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Predicting the upswing

Predicting the upswing

The Financial Roundtable is a group of noted industry members Nation’s Restaurant News has assembled to share their perspectives on economic or business-related questions. The current question:

What segment of the restaurant industry is expected to reap the rewards of recovery first, and why?

We have already seen the high-end/fine-dining category separate from the crowd with [first-quarter] results showing a more definitive rebound than other segments.

It is not without precedent that business entertainment and travel spending would be a leading indicator of an economic recovery, and that is clearly what is driving sales improvement at the high end. Obviously the high-end segment had the easiest sales comparisons so it will take a while to get back the 20 percent to 30 percent of sales that these companies lost in the last two years.

I’m not sure there will be any one segment that will see recovery before another—I think all segments are already seeing it. The segments that were hurt the most during the recession, thereby registering the steepest declines in comp sales, will see the strongest recoveries.—Jim Greco, chief executive, Bruegger’s Enterprise Inc.

As you move down the price point spectrum, I think sales results will more closely correlate to unemployment trends. This likely means a slower recovery at the low end.—Nick Cole, executive vice president, Wells Fargo Restaurant Finance Group

The recovery should be felt first among casual-dining companies, followed by fine dining then fast food. It will broadly follow the shape of the consumer recovery, which has been top down.

Casual-dining earnings will also be stronger during the recovery, as this segment tends to have a company-owned business model and will therefore see more leverage as sales recover.—Larry Miller, analyst, RBC Capital Markets Corp.

I believe that traffic will continue to return disproportionately to both the casual and fast-casual segments. The degree of improvement will be directly related to the unemployment rate.

By and large, I do not agree with the pundits that claim the consumer has permanently changed their spending patterns in the industry; as the recession falls into the rear-view mirror, and economic confidence is restored, I believe consumers will return to their prerecession routines.

What will be most interesting to watch are the individual brands within each category. Some brands have made significant shifts in pricing, portions and ingredients. While these tactics have drawn some customers, or improved profitability during tough times, it will be interesting to see whether the net effect in a restored economy is positive or negative.

In general, I believe the brands that will benefit the most are those that stayed the course through the recession, and stayed true to their core brand strengths.—Don Fox, chief executive, Firehouse Subs

Fast casual and fast food. We’re already seeing it. More affluent consumers that had money, but were afraid to spend it, are coming out of the closet and spending again. Same-store sales comps at Panera, Chipotle and Starbucks prove this out.

As other consumers start to gain more confidence and jobs, they’ll start to “trickle” back into the space at the QSR level due to the quality, value and convenience of their offerings versus casual dining.

Generally speaking, I believe casual dining will continue to lag as it goes through a very protracted recovery. While consumers in past recessions typically went back to casual dining first, the length and severity of this recession has changed consumer mind-sets. We are clearly seeing consumers go back to other retail first as reflected in comps at hard-line, soft-line and specialty retailers versus casual dining.—Steve West, vice president, equity research – restaurants, Stifel Nicolaus

The overall operating environment for the restaurant industry has definitely improved over the first four months of 2010.… Since the total restaurant industry is comprised of almost 70 unique segments across 50 states with totally distinct economic infrastructures and employment situations, it is difficult to generalize which segment reaps the economic rewards first.

In general, NRA research shows that the lower the average check per person, the less likely that operator is to report the economy as a challenge. In addition, business and leisure travel is now stronger, and higher levels of consumer confidence in upper-income households are apparent. This is helping to take some of the pressure off the higher-average-check operations. Fifty-five percent of restaurant operators expect to have higher sales in six months—the strongest level in almost three years. Consequently, the “rewards” are distributed across segments with region and local employment [or] income patterns strongly influencing outcomes.

Demographics is truly destiny in the restaurant industry.—Hudson Riehle, senior vice president, research and information services, National Restaurant Association

Ironically, high-end dining will show the most dramatic recovery. That prediction may shock many, but when the pendulum swung hardest on this sector (off about 20 percent back to back) that was a devastating blow, and it caused many independents to close their doors and the chains to trim the fat.

Therefore, a recovery will be just as dramatic, as the pendulum only needs to swing back a little to create a large recovery. The triggers will be business confidence, and that will create business meetings that buy the full bottle of wine instead of just wine by the glass. Many of these diners could still afford to eat out but chose to save instead.

Conspicuous consumption which influences high-end dining is like fashion, it goes in and out of style. It has been out of style for over two years.

Secondly, quick service remained more resilient in the downturn as customers traded down…but in the second year of the recession, this sector has been hit, even though many operators resorted to value menus. Once the unemployment figures drop, quick service will benefit if more people get back to work.…

Another comment is that most would cite the fast-casual sector as a probable winner. While fast causal has done well and may continue to have structural price advantages under the new health care proposals and costs that will impact restaurateurs, much of the continued growth has been in fast-casual concepts, and it is one person’s opinion that unit growth may outstrip demand growth leading to more difficult environment.

Therefore, this sector gains market share but gains too many competitors. For example, look at the rash of gourmet-burger chains that have been launched.—Craig Weichmann, Brazos River Advisors LLC

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