With gas prices hitting a national average of $3.18 per gallon just before Memorial Day, a record high even when adjusted for inflation, research points to a summer travel season of reduced consumer spending, especially at restaurants.
Optimistic pundits and operators say consumers have already adjusted their spending habits from high gas prices last summer and that restaurants this year should see sales on par with prior results, maybe even outdoing other discretionary retail segments.
Nonetheless, consumers will cut their spending on meals away from home because of increased gas prices, according to the latest National Retail Federation consumer survey, citing expectations of a $3.32-per-gallon average for regular gas by Father’s Day.
The NRF’s 2007 Gas Prices Consumer Intentions and Actions Survey, which polled 8,353 consumers in early May, found that 31.1 percent were dining out less because of record gas prices.
The study also found that about 40 percent of those surveyed were choosing to drive less.
A USA Today/Gallup Poll in early May of 1,010 adults echoed that finding, reporting that 32 percent of the respondents had shortened or canceled a planned car vacation because of high gas prices.
A new USA Today analysis of federal highway statistics also found that Americans, for the first time in 26 years, are driving fewer miles, apparently in response to soaring prices at the gas pump.
Summer car travel is key to the family-dining, quick-service and casual-dining segments. The travel industry points to a summer season of slight growth in vacation travel, even in the face of $3-plus-per-gallon gas in 34 states and the District of Columbia.
“High gas prices and increased vacation costs won’t deter Americans from traveling,” Sandra Hughes, vice president of travel for AAA, said. “Families will travel closer to home, they will travel for fewer days, and will save money by staying in less-expensive hotels and eating in cheaper restaurants.”
The AAA vacation survey, released in mid-May, projected that Memorial Day travel would rise about 1.7 percent from last year’s levels.
According to the Travel Industry Association, or TIA, summer leisure travel is expected to rise 1.4 percent from last summer. Business and convention travel also will remain strong, increasing about 3 percent from last year, the TIA projected. The association bases its projections on interviews with 2,000 U.S. travelers. An industry source also indicated that foreign travelers, especially from Europe, are expected to take advantage of the currently strong euro and travel to the United States this summer.
For the restaurant industry, summer travel is expected to boost sales at quick-service chains, where consumers can take advantage of lower pricing and convenience, analysts said. Some travelers also are expected to frequent higher-end and fine-dining establishments, as business travel and European tourist visits are expected to increase from last year, and as higher-income consumers who aren’t as sensitive to gas prices continue to eat out.
The losers this summer again will be the casual-dining segment, especially brands in the bar-and-grill segment, analysts predicted, as those chains struggle to compete with quick-service pricing, but target the same, lower-income consumer.
“It will be more of the same,” said Ashley Woodruff, securities analyst and senior vice president at Friedman, Billings, Ramsey & Co. in New York. “Casual dining will continue to struggle—it won’t get a lot worse, but it won’t get much better, either—and fast food will continue to outperform.”
On the plus side for casual-dining restaurants is the possibility that some consumers may have adjusted their spending habits because gas prices have been creeping upward for months. Of course, consumers who are traveling may have no other dining option but restaurants.
“The good thing about restaurants,” Woodruff said, “and why they might hold up better than other consumer discretionary segments, is that people still need to eat several times a day. You still have consistent demand.”
The national average for a gallon of regular gas was $3.10 for the week of May 14, an increase of nearly 16 percent from a year earlier, according to data from the Energy Information Administration. While consumers said $3.10 per gallon would not deter them from traveling, the TIA found that a $3.50-per-gallon average would force nearly one-third of travelers surveyed to cancel their plans. And a $3.50 gallon of gas may not be far off, as California already averages $3.45 per gallon, according to the Energy Information Administration.
Regular gas in California already has broken through the $4-a-gallon barrier in some areas.
The AAA on May 18 said gas prices had hit a record high for the sixth time in as many days.
Still, some restaurant operators have increased sales projections for the remainder of the year, though several casual-dining companies have slashed their outlooks.
Burger King said it would meet annual projections of revenue growth between 6 percent and 7 percent and adjusted net-income growth of more than 20 percent over fiscal 2006. The company also said it planned to increase same-store sales by at least 1 percent during the summer by requiring all operators to keep their units open until at least midnight, beginning in May, either through full-store operations or drive-thru-only service.
McDonald’s has been firing on all cylinders for more than two years, and most analysts expect 2007 to be no different.
Jack in the Box Inc. this month upped its annual forecast to include an annual same-store sales gain of between 5 percent and 6 percent over fiscal 2006. The chain plans to focus on both its premium offerings, like the quick-service sector’s first 100-percent sirloin burger, as well as value items, like its two-tacos-for-99-cents promotion.
But P.F. Chang’s China Bistro Inc. last month cut sales projections for its 153-unit namesake chain. It had expected full-year same-store sales to drop 0.2 percent from the year earlier, but now expects a decline of 1.2 percent, the company said.
Because of the “difficult economic environment” Steak n Shake Co. said it expected same-store sales to decline from 2 percent to 4 percent for the year.
“The underlying sales fundamentals for casual-dining companies will likely remain pressured as middle-income consumers continue to cut back and trade down to quick-service restaurants as they feel pressure from high fuel costs and declining home values,” said securities analyst Andrew Barish of Banc of America Securities LLC.
Some casual-dining brands that have worked during the past 18 months to upgrade menu offerings and ambiance, like Max & Erma’s and O’Charley’s, have a positive outlook for summer sales. Both Max & Erma’s and O’Charley’s have made bolder efforts to reimage older locations, revamp menus to introduce higher-quality items and target a more high-end consumer .
“I do think the storm has come,” said Ron Lindeman, president of Max & Erma’s. But he is counting on upgrades made by the casual-dining chain, which is based in Columbus, Ohio, to help maintain customer traffic.
“Last year gas prices were 30 percent higher than the previous year, and that’s when people adjusted their spending and lifestyle,” Lindeman said. “I don’t think it will be worse this year, and it may be even better.”