On the Margin
Are restaurant results predicting a recession?

Are restaurant results predicting a recession?

This post is part of the On the Margin blog.

Economic signs seem to be pointing toward a downturn. Job growth slowed to a paltry 38,000 jobs, according to federal data. Consumer confidence declined. The federal reserve appears unwilling to raise interest rates out of economic concerns. 

And restaurant sales are weakening.

Both MillerPulse and Black Box Intelligence reported weakening same-store sales in May. Seeming to confirm this, Sonic talked about a weakened consumer environment as it said same-store sales rose just 2 percent in the quarter ended May 31. 

The Wall Street Journal, citing numbers from NPD Group, noted that visits to quick-service restaurants were flat in the three months ended in May. The Journal also noted that fast-casual restaurants saw a decline last month for the first time since 2004, and suggested that these declines could signal a jittery consumer.

We’ve been noting for weeks now that consumers appear to be less willing to tolerate menu price increases when they see prices falling at their local grocery stores. If consumers see lower costs for the price of chicken or steak, they’ll stock up and eat at home more often.

That might be hurting the industry this year. There is a correlation between slowing sales and the emergence of the restaurant-grocery price gap.

Wall Street certainly appears to be in agreement. Investors hit restaurant stocks hard — the NRN Restaurant Index fell 2.5 percent. By comparison, the Dow Jones Industrial Average fell less than 2 percent.

But it’s not entirely clear that slowing quick-service sales are indicative of an economic slowdown. It’s not even clear that sales overall are slowing down.

Restaurant sales numbers aren’t all in agreement. While same-store sales indices reflect a weakening environment, overall restaurant sales according to federal data appear to be doing fine.

Restaurant sales increased 6.9 percent year over year in May, according to federal data. Grocery sales increased 2.2 percent.

While menu prices can explain a lot of that gap — restaurant prices are growing at a far higher rate than grocery prices — it can’t explain all of it. And while we’ve said federal data undercounts groceries bought outside of traditional retailers, those numbers still suggest people are more willing to eat out than eat in. 

And quick-service concepts typically benefit from an economic slowdown, unless it’s really bad.

In the fourth quarter of 2008, when the Lehman Brothers collapse signaled a financial meltdown, the three largest burger chains’ same-store sales averaged 3.5 percent growth. It wasn’t until 2009, with the worst recession in 75 years more than a year old, that the chains’ sales turned negative.

Contact Jonathan Maze at [email protected]
Follow him on Twitter at @jonathanmaze
 

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