Ominous economic forecast indicates restaurants will keep feeling the pinch

Ominous economic forecast indicates restaurants will keep feeling the pinch

What happens in Vegas won’t be staying in Vegas.

At this year’s Restaurant Finance & Development Conference, put on by Franchise Times, the news out of almost every pundit’s mouth—from economists to lenders and even the typically bullish securities analysts—is not very good for anyone.

According to experts, the housing turmoil that started this summer in the sub-prime lending sector has yet to really reach its peak, or valley, I guess. What happens in housing won’t be staying in housing, either, as prognosticators see the downturn affecting spending and job growth. That only means continued troubled times for restaurants.

Already confronted with pressured consumers and rising costs for everything from labor to food, restaurant operators are going to have to get even more creative in the year ahead in order to make ends meet.

Paul Kasriel, senior vice president and director of economic research at The Northern Trust Co., told attendees that the risk of a recession “is relatively high” when factoring in the index of leading economic indicators, including housing. Michael Eagen, vice president at Merrill Lynch Capital, Franchise Finance, said his outlook was “bearish” despite the bull on his business card. Almost all speakers at the conference discussed the leveraged state of today’s consumer, and, more importantly, the fact that consumers can no longer look to their homes for equity. The end result will be a further decrease in spending, partnered with another year of higher costs. Don’t shoot me; I’m just the messenger.

But what about the Federal Reserve’s rate cut—isn’t that supposed to spark spending? Not really, said Merrill Lynch’s Eagen, reminding attendees that the Fed cut rates 23 times before the real estate decline from 1989 to 1992 ended. Yikes.

OK, so what can restaurant operators do to stack the deck in their favor—to borrow a phrase from Vegas? Here’s some advice from the experts at the conference:

The industry’s mantra used to be location, location, location; today it is differentiation, differentiation, differentiation. The brands that differentiate their menu offerings, value equation, decor, hospitality and advertising will no doubt be better equipped to ride out the economic storm.

Think about “capacity rationalization,” says Nicole Miller Regan, a securities analyst at Piper Jaffray. In layman’s terms, this means closing underperforming stores and slowing development, which can often lift same-store sales and average unit volumes.

Maintain your cash and your borrowing power, says Kevin [3] Burke, managing director at Trinity Capital LLC. Don’t make huge strategic changes during this challenging time, but refine what your brand is good at.

Increase prices. While I hate to tell you that—because I, and many of my fellow New Yorkers, eat out at every meal—the experts say it’s time to raise prices. The restaurant industry is well behind the price increases grocers have taken so far this year, they say, and if your brand can do it, it should, and now.