Restaurants suffered as spending dropped in late '08

As fourth-quarter earnings season begins this week with reports from Yum! Brands Inc. and others, more macroeconomic and industry-specific data reveal just how difficult the end of 2008 became for restaurant operators.

Last week the U.S. Department of Commerce reported that the gross domestic product, or GDP, contracted 3.8 percent in the fourth quarter, from a 0.5-percent decrease in the third quarter. The latest contraction was the worst recorded since the first quarter of 1982.

 

The decline was led by a decrease in consumer spending, which accounts for more than two-thirds of the U.S. economy. Real personal consumption expenditures fell by a 3.5-percent annual rate in the latest quarter, which followed a decline of 3.8 percent in the third quarter. The declines were reportedly the first time that the rate of consumer spending fell by more than 3 percent in back-to-back quarters since records began in 1947.

The restaurant industry felt the nation’s pain. The National Restaurant Association reported last week that its Restaurant Performance Index – a monthly composite index that tracks the health of the industry through an operator survey on same-store sales, traffic, labor and capital expenditures – fell to a record low in December.

“The weak economy and declining sales continue to weigh on the minds of restaurant operators,” said Hudson Riehle, senior vice president of research and information services for the National Restaurant Association. “Forty-five percent of restaurant operators said the economy is the number one challenge facing their business, followed by building and maintaining sales volume, at 27 percent.”

In December, the association’s index fell 0.5 percent from November to 95.7, a record low and the 16th consecutive month of an index value below the 100 level, which signifies industry contraction.

Only 23 percent of restaurant operators reported a same-store sales gain between December 2007 and December 2008, and 66 percent reported a year-to-year same-store sales decline. Sixty-eight percent of operators reported a traffic decline in December, the highest level on record, the NRA said.

Looking ahead, 41 percent of operators said they expect economic conditions to worsen in six months, a result that actually fell from the 49 percent of respondents who reported similarly in November. Still, only 18 percent of restaurant operators said they expected to post higher sales in the next six months, compared with the previous year.

With unemployment continuing to rise, further consumer spending decreases and more contraction in the U.S. economy are expected, pundits said in various reports covering the GDP results.

The latest quarterly government data did show that the price index, which measures prices paid for various goods in the United States, had declined. But experts say the typically positive news would not help spark spending.

“Prices declined by 5.5 percent in the fourth quarter, particularly in energy, but this provided consumers at best with an opportunity to strengthen savings rather than boost spending,” said Bart van Ark, chief economist at The Conference Board.

Contact Sarah E. Lockyer at [email protected] [3].