On the heels of Federal Reserve Chairman Ben Bernanke’s statement this month that the recession is “very likely over,” new data from Technomic Inc. shows that restaurateurs may have to wait awhile, perhaps years, before feeling an upswing.
According to the Chicago-based firm, 2009 and 2010 are expected to provide the foodservice industry with two consecutive years of sales declines for the first time ever. In addition, Technomic, which projects industry performance each year during events sponsored by the International Foodservice Manufacturers Association, said it doesn’t expect a return to real sales growth until late 2011 or early 2012.
Yet while Technomic’s projections are somewhat depressing, some operators are nonetheless upbeat, with many expecting their businesses will begin to recover as early as next year. They also anticipate improved profits, as the lower sales volumes have forced operations to become leaner and meaner, boosting the bottom line.
The mixed signals about the economic recovery likely reflect whether one looks at the glass as half full or half empty, observers say.
“There are always some that are more optimistic and some that are less optimistic,” said Janet McCullough, director, project operations at Technomic. “In addition, there is a huge variation in regional data.”
At an investment conference by RBC Capital Markets this month in New York, executives from leading restaurant companies agreed that the future of the macroeconomic environment remains difficult to decipher, but that the industry’s prospects can only improve.
“It is a cycle,” said Mike Murphy, president and chief legal officer at CKE Restaurants, the Carpinteria, Calif.-based parent of the Hardee’s and Carl’s Jr. chains. “We were at a down trend and now we’re headed toward an up trend.”
That isn’t to say that sales levels will revert back to the flush days of restaurant industry growth in 2005 and 2006, the restaurant executives noted. While consumer traffic will come back to the restaurant industry in the long term, the lower prices, smaller portions and consumers’ new views on spending may remain.
“There is a new normalcy,” said Rick Rosenfield, co-founder and co-chief executive of California Pizza Kitchen Inc. in Los Angeles. “We’ve reset the bar in terms of what revenues to expect, but people do go out, will continue to go out, and as consumer confidence increases, I’m a glass-half-full person that people will go out more.”
Total foodservice sales this year are expected to drop 3.8 percent on a nominal basis, which includes the assumption of 2.5 percent in menu-price inflation, according to Technomic’s forecast.
The outlook for 2010 includes the continuation of numerous challenges for restaurant operators, including low consumer confidence and a more costly regulatory environment. Sales are expected to fall again next year, although at a lower rate than in 2009.
The result is the first two-year decrease in nominal industry sales since Technomic began tracking results in the 1970s.
“Expect continued slower traffic,” Tim Powell of Technomic said at the market research firm’s Forecast and Outlook presentation on Sept. 17 in Newark, N.J. “A lot of people are not going to feel good about going out to eat. There is a ways to go before we see a rebound.”
The Technomic 2009-2010 U.S. Forecast and Outlook shows that total foodservice industry sales are expected to total $588.5 billion, including alcoholic beverages and non-food sales.
Projections for 2010 include a 0.8-percent nominal decline in total foodservice sales from 2009, and reflect an inflation rate of 1.5 percent.
Revised results for 2008 showed a 0.7-percent nominal uptick in sales.
The three years of 2008 through 2010 mark the weakest time frame in foodservice history, Technomic executives said. During that period, not only have same-store sales slowed for nearly all restaurants—first at casual-dining concepts and now even at quick-service players—but the total number of locations decreased as well. Once an industry driven by strong unit growth, the U.S. restaurant landscape will have contracted 3.8 percent, reflecting the closure of 21,425 units between 2008 and 2010, to total 549,555 restaurants, Technomic research showed. Almost 84 percent of those closures came from the full-service segment.
Topping the list of reasons behind a projected two years of nominal sales declines, however, is the pressured U.S. consumer, who is challenged by job losses, reduced income and fears of a long economic recovery.
“We’ve been in a recession for two years, and unemployment is expected to rise until 2011,” Technomic’s McCullough said. “That gives people a long time to get in that mind-set of cutting back.… After economizing for a while, it will take time to go back.”
Many restaurant operators agree with the dismal sales picture, according to a Technomic survey of 727 operators across all foodservice sectors. Less than half of survey respondents, or 44 percent, told Technomic they expect their own businesses to post an increase in sales in 2010. That is down from 62 percent who said they expected sales growth at this time last year.
To combat these trends, operators will continue to cut costs, focus on value, work to enhance customer experience through service and ambiance, and continue to innovate, whether via new menu items or expanded daypart service.
“Innovation is still a key weapon,” McCullough said. “Supplier support will be critical—it is not business as usual.”
Cited winning strategies included barbell menu pricing, seen at numerous quick-service chains such as Burger King and Taco Bell; readjusted supply chains, like the move to consolidate vendors completed at Ruth’s Chris Steak House; or new kids’ menus, like the one introduced at P.F. Chang’s China Bistro.
While sales traction proves challenging, one silver lining for operators is the expectation of increased profit. Many companies have spent this year cutting costs, evaluating expenses and improving efficiencies. Those actions have helped drive profits, Technomic said. About 51 percent of surveyed operators said they expect their profit to grow in 2010, up from 39 percent who were optimistic about profit growth at this time last year.
When adjusting the projected foodservice sales declines to remove menu price inflation, total foodservice sales are expected to fall 6.1 percent this year and 2.3 percent in 2010. The two-year string of reduced real sales, which assumes inflation of 2.5 percent in 2009 and 1.5 percent in 2010, follows another two-year string of falling real sales in 2001 and 2002. Technomic officials said they did not expect a return to real, positive growth until late 2011 or early 2012.
As has been the case for the past two years, full-service restaurants, which include casual-dining and upscale concepts, will continue to post the largest sales losses. In 2009, full-service segment sales are expected to fall 8 percent on a nominal basis and 10.2 percent on a real basis, to $165.7 billion, according to Technomic. In 2010, full-service segment sales are expected to drop 4.1 percent on a nominal basis and 5.5 percent when backing out menu-price inflation.
Limited-service restaurants, mainly quick-service brands and fast-casual concepts, are expected to see a flat sales performance in 2009 on a nominal basis, and a 2.4-percent decline on a real basis, to $189.4 billion, Technomic said. In 2010, limited-service restaurants are expected to post a 1.5-percent nominal sales growth and flat real growth.— [email protected]
