On the Margin
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Is Netflix stealing sales from restaurants?

Blog: Increased consumer spending on “new necessities” could be hurting restaurants

This post is part of the On the Margin blog.

Looking for a reason why consumers aren’t eating at restaurants as much?

Here’s one: Netflix. 

But it’s not in the way you would think, although consumers are perhaps spending a bit more time on the couch and less time eating out. 

Instead, consumer spending on new services, like Netflix, could be taking up room in their budgets and leaving less for restaurants.

So says Gene Lee, CEO of Darden Restaurants Inc., who, during the company’s earnings call Tuesday morning, suggested that new, additional costs are leading some consumers to cut restaurant spending.

“There are other new necessities, whether it’s smartphones, their cable bill, their Netflix bill,” Lee said. “Those have all increased significantly over the years. People are making choices. They’re not just confined to food.”

Malcolm Knapp, publisher of the Knapp-Track casual-dining index, has long held a theory that additional costs force consumers to shift budgets from one area to another amid weak income growth — what he calls “re-allocation nation.” 

Many costs have been rising in recent years. Apple released the iPhone in 2007, just before the recession, and helped unleash the smartphone craze. So consumers began buying the devices while also paying for data plans, which can tally well over $100 per month. Netflix began streaming the same year. 

Cable bills have been increasing at a rapid clip every year, and consumers now pay $103.10 for television per month, up 4 percent over last year, according to entertainment research firm Leichtman Research Group. That was the slowest rate of growth in the past four years.

We talk a lot about gas prices. And gas prices do impact restaurant sales, both positively and negatively. Gas prices likely helped boost restaurant sales last year, and it’s possible that one of the reasons for weak sales now is that consumers have adjusted their budgets.

But if gas prices impact restaurant sales, then so, too, would the proliferation of costs. And it’s not just additional costs for wireless services or cable television, but also for health insurance, or purchasing a car.

Higher costs lead consumers to look for cheaper options, which they have this year, thanks to lower grocery prices and the proliferation of prepared food at retail.

So what’s a restaurant operator to do? According to Lee, the answer is simple: Innovate and improve service. In other words, make people want to go out to eat.

“We have to create environments people want to come to,” he said.

Jonathan Maze, Nation’s Restaurant News senior financial editor, does not directly own stock or interest in a restaurant company.

Contact Jonathan Maze at [email protected]

Follow him on Twitter: @jonathanmaze

TAGS: Sales Trends
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