Rising gas prices may have restaurant operators on edge, but there’s no need yet for that concern to be fueling any panic, observers say.
While spikes in gas prices, such as those experienced after Hurricane Katrina in 2005, can have an immediate impact on consumer spending, gradual long-term increases are less likely to affect restaurant sales — even at quick-service restaurants where customers tend to have lower incomes, according to new research from Restaurant Research LLC.
Looking at the annual same-store sales results of the 10 largest quick-service chains from 2000 to 2011, Restaurant Research found that overall economic strength had the ability to dampen the deleterious effects of rising gas prices, despite the high correlation between gas prices and QSR sales.
That’s because high gas prices more often reflect increasing demand than decreasing supply, said Phil Mangieri and Wally Butkus, partners in the Fairfield, Conn.-based firm, which specializes in unit-level data for the industry’s largest chains.
“The conventional wisdom is that higher gas prices mean less money in the pockets of fast-food customers,” the duo wrote. “However, it is important to consider that higher gas prices typically reflect stronger economic activity — a good thing for restaurant sales. Gasoline supply shocks are a different story. Higher prices driven by contracting supplies hurt the consumer.”
Not surprisingly, Restaurant Research found that sales performance was most highly correlated with gross domestic product: when GDP grew, so did sales. Less expected, however, was the discovery that unemployment — another indicator many operators watch to determine performance — had the lowest correlation to sales.
Some of the disconnect lies in the fact that unemployment benefits were extended during the recent recession, Butkus said.
“In Connecticut you had 99 weeks to collect [unemployment],” he said. “That’s a long period of time for that benefit, so even if you were unemployed, you still had a paycheck, which lessens the impact.”
Gas prices had the second-strongest correlation to sales, which is why operators should nevertheless keep an eye on what’s going on at the pump, Butkus said.
“We’re approaching an all-time high,” he said. “In July 2008, $4.11 was the peak. More recently, the price was at $3.92, so we’re right there. I think the higher prices go, the more it impacts the consumer wallet, but so far it’s been offset by an improving economy. The stock market and consumer sentiment are all going up and still encouraging people to eat out. It could become an issue if prices keep going up, but gradual increases have less of an impact.”
According to the U.S. Energy Information Administration, the national average for gas prices was $3.94 the week of April 2, inching up more than 2 cents from the week earlier and 7 cents from two weeks before. Compared to the same week in 2011, the average increased by 26 cents.
The EIA expects that 26-cent difference to remain a factor throughout 2012. The administration is projecting that regular-grade gas prices will average $3.79 per gallon this year, compared with an average of $3.53 per gallon in 2011. During the summer driving season — the months of April through September — prices are expected to average $3.92 per gallon. That average will jump in May, when EIA officials anticipate it will hit $3.96 per gallon.
Bruce Grindy, chief economist of the National Restaurant Association, observed in a late-March commentary that so far higher gas prices have not significantly hurt total restaurant industry sales, which reached a monthly record of $43.4 billion in February, according to the Census Bureau.
But the story is different at the individual level, Grindy wrote, noting that an NRA survey of 600 restaurant operators conducted from March 15-22 found nearly 75 percent of respondents saying rising gas prices had affected both their sales and operations. Twenty-eight percent said that impact was extremely negative, while 45 percent called it somewhat negative. The average reported drop in sales was 5 percent.
Another report, the monthly Restaurant Industry Snapshot, found that same-store sales for the 73 brands it tracks rose 2.5 percent in February, even as traffic fell 0.1 percent.
Both metrics were down from earlier in the month, said Wallace Doolin, chairman and founder of Black Box Intelligence, which produces the report.
“The second half of the month produced some concerns regarding the recent spike in gas prices at the pump and how that is hurting the restaurant consumer’s wallet,” Doolin told Nation’s Restaurant News when the report was issued in early March.
The fact that gas prices have been above the $3-per-gallon mark since late 2010 helps, observers say. The question becomes: What price is the tipping point?
Restaurant Research’s Butkus suggested that figure may be $5 today, since $4 has already been crested.
“Five dollars is a pretty high number,” he said. “But it’s only 25 percent away. The summer driving season is about to start, and there’s continuing pressure on gas prices. It’s a significant issue right now.”