Outlook 2008: Midwest

SALES FORECAST

Restaurant sales in the Midwest are expected to increase by 3.7 percent in 2008, or just 0.1 percent after factoring in menu price inflation, the lowest predicted regional rise.

That lackluster outlook can be blamed on several pockets of high unemployment stemming from the loss of 1.2 million manufacturing jobs since 2001 in states bordering the Great Lakes. Michigan’s unemployment rate of 7.7 percent as of last fall was the highest in the nation, according to the federal Bureau of Labor Statistics.

“Ohio and Michigan are in recession,” according to Diane Swonk, chief economist of Chicago-based Mesirow Financial. There and elsewhere in the region, middle- and lower-income consumers are “trading down the food chain,” she says. Swonk predicts that energy prices will fall this year and that the mortgage issues will be resolved, which should help discretionary spending. “It won’t get a whole lot worse,” she predicts.

With the growth rate of real disposable personal income in Michigan and Ohio projected to increase well below the national average, hard-hit consumers will likely dine out less often and spend less when they do.

States with large metropolitan areas that have more diversified job opportunities are doing better than areas still struggling to replace manufacturing and farming jobs. With finance and technology helping to drive the economies of such markets as Chicago, Minneapolis-St. Paul and Kansas City, restaurateurs there are more optimistic than in other parts of the Midwest.

Rural areas are reporting the lowest growth in real disposable personal income, especially South and North Dakota and Iowa.

OPERATOR OUTLOOK

Several regional multiunit operators are forecasting modest sales increases of between 1 percent and 3 percent for 2008, but they do see pockets of opportunity in business entertaining, private parties and gift card sales.

ECONOMIC INDICATORS, PROJECTED GROWTH RATES, 2007 TO 2008

Sales in 2007 suffered from commodity and minimum-wage hikes, severe winter weather and rising consumer costs for essentials, led by gasoline and heating oil, operators say. Some report customer defection to newly opened units of national chains that boast lower menu prices.

Peter Bedzyk, president of 13-unit Timber Lodge Steakhouse of Minneapolis, expects sales to increase between 2 percent and 3 percent in 2008. He is banking on positive returns from a 30-percent increase in holiday gift card sales, a new menu with lower-priced items and an end to discounting.

“When gas prices go over $3, some of my core customers may go to Applebee’s and spend $12 instead of $20 at my places,” Bedzyk concedes. His restaurants suffered an overall sales decrease of 8 percent in last year’s first quarter, largely due to ice or snowstorms on weekends.

Scott Harris, owner of 16 Francesca’s Italian dinnerhouses in the Chicago area, shared similar woes, although his 2007 sales rose about 3 percent—an increase he hopes for again in 2008. “The restaurants are busy, but it’s a tough business,” he says.

“Our Christmas parties were great—corporations are spending money,” Harris says. “But how much can we charge for food?” He is reluctant to raise menu prices, even though his costs, especially for fuel and labor, have spiked. Undeterred by such challenges, Harris is scouting locations for new restaurants, venturing to distant Chicago suburbs that are seeing rapid growth.

Joe Saccone, partner of Hyde Park Restaurant Group near Cleveland, is planning to open two new Hyde Park Steakhouses this year, but not in Ohio. They will open in Sarasota, Fla., and Buffalo, N.Y., he says. His newest unit opened at the end of 2007 in a Hilton hotel in Daytona Beach, Fla.

2008 WEST FORECAST

“Northeast Ohio didn’t see the recovery after 9/11 that the rest of the U.S. has,” Saccone says. “It’s consistent but not rapid growth, and it’s more competitive.” Most of his 1-percent to 3-percent sales growth has come from small parties booking his private rooms, he adds. “Local businesses want private rooms instead of in the main dining room,” Saccone notes. He is adding three such rooms for a total of 80 seats to a restaurant in Columbus, Ohio.

In Oakland County, Mich., near Detroit, Bill Kruse of Kruse & Muer Restaurants is forecasting 2008 sales to be slightly down from 2007. Sales last year dipped about 3 percent at the four Kruse & Muer casual dinnerhouses, which have average per-person dinner checks of about $20. At the more upscale Rochester Chop House & Oyster Bar, with a $38 dinner check average, sales dropped just 1 percent, Kruse says.

“We’re expanding our marketing and merchandising to go after banquet sales and off-premise catering, which is new for us,” Kruse says.

LEGISLATIVE HOTSPOTS

ILLINOIS: Repeal of Chicago ban on sale of foie gras in restaurants; new statewide smoking ban, effective Jan. 1, 2008.

MICHIGAN: New taxes and fees to help plug state budget deficit; statewide smoking ban; new regulations for gift card expiration dates and dormancy fees; increased penalties for immigration violations; changes in the FDA food code.

MISSOURI: Immigration reform; new tax credit for employers who hire qualified high schools students for summer jobs.

OHIO: Mandated health insurance through employers; 12 weeks of unpaid pregnancy leave and a guaranteed job upon return to work; seven days paid sick leave for all employees.

WISCONSIN: Statewide smoking ban; full disclosure of fees charged for gift cards; minimum-wage hike with future indexing.