Outlook 2009: Midwest

Midwest restaurant operators are bracing for a lean year of high unemployment and expected dips in both consumer traffic and disposable income levels.

To combat the trends, independent and chain operators alike will employ various tactics in 2009, including the freezing of employee bonuses, repairing rather than replacing equipment, renegotiating terms with suppliers, promoting menu specials and price discounts, and raising menu prices.

Whatever operators do, however, they say they must maintain high levels of quality and service should they hope to survive.

“One thing we are not doing is cutting labor in the stores,” says Chicago-area Burger King franchisee Charles “Chuck” James III. “That leads to a doom loop—less staff means they work longer, the dining room gets dirty, the bathrooms get dirty. You might make more money in the short term, but the customer is not coming back. You have to bring people back in.”

James froze salary increases for himself and his senior management team heading into this year, and no one in his 48-unit company, James Restaurant Holdings LLC, received a bonus in 2008.

Although lower-priced, quick-service operations usually fare well in an economic downturn because customers trade down from higher-priced brands, James is concerned about the Midwest region’s high unemployment. According to the U.S. Bureau of Labor Statistics, the Midwest region posted an unemployment rate of 6.9 percent in November. Illinois and Ohio were at 7.3 percent, and Michigan continued to lead the nation with unemployment at 9.6 percent. The national rate was 6.7 percent.

“We see a number of customers trading down to us, but our core customer is getting traded out,” James says. “When unemployment hits past 8 percent…we lose our core customer base. Instead of spending $3 or $4 at Burger King for breakfast, they spend 50 cents on a bowl of cereal at home.”

Early indications point to Michigan experiencing more layoffs this year, says Andy Deloni, vice president of public affairs for the Michigan Restaurant Association.

ECONOMIC INDICATORS, PROJECTED PERCENTAGE GROWTH RATES, 2008 TO 2009

“Some have suggested that between 2008 and 2009, and possibly 2010, there will be over 100,000 layoffs in the state,” Deloni says. “We hope it doesn’t happen, but a lot of reports are suggesting it will.”

Ohio has already lost about 250,000 jobs in the past couple of years, which translates to a loss of $10 billion in disposable income, notes Geoff Hetric, president and chief executive of the Ohio Restaurant Association.

“Those who are treading water and holding their own are pizza and quick service, which is typical in a down economy,” Hetric says.

Indeed, Toledo, Ohio-based Marco’s Pizza recently completed its ninth consecutive quarter of same-store sales increases. It is not just the recessionary consumer trade down that has kept sales strong, however, according to Jack Butorac, president of Marco’s Franchising LLC, which franchises the chain’s 170 pizza delivery stores throughout 14 states.

“Michigan and Ohio have been in a recession for years,” Butorac says. “It is difficult out there and challenging. But you have to make it happen and not hide behind the economy.”

For example, as the costs of key ingredients like cheese and flour rose significantly last year, the chain worked out a hedging strategy, or the buying of commodity futures as protection against price fluctuations, he says. In addition, Marco’s saved $1 million by negotiating better terms from its pizza box supplier.

Butorac says he has sought out the counsel of financial experts and hired Don Vleck, the former head of distribution for Domino’s Pizza.

MIDWEST 2009 STATE-BY-STATE SALES FORECAST

“There are people who have done this before,” he says. “You’ve got to have good people. If you don’t have good people and a good product, you are handcuffed.”

While larger chains may have more resources and greater strength when it comes to negotiating with suppliers, independents have the advantage of flexibility, which allows them to quickly change menus and promotions to keep customers interested, observes John Kavanaugh, owner of the Esquire Club in Madison, Wis.

The family-style supper club has been able to keep repeat customer visits strong with weekday promotions such as a Friday Fish Fry and specially priced chicken dumplings on Tuesdays.

“If you just let your business come to you, will it come to you right now? Probably not,” he says. “We sat down with our staff and said, ‘O.K., what can we do to make Monday busier? What about Tuesday? What can we do on Saturday?”