the same. The largest roadblock to profitability in 2009 is by far expected to be reduced customer traffic, according to 68 percent of respondents.

To combat the difficult economic environment, about 27 percent of respondents said they would cut costs, about 23 percent said they would promote discounts and about 44 percent said they would employ a combination of menu discounting, cost cutting and slowed development.

Yum! Brands Inc., for example, will be doing all of the above. The Louisville, Ky.-based franchisor of Taco Bell, Pizza Hut, KFC and other quick-service brands has said it would introduce a national value menu at KFC, cut expenses by $60 million, begin national advertising for Pizza Hut’s co-branded Wing Street chain, and continue a _ranchising effort to reduce the number of corporate locations in its 35,000-unit system.

Jim Bitzonis, a Buffalo Wild Wings franchisee and president and chief executive of Four M Capital LLC in Connecticut, said discounting has helped his restaurants thrive during the downturn. His locations use special offers like 50-cent wings, or $9.99 all-you-can-eat deals on Mondays, Tuesdays and Wednesdays to boost traffic on off nights.

Buffalo Wild Wings is one of few concepts that has posted positive same-store sales results throughout 2008. The parent company, Buffalo Wild Wings Inc. in Minneapolis, was one of just three public restaurant company stocks that posted a gain in 2008.

Bitzonis said relief on the cost side will come from renegotiated contracts for everything from food to supplies. With gas prices now at five-year lows, versus the near all-time highs this past summer, fuel surcharges that were levied are now getting removed, he said. If the supplier isn’t automatically rolling back the charges, Bitzonis said he is pushing back and most often garnering the concession.

In addition, his system of seven Buffalo Wild Wings locations is scheduling deliveries via ground shipping or asking for free shipping when available. He said most suppliers are happy to oblige. Finally, the company is looking to bring in house efforts that they used to contract to vendors. For example, the company now services and cleans its own beer lines, he said, after investing in a cleaning machine that Bitzonis said would pay off in the long term.

“There is no magic button,” he said. “It’s about execution.”

Looking toward other possible silver linings, about 33 percent of NRN survey respondents said that the lowering of commodity cost inflation would bring welcome relief in 2009. According to Morgan Stanley research, food inflation is expected to reach between 3 percent and 7 percent in 2009, compared with the spikes of between 10 percent and 12 percent in 2008. About 34 percent of survey respondents also said real estate and lease trends will provide some relief to the current economic hardships, as the industry continues a shakeout that has resulted in mass closures and more readily available properties.

About 36 percent of NRN survey respondents said they would increase menu prices in 2009 by between 1 percent and 3 percent, while about 31 percent of respondents said they did not plan to raise menu prices in 2009. Last year saw the largest rate of menu price hikes since 1990, according to the National Restaurant Association, with an average increase of 4.4 percent.

In 2009, about 43 percent of NRN survey respondents said they would find room in their budgets to increase spending on marketing and advertising, just like The Cheesecake Factory, P.F. Chang’s China Bistro and BJ’s Restaurants, which all have said they would increase ad spending in 2009 in the hopes of luring added traffic. About 40 percent of survey respondents said there would be no room in their 2009 budgets for increases on anything, including unit development or menu research.

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