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5 positive signs for restaurants

Analyst on reasons why operators should have a sunny outlook

Rising costs for food and fuel have dominated headlines and weighed heavily on the minds of restaurant operators.

However, despite all the discouraging news, the state of the industry isn’t as grim as it sounds, according to Brad Ludington, a restaurant securities analyst at KeyBanc Capital Markets.

In a research note this week, he outlined five reasons why things are looking up for restaurant operators this year:

1. Consumers are coming back to restaurants. Ludington dismissed the notion that consumers have settle into  a permanent “new normal” of dining out less. As the economy improves, so will restaurant traffic, he said. “We believe meals at restaurants have both entertainment and convenience factors that are valuable to consumers and will become more prevalent as incomes rise,” Ludington said.

2. Social media marketing is working. Ludington noted that restaurant chains are successfully using social media to reach customers and build loyalty without resorting to deep discounts, which were ran rampant during the recession.

3. There are still opportunities for growth. Despite all the clamor during the recession that the U.S. restaurant field was oversaturated, some brands are still experiencing rapid growth, said Ludington, who pointed to BJ’s Restaurants, Chipotle, Panera and better-burger brands like Five Guys and Smashburger. “We believe this unit growth proves that successful growth is not dependent solely on competitors closing shop, but that one needs only to ‘build a better steakhouse,’” he said, “as we believe differentiation and a higher quality experience will always win out.”

4. Restaurants can work around inflated commodity costs. Many restaurants have found a way to navigate rising food costs without making steep price increases. Instead, Ludington said operators have focused on cost-saving initiatives, menu engineering and efficient purchasing.

5. Consumers are still spending. High gas prices haven’t hurt consumer spending dramatically, thanks to an improving employment picture and a payroll tax cut that started this year. Ludington also noted that that gas prices have recently stabilized as the summer travel season shifts into full gear.

Contact Charlie Duerr at [email protected].

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