Uncertain Economy Creates Anxiety in the Restaurant World
If you’ve turned on the television or radio, picked up a newspaper or magazine, or logged on to the Internet in recent months, you’ve heard about the looming economic crisis that is coming in the days ahead. Presidential candidates and pundits, bartenders and bakers, even the cashier at the convenience store are all talking about the same thing: are we headed into a recession or a depression? Restaurants are cautiously optimistic about how they will weather what some analysts call “the perfect storm” that could spell financial disaster for operators everywhere.
Here’s a short list of things that are creating an anxious climate as restaurateurs look toward the coming year:
- Rising fuel costs are eating into consumers’ budgets in obvious and hidden ways. Sure consumers are obviously paying more at the pump, but so are all the suppliers that deliver goods to retail outlets everywhere. From the post office to drycleaning, department stores to food courts, everyone is paying more in delivery costs; so ultimately, consumers foot the bill for that increased cost as well.
- Massively escalating commodity costs. Rising oil prices have a double effect on this important factor in a restaurant’s operational costs. There’s the obvious cost impact of commodity producers paying more for gas to deliver their products, but consider a not-so-obvious cost. As the government subsidizes farmers who plant corn for ethanol (used to make our existing stores of gasoline go further), less land is available to produce corn for animals to eat. Those animals produce much of our food supply. So if it costs more to feed them, it costs consumers more to eat them. To get more information on commodity pricing, take a look at http://www.foodservice.com/marketprices/ (free registration required).
- Significant decrease in consumer spending. Although food is a necessity, restaurants aren’t. People have less disposable income, at least psychologically, than they did last year. As the housing market slumps, homes are worth less. For most Americans, their homes are the greatest source of wealth. In some cases, they’ve lost 20% of the home’s value and thus their wealth, virtually overnight (or over the course of a year or so).
- More quick dining options available in grocery stores make it easier for consumers to create homemade-ish meals without all the work. Grocery stores and restaurants are competitors, especially as grocery stores expand their ready-made options from the ubiquitous rotisserie chicken to include other proteins, such as roasts, briskets, ribs, and pork loins. Grocery store food prices have risen as much as 17% by some estimates, but it’s still cheaper than eating in a restaurant.
As recently as January 2, the National Restaurant Association (NRA) was optimistic about 2008, predicting flat growth, but growth nonetheless, to the tune of $558 billion nationally. Operators are looking at a variety of strategies to keep on their preferred financial course:
- Darden Restaurants (http://www.darden.com), which operates Olive Garden, Red Lobster, Bahama Breeze, and Seasons 52, is focused on diversification, with most of its growth coming from its new chain, Seasons 52. It just purchased Long Horn Steakhouse to add to its portfolio. It made the decision last year to dump the underperforming Smokey Bones brand, which may help its financial picture look brighter.
- Gourmet Burger Kitchen (http://www.gbkinfo.com/) in the UK is slowing expansion plans, while continuing to grow same-store sales year after year.
- Starbucks (http://www.starbucks.com) is curbing domestic expansion plans and closing at least 100 underperforming stores. It’s also made a huge investment in retraining staff to focus on the experience of visiting its stores.
- Some brands, particularly in the QSR (fast food) market, are looking to make a price-value connection more solid in the minds of their consumers, offering combos and loyalty programs.
The NRA is also hoping that the coming economic stimulus package, realized in the form of rebate checks issued to consumers from the government, will help the industry. In a press release at the organization’s website (http://www.restaurant.org), the NRA’s [Senior Vice President of Government Affairs and Public Policy John] Gay said, “This measure promises to be good for the restaurant industry as we have seen a boost in restaurant spending when consumers receive rebates such as this from the government. And, of course, a great majority of our industry is small business.”