While today’s economic storm isn’t expected to pass any time soon, restaurant operators and analysts predict a parting of the clouds for the industry in the not-too-distant future.
Observers said three performance-driving gale-force winds together may help push the industry forward in the months ahead, including consumers’ need to escape the mounds of negative economic data; the comparatively low ticket for dining out, versus other discretionary expenditures; and the first-in-first-out recessionary nature of the sector.
“At some point it seems battle fatigue sets in and, as a protective conditioned response, consumers look for an escape,” Bob Derrington, a restaurant securities analyst at Morgan Keegan & Co., said in a note to investors. “They look for comfort. They seek out some refuge in the storm of daily living. Restaurant dining can provide that escape.”
Derrington said the restaurant sector will hold up better than other consumer sectors, such as auto manufacturers or retail chains, because the industry fulfills such basic needs as eating and socializing.
“The good news for the restaurant industry is that consumers typically get hungry about every four to five hours, generally three times a day, seven days a week, 365 days a year,” he said. “While consumers’ budgetary constraints have forced some to make do with less, it’s the systemic underlying demand that the restaurant industry serves which has [kept] and, we believe, will keep the industry’s chains active, relatively vibrant and ultimately profitable.”
While conceding that the industry is not nearly as robust as it was just a year ago, Derrington noted that it is still performing at higher levels than other consumer sectors. The same-store sales declines at various restaurant chains could be worse, like the declines of between 20 percent and 40 percent at retailers or those of as much as 50 percent at auto manufacturers.
By comparison, domestic same-store sales increased by an average of 0.4-percent at quick-service chains and fell by an average of 7 percent at casual-dining brands for the latest quarter, according to Nation’s Restaurant News research. The data is based on reports from publicly traded companies and their brands for the most recent quarter. The fast-casual sector showed an average domestic same-store sales decline of 1.6 percent. Meanwhile, coffee and snack chains posted a 5.4-percent dip, family-dining chains saw a 3.2-percent drop, and pizza chains reported a 2.5-percent decline.
As counterintuitive as it sounds, helping the industry spark sales may be the never-ending deluge of negative economic information, sources said. Unemployment is at a 25-year high; the net worth of American households fell by the largest amount in more than 50 years in the fourth quarter; the stock market has posted declines not seen since the 1930s; and the U.S. recession already is the longest in a quarter-century.
“People are looking for an escape, and we’re an easy aspirational escape at our price point,” said Rick Rosenfield, co-founder and co-chief executive at California Pizza Kitchen Inc.
Rosenfield said that while sales are off from a year ago—the casual-dining chain’s same-store sales fell 7.2 percent in the fourth quarter—California Pizza Kitchen restaurants across the country still are filled with families looking for a good time.
“People like to be out,” he said. “They may spend less than they used to, but they want to be out. That’s the advantage we have.”
At CEC Entertainment Inc., the parent to pizza and entertainment chain Chuck E. Cheese’s, the battered economy has helped spark sales.
“We found that when times get tough, with all the doom and gloom, people really go back to basics,” said company spokeswoman Brenda Holloway. “We’re benefiting from that a great deal.”
She noted that children’s birthday parties, which parents never want to deny in good times or bad, as well as decisions by families to take “staycations” rather than travel on vacation, have helped Chuck E. Cheese’s.
At T.G.I. Friday’s, the casual-dining chain has built some of its latest promotions around fulfilling the customer’s need for a fun escape. The chain, with more than 600 locations in the United States, has hosted nationwide Mardi Gras celebrations as well as the “World’s Largest Inauguration Party” to foster a sense of community.
“Consumers in general are seeking more refuge,” said Andrew Jordan, senior vice president of marketing for T.G.I. Friday’s USA.
The chain, owned by Carlson Restaurants Worldwide, declined to offer sales figures for its promotions.
More evidence suggesting a sales upswing for restaurants comes from recent RBC Capital Markets data that shows a possible bottoming out of negative consumer sentiment when it comes to decisions on dining out. The firm’s March Restaurant Snapshot Survey revealed that fewer consumers are looking to further cut expenses on dining out during the next three months, the first time RBC’s research has pointed in that direction since November 2007.
Fifty percent of consumers said they were planning to spend less at restaurants over the next 90 days, RBC data showed, which was a 200-basis-point, or 2-percent, improvement from February results. Respondents who said they were planning to spend more at restaurants remained stable at 5 percent.
“While this may prove to be another head fake, the bottoming trend is stronger,” said Larry Miller, restaurant sector analyst at RBC Capital Markets. “We have seen a stabilization in spending plans—at very low levels—over the last three months after a year of progressively worse restaurant spending intentions.”
Other anecdotal evidence is starting to point to a light at the end of the tunnel for the U.S. economy as well. This month, Federal Reserve Chairman Ben Bernanke said the recession could end this year if the U.S. banking system is successfully shored up. Speaking on CBS’s “60 Minutes,” he expressed optimism, noting some progress in the financial markets and a plan to stabilize those markets.
“I do think that we will get it stabilized, and we’ll see the recession coming to an end probably this year,” he said.
Other federal moves, like President Barack Obama’s $15 billion plan to help small businesses—through reduced lending fees, eased tax burdens and increased bank liquidity—also could help turn the economy.
Speaking at a conference this month in New York, restaurant securities analyst Paul Westra also pointed to reasons for optimism.
“It is extremely, extremely scary out there,” Westra said, “but it is 10 times better than it was in November.”
He pointed to recovered money market fund liquidity, improved interest rate spreads and bond activity returning in recent months.
“This is 1982, not the 1930s,” he said. “The recession should end this year.”
