Outlook 2008: New England

SALES FORECAST

As the nation’s economy continues to sputter, restaurateurs in New England say they expect to see sluggish sales growth in 2008, much the same as they did a year ago, and will be happy just to hold their own by implementing such measures as controlling food costs and energy usage at their operations.

According to data compiled by the National Restaurant Association, a nominal growth rate of 4.1 percent is projected for the year, with sales expected to top out at approximately $23.95 billion in the region, which comprises such states as Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont.

Factoring in the NRA’s projected menu price inflation of 3.6 percent, the region’s real sales growth rate is expected to be 0.5 percent.

Despite the industry’s guarded optimism, New England’s economic growth, which is tracked by a measure called gross regional product, is expected to increase at an annual rate of only 2.2 percent through 2011, reports the New England Economic Partnership, or NEEP, a nonprofit organization that provides economic analysis and forecasts for the region. The group made the projection at its semiannual conference in Boston on Nov. 13.

NEEP also indicated that the downward spiral is related in part to increased energy costs, which would especially affect a cold-weather region like New England.

“The economy is a little softer, the business community a little more cautious and the obvious outside factors have slowed things up a bit,” says Rich Rosenthal, owner and chief executive of the seven-unit, up-scale-casual Max Restaurant Group in Hartford, Conn. “We had a phenomenal year in 2006, but ‘07 was pretty stagnant. As a company, 2006 gave us a great sales year—almost 10 percent—but in ‘07 a couple of our restaurants were down around 2 percent, while a couple of others were up 5 percent.”

In a state-by-state breakdown, restaurant sales in Connecticut are projected to grow 4.1 percent to approximately $5.19 billion; 3.7 percent in Maine, to $1.80 billion; 4 percent in Massachusetts, to $12.12 billion; 4.8 percent in New Hampshire, to $2.17 billion; 4.5 percent in Rhode Island, to $1.86 billion; and 3.8 percent in Vermont, to $816.4 million.

OPERATOR OUTLOOK

Despite the recent slowing in sales growth, New England restaurateurs say they are trying not only to figure out the economy’s unpredictability, but also to find ways to embrace the challenges associated with it and still succeed at business.

“We are trying to understand the economy,” says Jon Luther, chairman and chief executive of Canton, Mass.-based Dunkin’ Brands Inc., parent of the Dunkin’ Donuts and Baskin-Robbins quick-service chains. “With the significant underlying issues of the economy, such as the housing slump and rising gas prices, we’re just trying to give value back to our customers as best we can.”

That value, he says, comes in the form of limited-time offers, increased hours of operation, better service and new product innovation.

“You’re going to see an awful lot of innovation,” he says. “You’ve got to produce new product to keep customers coming back. And if you don’t deliver great service, you may not make it through.”

According to Luther, Dunkin’ Brands, which in 2006 reported total systemwide sales of $6.4 billion, posted marginal same-store sales growth in 2007 of 2 percent to 3 percent. He also says he expects a similar performance in 2008.

“We’re not discounters; we’re value players,” he notes, “and when you [look at the growth] in our comp-store sales, a lot of it is because of pricing and extended hours. It’s been a real challenge for us.”

Luther adds that in the quick-service segment, “the coffee guys are going to do just fine. We’ll still see some discounting, but that will slow down because it’s going to start affecting their P&L.”

2008 NEW ENGLAND FORECAST

In addressing the current state of the economy, Luther says “2008 doesn’t look a whole lot better than 2007, but I’m very bullish on ‘09. I think [that’s when] we’ll see good things.”

James Greco, chief executive of Burlington, Vt.-based Bruegger’s Enterprises Inc., parent of the fast-casual Bruegger’s Bagels chain, says commercial real estate in New England—a lack of available land and skyrocketing prices on what currently is available for rent or purchase—is another issue that could have a negative impact on business in the region in 2008.

“New England is a small place with a lot of people and not a lot of vacant land,” he says. “Commercial real estate in the region has actually become a tale of two cities, so to speak. The vast majority of what is available is in less desirable suburban markets, not in prime locations like metro Boston, where most people tend to congregate. I would say that in the last seven years, rental rates at those prime locations have at least doubled, but not at the smaller suburban centers, where there has been little or no increase in rent.”

Still, Greco maintains that the rates on those prime locations will at some point have to decrease or else fewer businesses will expand their operations.

“I’m not sure it can continue at the same pace,” he says. “Nothing goes up forever, and with interest rates higher and the economy slowing, there could be less demand for commercial real estate, less demand from retailers and less transactions.”

LEGISLATIVE HOTSPOTS

MASSACHUSETTS: Minimum-wage was set to increase to $8 per hour on Jan. 1; other issues under consideration are casino gaming, local meals tax option, a trans fat ban, paid sick leave, menu labeling and food allergen item disclosure.

CONNECTICUT: Trans fats ban; menu labeling.

NEW HAMPSHIRE: Minimum-wage set to increase to $6.55 per hour, effective July 24, and to $7.25 per hour, effective Sept. 1; other issues under consideration are the dissolution of teenage working papers and a trans fat ban.

RHODE ISLAND: Trans fat ban; choking law.