This post is part of the On the Margin blog.
The further we go into the second-quarter earnings season, the more it looks like I’m the lone voice of optimism in a sea of despair about the state of the restaurant industry.
That is: I’m not ready to declare the industry in a state of recession. Not after one mediocre quarter and one bad quarter.
As I said last week, restaurant CEOs — including McDonald’s Corp. CEO Steve Easterbrook — are largely saying economic uncertainty and consumer issues are at the root of the industry’s current issues with same-store sales weakness. Other executives appear to be on board with the idea. DineEquity Inc. CEO Julia Stewart echoed her general view that the consumer is “lumpy and bumpy” at the moment.
That may be right. It’s entirely possible the industry is at the start of a sales decline amid renewed economic weakness.
But there are a number of reasons I still believe it’s too early to say this — that the issue is rooted in a shift in industry sales toward different players, or toward grocers, or toward some combination of all of it.
Same-store sales are imperfect. Same-store sales measure the growth in existing locations, making them a short-term look at sales directions. And the concerns are rooted in a slowdown in this imperfect measure. And often these numbers are comparing against strong numbers the year before — Burger King’s 0.8-percent same-store sales decline came a year after a quarter in which its same-store sales rose 7.9 percent. That’s still a 7.1-percent two-year number.
But broader numbers appear to be OK. Restaurant sales rose 4.9 percent in June, according to retail sales data. That captures same-store sales and new locations. In 2007, with the country on the verge of a recession, that number had grown 3.4 percent and was weak all year before actually falling by the following December 2008.
The industry has been expanding. Restaurants are growing. They’ve been adding workers at a rate far greater than the overall economy for the past two years. In July, for instance, restaurant franchisees added 16,900 jobs. I talk with smaller and larger operators every day about their robust expansion plans.
Operators have access to low-cost debt, fueling their new unit development and old unit acquisition. Private-equity groups have been investing heavily in upstart concepts, pushing new unit growth. The expansion could be watering down the supply of restaurants, spreading sales toward a larger number of locations. The industry is saturated and competitive. The new units are only making it worse.
And let’s not forget grocery prices. Those lower food-at-home prices have to be enticing more consumers to eat at home more often. The gap between restaurant and retail food inflation is as wide as it has ever been. That has to be enticing to a sector of consumers even in an economy that’s going fine.
Other factors could be at play, too. It’s also difficult to ignore all of the protests and social unrest, as well as the upcoming election that appears to be as divisive and controversial as it has ever been. Some executives have cited these factors, and at least one analyst suggested it could benefit pizza chains.
Again, I’m not necessarily saying we aren’t headed for a restaurant recession. But it requires some time before we can fully make that call.
Contact Jonathan Maze at [email protected]
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